Major Construction Projects - K&L Gates
Transcript of Major Construction Projects - K&L Gates
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Major Construction ProjectsKey Risk and Insurance Strategies
October 6, 2011 – Los Angeles, CA
Hosted By:John R. Cunningham, Senior Vice President, Construction Consulting Practice, Marsh Risk Consulting
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Speakers
Harold DorbinSenior Vice President
Construction Consulting PracticeMarsh Risk Consulting
Frederic J. GiordanoPartner
K&L Gates LLP
Michael D. HastingsProject Risk Practice Leader
Marsh U.S. Construction Practice
Danette M. JonesSenior Vice President
Marsh U.S. Construction Practice
Timothy L. PiercePartner
K&L Gates LLP
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Insurance in Context:Construction Risk Management
Michael D. Hastings, Marsh U.S. Construction PracticeDanette M. Jones, Marsh U.S. Construction Practice
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Charles De Gaulle International Airport, Terminal 2EMay 23, 2004, 05:00 GMT
Risk Transfer Is Not Risk Management
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Insurance in Context: Construction Risk Management
Not all risk is insurable There is an interplay between insurable and
uninsurable risk Regardless of insurance in place, loss control and
mitigation is preferable to an insurance settlement Insurers provide their best terms and conditions to
projects where risk is managed
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Identify/Quantify the risk to all stakeholders Determine the most effective methods to control and
mitigate risk Assign/Define contractual responsibilities Determine the coverage and limits necessary to
protect the parties and the work Identify which party is in the best position to provide
each coverage Communicate/Collaborate
Construction Risk Management: Insurance in Context
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The Insurance Industry: What Every Party Should Understand
Insurance companies are for-profit businesses that seek to earn a fair rate of return for the risk they take
Traditional insurance coverages are supported by years of precedence
Insurance rates are supported by years of data Denying a claim can be as expensive as paying it Insurance companies’ financial ratings are
determined by the capital backing the policies they write
Insurance is a heavily regulated industry
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Professional Liability Insurance: What every party must know What it covers
Amounts which the Insured is legally required to pay due to negligent acts, errors, or omissions
Bodily injury, property damage, economic damage
Pitfalls Duty of care Claims made policy Retroactive date/extended reporting period Exhaustion of limit/defense within limit
Enhancements Project-specific professional liability OPPI/CPPI
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General Liability Insurance: What every party must know
What it covers Amounts which the Insured is legally required to pay Bodily Injury or Property Damage caused by accident (including
resulting damage) Personal Injury
Pitfalls Claims arising out of defective construction Completed operations through statute of repose Indemnification/limitations of liability Additional insured for ops and completed ops Anti-indemnification statutes/precedence Wrap-up exclusions
Enhancements Limited professional liability coverage Limited pollution liability coverage
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Environmental Insurance: What every party must know
What it covers Bodily injury, property damage, clean-up costs
Unknown/unexpected release of unknown pollutants Unexpected release of known pollutants Liability associated with transportation and off-site storage
facilities Fund indemnification when land with known pollutants changes
hands
Pitfalls Reliance on CGL endorsement Claims made forms
Enhancements Project-specific CPL, PLL, Cost Cap
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Builders Risk Insurance: What Every Party Must Know
What it covers Direct physical damage to property
Project itself Equipment, materials that will become a part of the project Temporary structures
Delay in Start-Up (DSU) Actual damages Expediting expense
Pitfalls Transition to permanent insurance Sub limits Responsibility for deductibles Who pays what insurer does not? Damage to existing structures Lender requirements Design firm as named insured
Enhancements Project-specific policy forms
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Controlled Insurance Programs: What Every Party Must Know What it covers
General Liability, Excess Liability, and/or Workers Compensation
Job-site claims for owner, general contractor, trade contractors
Pitfalls Geography/operations covered Over-focus on “savings” Completed operations Products liability Deductible pass-throughs Sponsor v. enrollee claims
Enhancements/Benefits Broad/Stable coverage Expedited claims process Supports collaboration
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Controlled Insurance Program: Savings Dilemma
$1 Million Insurance Cost
$500,000 Insurance Cost
$28 Million Materials & Labor$30 Million Materials & Labor
Subcontractor A Subcontractor B
$31 MM Bid
$28.5 MM Bid
Better cost, but lower “savings”
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Controlled Insurance Program: OCIP vs. CCIP
Dramatization
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Identify/Quantify the risk to all stakeholders Determine the most effective methods to control and
mitigate risk Assign/Define contractual responsibilities Determine the coverage and limits necessary to
protect the parties and the work Identify which party is in the best position to provide
each coverage Communicate/Collaborate
Construction Risk Management: Insurance in Context
(Earlier slide intentionally repeated)
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Contractual Risk Management for Mega Projects
Timothy L. Pierce, K&L Gates LLP
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I. Dispute Resolution Clauses
Litigation vs. Arbitration International Arbitration Administrator Attorneys Fees Clauses Waiver of Juries Appeal of Arbitration Decision
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Examples of Consequential Damages
Owner – rental expenses, loss of use of income profit, financing, business or reputation, and loss of employees or employee ineffectiveness
Contractor – Home Office overhead, loss of profit on other jobs and losses of financing, business, and reputation
II. Consequential Damages
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Allocation of liability and negotiation of same Waiver of consequential damages except:
To the extent of insurance coverage No waiver for willful conduct No waiver for subcontractor caused Cap on liability
II. Consequential Damages
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III. Allocation of Responsibility for Builders Risk and Uncovered Risk
All risk of loss covered Who has responsibility for uncovered damage
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Pay if Paid Invalid in California Clark v. Safeco – Pay if paid provisions are
unconstitutional and unenforceable in California on private works of improvement Mega Construction – Pay if paid provisions
are unconstitutional and unenforceable on public works of improvement
IV. Pay if Paid vs. Pay When Paid Clauses
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Are Pay if Paid clauses valid in response to a pure contract claim?
IV. Pay if Paid vs. Pay When Paid Clauses
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What if Project in New York uses contract adopting law of another state?
IV. Pay if Paid vs. Pay When Paid Clauses
K
Project
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A. Handling of subcontractor claims Pay when paid What is a reasonable time Subcontractor pass-through claims Coordinate dispute clause with all
participants
IV. Pay if Paid vs. Pay When Paid Clauses
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Owner can shift the burden of unknown conditions to the contractor
– Interstate Contracting v. City of Dallas
– Contract should use explicit language
– Does shifting the costs for unknown conditions help or hurt the owner?
V. Changes To The Work
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– Statutes May Limit Burden Shifting by a Public Owner. For example: California Public Contract Code section
7104: Contracts that involve digging trenches or excavation deeper than four feet “shall” include a clause providing for a change order when unknown conditions are encountered
V. Changes To The Work
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Contracts generally provide that:
Change orders and change directives should be in writing
Contractors should be cautious not to perform work unless there is a written change
Changes need to be approved in writing
V. Changes To The Work
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V. Changes To The Work
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Material Acquisition Issues To Consider
Ownership of Material Prior to Use on the Project
Responsibility for Material Escalation Costs
VI. Material Acquisition
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Legal Perspective on Insurance Issues
Frederic J. Giordano, K&L Gates, LLP
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Legal Issues
Large construction projects often insure differently that other construction projects Wrap-ups
OCIP CCIP
Subguard policies Project specific policies (for professional liability) More comprehensive builders risk policies
Very few court decisions specifically address the interpretation of these kinds of insurance policies No reported Subguard cases
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Legal Issues (cont.)
Consolidated insurance programs eliminate or reduce some of the legal issues that arise under traditional insurance products. For example: Disputes over additional insured status and coverage
All contractors and subcontractors participate in wrap-up
Ancillary disputes over scope and validity of contractual indemnification
Subrogation and disputes between insureds Professional liability/general liability
EPC systems Availability of sufficient limits
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Legal Issues (cont.)
California recently enacted certain statutes impacting wrap-ups Cal. Civ. Code § 2782.9
Prohibits requiring a participant under a residential wrap-up from defending, indemnifying or holding harmless another for claims covered by the wrap-up.
Cal. Civ. Code § 2782.95 Disclosure requirements for residential wrap-ups
Cal. Civ. Code 2782.96 Disclosure requirements for public works and projects other
than residential construction
Other, significant legal issues exist even under consolidated insurance programs
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The Occurrence IssueMust be an “occurrence” to trigger general liability coverage Occurrence generally defined as “an accident,
including continuous or repeated exposure to conditions, which results in bodily injury or property damage neither expected nor intended from the standpoint of the insured”
On its face would seem to include any property damage
Whether property damage resulting from defective construction remains a hot issue in construction claims
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The Occurrence Issue (cont.)
Significant Variance in Court Interpretation IL, OR, PA, and an increasingly limited number of
other states Allegations of damage only to the building itself are not
property damage and not occurrences E.g., West Bend Mutual Ins. Co. v. The People of the State
of Illinois, 929 N.E.2d 606 (Ill. App. Ct. (1st Dist.) 2010)
FL, IN, TN, TX, and an increasing majority of states Defect in the work can give rise to an occurrence if it
damages other parts of the work E.g., Lamar Homes, Inc. v. Mid-Continent Cas. Co., 242
S.W.3d 1 (Tex. 2007)
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The Occurrence Issue (cont.))
California among states where highest court has not yet addressed the occurrence issue
But see McGranahan v. Ins. Corp. of New York, 544 F. Supp. 2d 1052 (E.D. Cal. 2008) (indicating defective construction may give rise to an occurrence depending on insured’s intent)
Practical Solutions to the Occurrence Issue Start selecting other forum’s law to govern your policy
May not be enforceable in all states Careful that the selected state is favorable on other issues
Make an express change by endorsement (but you should not have to pay for it)
Purchase other insurance products Warranty insurance Surety bonds
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The Occurrence Issue (cont.)
Systematic Solutions to the Occurrence Issue Resolve the issue before the state Supreme Court
Favorable trend Some states have defined “occurrence” by statute
Colo. Rev. Stat. § 13-20-808 “In interpreting a liability insurance policy issued to a construction
professional, a court shall presume that the work of a construction professional that results in property damage, including damage to the work itself or other work, is an accident unless the property damage is intended and expected by the insured.”
Also Arkansas (Ark. Code § 23-79-155), South Carolina (2011 S.C. Act 26, to be codified as S.C. Code § 38-61-70), and Hawaii (Ha. Rev. Stat. § 431:1)
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Reservation of Rights & Conflict of Interests
In California and many other states where an insurer’s and insured’s interests do not fully align Independent counsel is mandated
Law: West's Ann. Cal. Civ. Code § 2860 San Diego Fed Credit Union v. Cumis Ins. Society,
Inc., 162 Cal. App. 3d 358 (1984) Md. Cas. Co. v. Peppers, 355 N.E.2d 24 (Ill. 1976) Public Service Mut. Ins. Co. v. Goldfarb, 425 N.E.2d
810 (N.Y. 1981)
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Reservation of Rights & Conflict of Interests (cont.)
Examples of conflicts: Multiple count complaint, not all counts covered
(fraud/intentional acts) Multiple types of damages, not all covered A potential dispute regarding whether the conduct in
question fell within the covered time period Plaintiff potentially seeking damages in excess of
limits, but demand within limits Vicarious liability v. direct liability
But see Travelers Property v. Centex Homes, 2011 WL 1225982 (N.D. Cal. April 1, 2011)
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Reservation of Rights & Conflict of Interests (cont.)
What does “independent counsel” mean? You control the defense and strategy of the case;
the insurer pays for it In some states, the case law suggests the insurer
has no right even to have input into the case (practically speaking this may not be a good idea)
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Reservation of Rights & Conflict of Interests (cont.)
Rates that are reimbursable varies CA – rate the insurer would ordinarily and
customarily pay to panel counsel under Cal. Civ. Code Section 2860
IL – “reasonable rate” Federal decisions clear, reasonable equals what the
market will bear
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Reservation of Rights & Conflict of Interests (cont.)
Are there consequences if an insurer fails to identify conflict? Yes, later could be stopped from raising coverage
defenses Utica Mut. Ins. Co. v. David Agency Ins., Inc., 327
F.Supp.2d 922 (N.D. Ill. 2004)
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Other General Construction Defect Considerations
Ramifications of when loss occurred or was discoveredProperty policies/builders risk might apply Normally exclude workmanship/design issues But, ensuing loss clause might create coverage
i.e. defect results in other damage to the building Possible to obtain coverage for “cost of making good”
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General Construction Defect Considerations (cont.)
GL is tricky Exclusion for work in progress Completed operations
Insurers drafted it to offer broad coverage and they market it accordingly
Subcontractor exception to “your work” exclusion Carriers have taken a narrower view in court and that
narrower view has on occasion carried the day “Accidental” v. “intentional” property damage
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Insurance Coverage for Delay Claims?
SubguardMay be covered in part under builders risk policies (if purchased)May even be possible under GL policies Often includes language providing coverage
“because of” property damageOften covered under professional liability Consider requiring for GC/CM?
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Claims-Handling Tips
Obtain copies of the policies that cover you or are supposed to cover youMake a timely claim
As soon as reasonably practicable Notice of a claim does not necessarily mean getting sued
Put all the carriers on notice Do not decide what type of claim it is too early Defect might be GL or Builders Risk or Professional
Duty to defend v. duty to indemnify A little bit of duty goes a long way
Don’t accept the first no Some would say to expect it
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Resolving the Claim
Duty of cooperation and reportingMediation and settlement strategiesIn the end Your goal should be to resolve the claim with as
little of your money as possible
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Project Governance and Retained Risk Management
Harold Dorbin, Marsh Risk Consulting
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Owner’s Project Perspective
Owners make money from the completed project Project objectives are longer term
On-Stream reliability Usable life Cost of use/operation
Schedule and cost may or may not be critical Project is “the asset” Funding structure Industry/Business needs
Success for the project defined by both Corporate objectives Business justification for project
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Contractor’s Project Perspective
Contractors make money by completing the project Project objectives are usually shorter term
Defined by contract compliance
Longer term objectives are real Execution reputation Technology supplied/experience
Success for the project defined by both Contract compliance Corporate objectives
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Risk RealityIs there more of it or are we just better at identifying it?Technology advances have led to higher risk recognition and elevated the management bar Personal computer and software Forecasting and forensics expectations Execution expectations Global execution and coordination Cost of risk – risks are retained selectively Each project is a unique collection of risks
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Project Governance and Mega Projects
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Project Governance Definitions
“Capacity of a management organization to positively influence the project toward a successful outcome”
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Why Mega Projects Are Different
First step is to acknowledge: “Bet the Farm” “Failure Is Not an Option” More developed strategic planning
Delivery method needs risk consideration Resources/Labor availability considerations
“New Sandbox Rules” Every action has a reaction “Not Kansas” anymore
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Why Mega Projects Are Different
Systematic (“stage gate”) identification of what is high risk (Yes/No) Define stages in planning/project when key decisions
need to be made Apply specific screening tests at each stage If a “high risk” condition exists
System engages internal experts “risk committee” Defined interaction between project and risk committee Risk committee makes recommendations to project and
executive management – at each stage
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55~ ~ ~
Why Mega Projects Are Different – Example Proposal Decision Flow Chart
Preliminary decision made on Proposal
Level 1, 2, 3
GATE ONE
PM completes Pre RA Form and submits for
comment/approval
Pre RA approve/reject and
comments via procedure 123
Bid/No BidAssessment
LEVEL 1 AND 2
REJECT
END
LEVEL 3
ACCEPT
BID
1 or 2
YES
Proposal LevelConfirmed via procedure
123
Notify Risk Review Group based on Pre RA
Responses
Notify Risk Review Group immediately after bid
decision
Risk Review Group provided the Pre RA & Proposal Documents
PM includes pre-approved Liability Limits,
etc.
Commitment made to providing proposal
PM completes Pre RA Form
NO
LEVEL 3
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~ ~Proposal Management
Plan Updated Proposal Management Plan updated and sent to
RRG
GATE THREE
Gate 3 Risk Checklist Forms completed, all documents
required via Procedure 123 completed
Project Risk Analysis completed and
contingencies defined by procedure 234
Risk Review Group provides remarks to PM
for consideration
PM submits Project Risk Analysis and other bid data
Project Risk Analysis completed and contingencies
determined per procedure 234, then provided to RRG.
Risk Review Group provides recommendations
on specific Risk Action Plans and RA
PM supplies revised Project Risk Analysis and
contingencies to RRG
RRG accepts revised Project Risk Analysis
PM submits contingencies, PRA and other data
Risk Review Group recommends No Proposal
YES
NO
PM determines which RRG recommendations
to include
Do Gate 3 Risk Checklist Forms or updates
to the Procedure 123 Risk Documents require
RRG engagement
PM provides Gate 3 Risk Checklist Forms and all
documents per procedure 123.
YES
NO
Gate 3 Risk Checklist Forms completed, All documents required via Procedure 123 completed
Why Mega Projects Are Different – Example Proposal Decision Flow Chart
Continued
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Why Mega Projects Are Different
Define and distinguish compliant from high risk projects at each planning/bidding stage What decision is being made? (ex. bid/no bid,
funding) By when must it be made? What information is necessary to make decision? What is risk to not having all the
information/assuming? Who can make the decision? Are there different criteria for different project
circumstances? (ex. cost of project, criticality to enterprise)
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Why Mega Projects Are Different
Define and distinguish compliant from higher risk projects during execution and close out stage Are there key decisions that require executive
management input (i.e. key vendor selection)? By when must it be made? What information is necessary to make decision? What is risk to not having all the information/assuming? Who can make the decision?
What metrics and at what level define when a project is “off the rails”
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Project Processes and Mega Projects
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Why Mega Projects Are Different
Project processes must align with stage gate requirements Example - if stage gate process requires different
levels of cost estimate accuracy – each level of accuracy must be defined and exhibit: Consistency – able to be repeated producing same outputs
from same set of inputs Accountable – clearly defined and assigned to project
members Transparent – allows others to quickly understand what
decisions have been made, by whom, and with what information
Industry Best Practices (IBP) – all project processes should meet IBP standards
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Why Mega Projects Are Different
Having good project processes even on non–high risk projects is critical: Rely on project processes to deliver projects that are
not “high risk” and subject to executive management and risk committee scrutiny
Having consistent, accountable, transparent, and IBP project processes will allow audits and easy testing of project metrics to determine if project eventually becomes “high risk” during planning/bidding phase or in execution
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Project Risk Management and Mega Project Governance
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Project Risk Management and Mega Project GovernanceSpending more resources does not guarantee better results: Start project risk management during strategic
development period of project plan/bid Bid screening tools Qualitative techniques to make key project decisions
Expectations from sophisticated project risk management processes cannot be higher than capacity of organization to develop needed information
Utilize a process that: Identifies and prioritizes key project objectives Identifies and tracks risk to all key project objectives Driven by project team and integrates with project controls
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Project Risk Management and Mega Project GovernanceSpending more resources does not guarantee better results (con’t): Simple lessons learned system aids with risk
identification Sort able risk data for easy identification of project specific
risks Project risk management will tell you what worked and what
did not
Linking project risk management with project controls
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Project Risk Management and Mega Project GovernanceGovernance requires effective project risk management inputs at every project stage: Early decisions (funding, bid/no bid) require
preliminary risk assessment What is the impact to the project key objectives of not
having/assuming the data required for the decision? What is the impact if the decision is delayed? What is the impact to the project key objectives of
negative feedback from project controls? Which decision should I make – increase the cost of
the project by accelerating the contractor/subcontractor or allow the schedule to slip?
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Wrap Up
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Wrap Up
Owner vs. contractor perspectives on mega projects Changing expectations and standards for project
governance Stage gate processes and aligning project process to
meet objectives Consistent, accountable, transparent, and IBP
procedures Risk committee involvement and value Project risk management – mastering the least
complex system that will support objectives Project lessons learned and project integration are
critical
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Contact Us:
Harold [email protected]
Frederic J. [email protected]
Michael D. [email protected]
Danette M. [email protected]
Timothy L. [email protected]
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K&L Gates includes lawyers practicing out of 38 offices located in North America, Europe, Asia and the Middle East, and represents numerous GLOBAL 500, FORTUNE 100, and FTSE 100 corporations, in addition to growth and middle market companies, entrepreneurs, capital market participants and public sector entities. For more information, visit www.klgates.com.
K&L Gates comprises multiple affiliated entities: a limited liability partnership with the full name K&L Gates LLP qualified in Delaware and maintaining offices throughout the United States, in Berlin and Frankfurt, Germany, in Beijing (K&L Gates LLP Beijing Representative Office), in Brussels, in Dubai, U.A.E., in Shanghai (K&L Gates LLP Shanghai Representative Office), in Tokyo, and in Singapore; a limited liability partnership (also named K&L Gates LLP) incorporated in England and maintaining offices in London and Paris; a Taiwan general partnership (K&L Gates) maintaining an office in Taipei; a Hong Kong general partnership (K&L Gates, Solicitors) maintaining an office in Hong Kong; a Polish limited partnership (K&L Gates Jamka sp.k.) maintaining an office in Warsaw; and a Delaware limited liability company (K&L Gates Holdings, LLC) maintaining an office in Moscow. K&L Gates maintains appropriate registrations in the jurisdictions in which its offices are located. A list of the partners or members in each entity is available for inspection at any K&L Gates office.
K&L Gates has offices in: Anchorage, Austin, Beijing, Berlin, Boston, Brussels, Charlotte, Chicago, Dallas, Doha, Dubai, Fort Worth, Frankfurt, Harrisburg, Hong Kong, London, Los Angeles, Miami, Moscow, Newark, New York, Orange County, Palo Alto, Paris, Pittsburgh, Portland, Raleigh, Research Triangle Park, San Diego, San Francisco, Seattle, Shanghai, Singapore, Spokane/Coeur d’Alene, Taipei, Tokyo, Warsaw, and Washington, D.C.
This publication/newsletter is for informational purposes and does not contain or convey legal advice. The information herein should not be used or relied upon in regard to any particular facts or circumstances without first consulting a lawyer.
©2011 K&L Gates LLP. All Rights Reserved.
This document and any recommendations, analysis, or advice provided by Marsh (collectively, the “Marsh Analysis”) are not intended to be taken as advice regarding any individual situation and should not be relied upon as such. This document contains proprietary, confidential information of Marsh and may not be shared with any third party, including other insurance producers, without Marsh’s prior written consent. Any statements concerning actuarial, tax, accounting, or legal matters are based solely on our experience as insurance brokers and risk consultants and are not to be relied upon as actuarial, accounting, tax, or legal advice, for which you should consult your own professional advisors. Any modeling, analytics, or projections are subject to inherent uncertainty, and the Marsh Analysis could be materially affected if any underlying assumptions, conditions, information, or factors are inaccurate or incomplete or should change. The information contained herein is based on sources we believe reliable, but we make no representation or warranty as to its accuracy. Except as may be set forth in an agreement between you and Marsh, Marsh shall have no obligation to update the Marsh Analysis and shall have no liability to you or any other party with regard to the Marsh Analysis or to any services provided by a third party to you or Marsh. Marsh makes no representation or warranty concerning the application of policy wordings or the financial condition or solvency of insurers or reinsurers. Marsh makes no assurances regarding the availability, cost, or terms of insurance coverage.Marsh is one of the Marsh & McLennan Companies, together with Guy Carpenter, Mercer, and Oliver Wyman.
Copyright 2011 Marsh Inc. All rights reserved.MA11-11092
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Major Construction ProjectsKey Risk and Insurance Strategies
October 6, 2011 – Los Angeles, CA
Hosted By:John R. Cunningham, Senior Vice President, Construction Consulting Practice, Marsh Risk Consulting