Risk in construction contracts
'Risk', in a project delivery context, can be defined as 'an event or set of circumstances that, should it occur, will have an effect on the achievement of the project's objectives'.1 Risk exists as a consequence of uncertainty, and, in any project, the exposure to risk produced by uncertainty must be managed.2
Construction projects are often complex, highly technical and of high value, and can have construction periods that may span a number of years. Common risks prevalent in construction projects include weather, unexpected job conditions, personnel problems, errors in cost estimating and scheduling, delays, financial difficulties, strikes, faulty materials, faulty workmanship, operational problems, inadequate plans and specifications, and natural disasters.3 Projects will also have additional specific risks dependent on the nature of the project and its surrounding circumstances.
Although the volume and nature of contractual documentation for a construction project will vary as a consequence of the nature of the project, its scale and the procurement methodology adopted,4 a construction contract may be simply described as a contract between a contractor and an employer whereby, 'one person (the contractor) agrees to construct a building or a facility for another person (the employer) for agreed remuneration by an agreed time'.5 A construction contract will include a compact of rights and obligations6 between the parties by which the parties pre-allocate responsibilities between themselves in respect of certain risks that may transpire during the contract's execution. In doing so, the parties define the impact of such risks on the three key elements of the construction: the product or facility that is to be constructed by the contractor, the time at which the product or facility must be completed by the contractor and the amount the employer is obliged to pay the contractor. The collective allocation of such risks in a construction contract represents its 'risk allocation'.
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1 Peter Simon, David Hillson and Ken Newland, Project Risk Analysis and Management Guide, The Association for Project Management, p. 17 (1997).
2 See Catriona Norris, John Perry and Peter Simon, Project Risk Analysis and Management, The Association for Project Management, p. 3 (2000).
3 See Samuel Laryea and Will Hughes, The Price of Risk in Construction Projects (2006).
4 See Julian Bailey, Construction Law, Volume 1, 2nd ed., p. 49 (2016).
5 Peter Simon, David Hillson and Ken Newland (op. cit.), p. 17 (1997).
6 Julian Bailey (op. cit.), p. 1512.
An extract from the first edition of GAR's Guide to Construction Arbitration, first published in September 2017.
Please note that the new suite of FIDIC Contracts (Red, Yellow and Silver Books) is due to be published in December 2017. Our Construction & Engineering Group will be commenting extensively on these new forms following their release.
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