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Contractual Risk Management

This document discusses various aspects of contractual risk management. It addresses whether risk is subjective or objective, noting that people's attitudes to risk vary and are influenced by both individual preferences and social dynamics. Contracts are entered into freely by parties to allocate risk between them and define the ground rules. There are controllable risks that parties can directly influence through management as well as uncontrollable risks like weather that can still be minimized. The document outlines different types of fundamental risks like liabilities, safety, deadlines and quality that are addressed in contracts. It also discusses methods for transferring or avoiding risks, such as through indemnification, statute, control principles, warranties and surety bonds.

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146 views

Contractual Risk Management

This document discusses various aspects of contractual risk management. It addresses whether risk is subjective or objective, noting that people's attitudes to risk vary and are influenced by both individual preferences and social dynamics. Contracts are entered into freely by parties to allocate risk between them and define the ground rules. There are controllable risks that parties can directly influence through management as well as uncontrollable risks like weather that can still be minimized. The document outlines different types of fundamental risks like liabilities, safety, deadlines and quality that are addressed in contracts. It also discusses methods for transferring or avoiding risks, such as through indemnification, statute, control principles, warranties and surety bonds.

Uploaded by

cityren
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Contractual Risk Management

Is risk subjective or objective?

Peoples attitudes to risk vary and are subject ot social dynamics as well as individual
preference

See Adams, Risk published University College London press for the concept of the risk
thermostat

See Gert Hofstede (1986) Cultures Consequences for the collective attitude to risk of
societies uncertainty avoidance

Also note risky shift phenomenon propensity to be less risk averse when in a group
and risk is shared.

Contracts

Are freely entered into:


Generally agree conditions without duress
Define the ground rules

Purpose of the contract is to allocate risk between parties (very narrow definition)

Tradeoff between price and ability to bear risk:


The risk reward relationship
Express and implied terms

Who writes the contract?


Jointly consensus of construction stakeholders
By one party e.g. government specific objectives e.g. public accountability

Controllable v. Uncontrollable Risks

Controllable e.g. variations in performance where management has a direct influence

Uncontrollable weather, inflation, exchange rates etc.

Are uncontrollable risks really uncontrollable or can measures be taken to minimize


disruption? (Even if the occurrence can not be eliminated?)
Fundamental Risks
Liabilities and responsibility (e.g. driven by Tort)

Adequacy of design
Cost of construction
Latent defects (workmanship/materials)
Safety and accidents
Completion deadlines
Quality/fitness for purpose

Transferring Risk

Indemnifying other parties

Allocation by Statute e.g. Health and safety

Principle of Control

Who can control the risk?

Risk Avoidance

Warranties and collateral warranties extends contractual relationships (expands privity


of contract)

Surety Bonds
Liability for failure of another not an insurance policy

Bid bonds
Performance bonds
Labour and material payment bonds

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