6.3 RISK ALLOCATION A PROPERLY WRITTEN CONSTRUCTION CONTRACT WILL AL...

A properly written construction contract will allocate the risk of loss or dam-

age occurring to the project clearly and completely, so that each party knows

precisely which risks he bears and what the consequences are should a risk

eventuate.

When two or more parties engage in a construction project, there are many

different kinds of risk of which each will need to be aware. These include the

following:

●

There are design-related risks. Does the design for critical parts of the plant

or structure, for example, achieve the performance expected? Is it efficient

and workable?

●

There are risks associated with s ite investigations : geotechnical investiga-

tions, for example, where tunnelling or extensive excavation work is required.

●

There are risks associated with the

construction process : the availability of

resources and materials, on time, in the right quantities and of the right

quality; encountering unexpectedly poor ground conditions even where

adequate site investigations have been carried out; the occurrence of

unforeseeable events such as bad weather, flooding, and the risk of injury

to persons and damage to property; and industrial and political risks, of

labour disputes, war, or other civil disturbance.

●

There are

financial risks. Will the employer or owner or developer pay

when the work-stages are achieved? What happens if the contractor

becomes insolvent before the work is completed?

Only if risk is clearly and completely allocated will each party be able to

manage risk efficiently, taking steps to protect against the consequences

9

See pp. 74–75 for a fuller account of the claims procedure under the FIDIC forms.

10

See clause 2.5, but here again the employer is required to notify a claim (such as for an

extension of a contractual defects notification period) at an earlier stage. The contractor is

then in a better position to investigate the claim.

should the risk eventuate. Risk allocation is therefore an essential element

of the efficient management of the project itself.