There is no such thing as a risk-free construction project. You may not work in construction or engineering, but there is no such thing as a risk-free project in any sector!
Each project team, scope, parties, end-user, location, specification and so on is unique. No-one can guarantee what will happen over the course of the next few months – between the contract being signed and the task or project being completed/delivered. There might be a global pandemic, energy prices might rise 200% overnight, government rules may make the project illegal or a flash flood might wash away the site. Every project involves taking a calculated risk.
Your contract should help the parties manage those risks (‘risks’ are more accurately referred to as ‘risk events’).
Using a contract to manage risks
Risk management is a four-step process: identification, analysis, response and review. The role of a contract is to reflect the parties’ chosen risk response for each of the identified risk events.
A clear contract should:
- state the specific risks that are allocated to an insurer (eg fire, flood, professional liability) or one of the parties (eg data compliance),
- include regular review procedures (eg changing time, cost or quality to reflect risks which have happened), and
- demonstrate how the consequences of specific risks are retained by, shared with or transferred between the parties.
In the UK construction industry, standard form contracts have lists of risk events that entitle the supplier to extra time or money or both. Anything which is not listed is generally the supplier’s risk. If your supplier is not aware of this principle and does not price for those risks, it can result in friction, loss of trust and even insolvency.
If there are other unexpected or unforeseen events then these are best dealt with by the parties talking openly with each other and agreeing how best to proceed.
What should you do?
Your contract can provide a framework, based on trust, for making decisions without having to dictate a precise path for every eventuality. Once the insurance position has been agreed, risks beyond the control of either party can be dealt with under a change management procedure (see essential 9: procedures).
This post is based on a chapter in three of the books in the series on Construction Contracts in Just 500 Words (Chapter 15 for small works contracts and subcontract agreements and Chapter 17 for consultant appointments). Each of these chapters also illustrates the perils of getting it wrong, based on a real-life case study, as well as how you can write it simply. For letters of intent, a key critical risk is that the full contract is not signed – read more in Chapter 15.