Risk sharing in construction contracts

(Extract from introduction) Many of the problems in the area of construction process risk assignment arise because the owner traditionally uses exculpatory and hold-harmless clauses to avoid obligations in construction contracts. Doing so, however, may not be in the owner’s best interest since the owner can select the type and provisions of the contract. When contractors are obliged to assume the risk, they include contingency costs for events that often do not actually occur. Litigation resulting from such construction contracts is not only costly and time consuming, but frequently results in decisions favoring the contractor. Owners who are willing to share risk with a contractor in an attempt to obtain smaller contingencies, and thus reduce the expected cost of a construction project, find that no systematic approach has been developed to guide them in the selection of a risk-allocation strategy. The overall objective of this study was to develop an approach to risk allocation in construction contracts and to provide guidance for its implementation. This study was limited to the areas of procurement strategy, selection of contract type and provisions, and administration of construction contracts. The results are applicable to the general types of construction. The viewpoint is that of a large owner who is frequently in the market for new construction.