Review Your Contract: Risk

The final element in my STAR analysis is Risk.

Risk v Reward

When reviewing your contract, you need to strike a balance between risk and reward (harm v benefits). Risk is inextricably linked to price and cost.

If your deal seems too good to be true, it often is!

In construction, the aim is to take measured risks. It is impossible to create a risk-free business or to avoid all risks. Neither should you ignore the facts and pretend that everything will go swimmingly all the time.

Not every risk is worth taking:

…the project may be alluring. But the risks of injury to those engaged in it, or to others, or to both, may be so manifest and substantial and their elimination may be so difficult to ensure with reasonable certainty that the only proper course is to abandon the project altogether. Learned Counsel… appeared to regard such a defeatist outcome as unthinkable. Yet circumstances can, and have at times arisen, in which it is plain commonsense and any other decision foolhardy. The law requires even pioneers to be prudent.

So be prepared, once you have identified risks, to walk away if the balance is too much in favour of risk and too little in favour of reward.

What should you do?

For every risk related to a contract or a project you should understand:

  • the precise meaning of that risk
  • likelihood of the risk occurring and its impact on the project or contract
  • how that risk will be managed if it occurs
  • who bears contractual responsibility for the consequences of that risk
  • whether you can pass on that responsibility, share it or insure against it
  • the reward you are getting for taking a risk

The role of your contract is to record the risk response i.e. who bears the time, cost and quality consequences of a risk event occurring, and who is responsible for managing/mitigating those consequences.

Quote from: Independent Broadcasting Authority v EMI Electronics and BICC Construction (1980) 14 BLR 1, HL Lord Edmund-Davies.

 

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