Question

There is close relationship between risk managment and the construction contract. Explain that relationship and how it is established.

If you don’t use Word Microsoft to write the solutions there, so write very big. Thank you

Answer 1

Risk management is vital when tendering for construction contracts. Risk is described by Atkinson (2001) as the “probability of an occurrence of a hazard and the magnitude of the consequences”. Consequently risk can be considered as the likelihood of an experience occurring and the resultant effect of that experience if it takes place.

As defined by RICS (2009) risk management is a means of processes where risks are identified, analysed and managed. It is a constant cycle that begins at the pre-tender stage; this means that risk can be priced into the bid and continues after post contract stage. During the different phases of a project, new risks will emerge throughout the contract. Identifying in advance allows quicker mitigation; to reduce impact risk has on the project.

- The success of construction lenders, owners, contractors or subcontractors may depend on how well each of them addresses project risks. This is called “risk management.” A major part of risk management is “risk allocation,” whereby a party assigns by contract the responsibility for a certain risk to another party, who will then bear that risk. Yet another part of risk management is the manner in which a party handles its assumed risk so that the possibility (and resulting cost) of the risk is minimized.

Some of the most important risk management tools at a party’s disposal are the contracts into which it enters with others involved in the construction project. Within those contracts, risk is primarily allocated through indemnity and insurance requirement provisions. Managing risks can be handled not only by sound business and construction practices (such as proper preconstruction planning, proven construction means and methods, use of experienced personnel, and stringent safety programs) but also by careful contract preparation and review. What follows is a brief overview of some of the key risk allocation and risk management concepts to consider when preparing or entering into your next construction contract.

- A fundamental risk management concept is that owners and contractors should anticipate potential project risks and determine whether it is more advantageous to accept responsibility for each risk or to allocate responsibility for that risk to another party. From a risk management perspective, it is important to assign a project risk to the party best able to control and manage it. For example, a project owner will want to allocate the risk that someone is hurt by construction operations to the contractor, who is in the best position to provide a safe work site. A contractor will want to allocate the risk of design errors to the owner, who often holds the contract with the architect and therefore is in a better position to address and minimize these losses. These are the types of risks that a construction contract should address, so that the parties know in advance who is responsible for what risk.