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HNO network contract risk management

Overview

Benefits of proactive risk management:

  • Aids decision making
  • Promotes comparison of solution alternatives
  • Increases communication
  • Generates common understanding
  • Promotes justification of contingency
  • Promotes credibility of solution.

The application of risk management is an integral part of contract development and execution.

Consideration of risk and the application of risk management in respect of management of the state highway network should begin prior to the issuing of tender documentation and thereafter continue for so long as the Transport Agency maintains responsibility for that part of the network under consideration.

Network Contract Managers (NCMs) should take note of risk management guidance provided in the NZ Transport Agency corporate documentation as defined in the image below.

The NCM has six primary responsibilities with regard to risk management:

  • To understand and comply with Transport Agency and HNO requirements
  • To initiate appropriate risk management prior to, and between, supplier ownership of risk management provision as part of contract execution
  • To ensure appropriate requirements are included within HNO contracts
  • To ensure appropriate evaluation of tender documentation with regard to supplier proposals for risk management
  • To ensure ongoing supplier delivery throughout the life of the contract in accordance with:
    • the contract, and 
    • supplier tender documents, and
    • good practice
  • To review, report and escalate as appropriate, risks arising from the execution of contracts in accordance with NZ Transport Agency and HNO requirements.

Relationship between NZTA suite of risk management documents and Z/44 – Risk Management

Getting started

A NCM taking on the management of a contract is well advised to make establishing familiarity with NZ Transport Agency documentation, approach and requirements for risk management an early priority. A sound understanding of the principles and practices of the discipline will add value to the NCM's ability to guide the delivery of the contract.

Minimum standard Z/44 - risk management

Z/44 is applicable only within HNO Capital Projects and M&O contracts delivered through the SM030 suite of contract proforma. It provides suppliers with HNO specific requirements for the conduct of risk management. The intent of the standard is to promote consistent delivery from suppliers with regard to risk management services; including reporting and deliverables.

Minimum standard Z/44 - risk management

General or advanced approach

Given the annual expenditure within NOC contracts, it can be expected that the general approach will suffice. However, where appropriate, the advanced approach may be required for analysis for specific tasks or topics where a greater degree of accuracy is required with respect to analysis outputs.

General approach

The general approach is characterised by the assignment of semi-quantitative risk scores which represent a consequential probability banding system whereby risks can be ranked by importance.

Advanced approach

The advanced approach includes the general approach to enable ranking of risks but looks at the risks in more detail using quantitative risk likelihood and consequence data. This data is used within computer based statistical analysis to determine contingency values in estimates.

Preparing contract documentation

Requirements for risk management are clearly defined within the NOC and compliance with Z/44 is a contract requirement.

Z/44 has been written, as the title indicates, as a minimum standard, should the NCM wish to alter aspects of this, then these amendments will need to be written into the appropriate sections of the contract. It is anticipated that the minimum standard will satisfy the expectations of the HNO NCM without the need for amendment clauses.

A requirement within the RFT documentation is the provision to tenderers of the current Activity Risk File (ARF) (see section 3.4.1). The quality of the ARF content is likely to be a reflection of the contractual requirements for risk management placed on an incumbent supplier, the degree to which these were fulfilled and the delivery teams’ attitude to delivering good practice risk management.

NCMs must ensure that the content of the ARF is as complete and up to date as is reasonably practicable prior to inclusion in the RFT and again at the point of transfer from an incumbent to a new supplier. Failure to ensure the veracity of the content of the ARF is likely to lead to downstream problems, in particular creating rework to re-establish data and documentation.

Tender submission review

When reviewing tender submissions the Tender Evaluation Team (TET) is tasked with reviewing the submissions against the issued Request for Tender (RFT). It is incumbent upon the TET to ensure thorough evaluation of tender submissions in relation to the requirements stipulated for risk management within the contract documents. It is fully appreciated that a tenderer's response to risk management requirements will not determine who the winning bidder is. However, it should also be appreciated that the existence of risk is unavoidable and its management therefore has an important part to play in aiding successful contract delivery. If the awarded suppliers' tender submission indicates a clear understanding of the risk management requirements within the RFT and a commitment to delivering risk management good practice then the TET can anticipate entering into a contractual arrangement with confidence regarding the conduct of risk management. However, if the winning bidder’s submission did not provide a good degree of confidence then the NCM must anticipate the need for a closer level of management and scrutiny of the supplier in this area of the contract. It is anticipated that Z/44 will drive the outcomes HNO require for risk management whatever the capabilities of the supplier, although a greater degree of HNO NCM input may be required.

Particular attention should be given to:

  • Identifying supplier acknowledgment of the requirement to comply with Z/44 
  • Understanding of and commitment to, providing required risk management deliverables
  • Evaluating risk management resources proposed – suitably qualified and experienced
  • Evidence of supplier commitment to continuous improvement in relation to risk management.

Contract execution

Throughout the contract execution period the NCM is expected to monitor the conduct of risk management by the supplier, ensuring not only that contractual requirements are being met, ie compliance to Z/44 but also that the services, documents and data offered within the tender are being delivered.

Contract conduct of risk management

When considering the scope of contractor provision of risk management services, the NCM's first point of reference should be the NOC contract and Minimum standard Z/44 – risk management. A pragmatic approach to risk management should be taken at all times and the minimum standard has been compiled specifically to address requirements for the application of risk management within the two HNO work streams (Capital Projects and M&O contracts).

Although Z/44 is a minimum standard the emphasis is on the NCM making decisions on and being fully engaged with, the degree of application and the conduct of risk management by the supplier. The intent being to identify, analysis and evaluate risks at the earliest point in time thus aiding in the reduction of exposure by encouraging proactive consideration and implementation of treatment solutions.

It is the responsibility of each NCM to ensure risk management practices are effectively applied both in their role as an NZ Transport Agency employee and as the manager for a HNO contract in so far as their level of delegated authority enables.

Throughout contract execution the contract delivery team should:

  • Regularly review and report on risk
  • Record identified risks; along with their exposure, treatments and possible treatment costs (within Risk and Action Registers)
  • Manage risks identified
  • Carry out treatment actions 
  • Maintain risk data to ensure currency
  • Record applicable assumptions, constraints and exclusions
  • Ensure corporate and HNO reporting requirements are met
  • Demonstrate risk management good practice.

Contract deliverables

The NOC contract and Z/44 require the provision of risk management related contract deliverables from the supplier; these are defined within Z/44 and are to be held within the Activity Risk File (ARF). Z/44 requires the maintenance and delivery at contract completion of the ARF. The ARF contains the risk related documentation and data associated with the contract. The ARF will be maintained by, and passed between, client and supplier at each end of a supplier’s contract tenure.

All risk related documentation is to be contained within an ARF. Where there is no existing ARF the NCM must initiate the creation of the ARF and ensure risk related data is captured and maintained. The expected content of an ARF is described within section 3 of Z/44.

At all times the ARF is to be viewed as live and is to be maintained as such.

The NCM must ensure that the content of the ARF is as complete and up to date as is reasonably practicable prior to both hand over to a supplier and when taking delivery of same from suppliers. Failure to ensure the validity of the content of the ARF is likely to lead to downstream problems, particularly when ARF responsibility is transferred to a supplier or NCM who has not previously been involved in the contract delivery.

Escalation and reporting of contract risks

Escalation is the upward promotion of risk from one management level to another. This promotion is intended to engender consideration of, and where appropriate direction on, significant risks by a higher level of management. For HNO contracts this means the escalation of risks to a Regional Management Team (RMT) or Decision Making Team (DMT).

Responsibility for initiation and management of risk escalation is the sole responsibility of the HNO NCM. It is the NCM's responsibility to review the contract risk register and identify against the NZ Transport Agency corporate risk scoring system those risks requiring escalation.

Escalation within HNO contracts should be initiated where a risk:

  • May impact on the conduct of business objectives within HNO and/or the NZ Transport Agency
  • Exceeds a predefined Transport Agency risk score/level established to initiate escalation (as defined in the HNO Regional Risk Management Reporting & Review Hierarchy diagrams in the hierarchy tab)
  • Has a consequence or requires action which is outside the delegated authority of the client representative (NCM) responsible for the management of the contract.

Escalated risks are to remain within the contract risk register, and dependent on the delegated authority of the NCM may continue to be managed at the contract level, or management may transfer to a higher level within the Transport Agency.

Key steps

For further information contact insurance@nzta.govt.nz.

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