A Quick Introduction To Construction Risk
A Quick Introduction To Construction Risk
A Quick Introduction To Construction Risk
Einführung
Definition of Risk
A construction risk can be defined as any exposure to possible loss. Because every
construction project is different, each offers a multitude of varying risks. To ensure the success
of a project, a contractor starting on a construction project must be able to recognize and
assess those risks. And then the contractor must be able to manage those risks.
There are many typical construction risks that might impact a contractor’s success on a project.
In Appendices A-I to this article are checklists to help a contractor identify, assess, and manage
risks on a specific project. These lists are not all-inclusive but are intended to help contractors
think about the risk management process.
A “reasoned” risk allocation strategy is a “win-win” proposition for all project participants. Such
a strategy tries to allocate specific risks based on an analysis of which party is best able to
evaluate, control, manage, and assume the risk. Proper risk allocation provides many benefits
to the project participants and to the project. It frames positive project relationships, thereby
reducing the adversarial outlook characteristic of an “all-or-nothing” or “take-it-or-leave-it”
approach and the chance for misunderstanding and claims. With fewer uncertainties caused by
unfairly allocated risks, contractors can avoid the addition of cost contingencies in the pricing of
project bids and estimates and schedule contingencies.
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A Quick Introduction to Construction Risks and Contracting Practices
The construction contract expresses the intent of the parties and records in writing their main
risk allocation decisions. The term “construction contract” is somewhat confusing. Rather, each
“construction contract” is actually a series of different documents, which together set out the
entire understanding between the contractor and the owner.
Standard form contracts have been an important part of the construction industry’s business
practices since the nineteenth century. These standard form contracts are drafted by
professional and trade associations for architects (American Institute of Architects, AIA),
engineers (Engineers Joint Contract Documents Committee, EJCDC), and commercial
contractors (Associated General Contractors of America, AGC), among others.
Standard form contracts help give private construction transactions predictability and efficiency
and have provided the framework for the development of construction law in the United States.
Because most industry drafted documents are developed through a process in which other
industry groups and organizations participate or give feedback on proposed terms and
conditions, these documents represent prevailing customs and practices and are good sources
of industry best practices. Therefore, even if the parties choose to draft their own contract
forms, industry standard forms serve as invaluable references for the parties’ forms drafting and
negotiations.
Industry standard forms are popular because they are familiar to industry players. This
familiarity with standard terms and conditions reduces drafting and review time. Familiarity with
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A Quick Introduction to Construction Risks and Contracting Practices
standard terms and conditions provides contractors and subcontractors with the necessary
comfort to offer lower bids or negotiated prices.
Another reason to support the use of industry standard forms is that drafting a multi-part
construction contract from scratch in a short time is an ambitious task for the inexperienced.
Despite their usefulness, construction industry standard form contracts should not be used
without noting certain cautions:
Standard forms should not be used without modifications. Because they are drafted for
broad use, standard form contracts cannot account for all specific transactional and
jurisdictional terms that the parties need to insert in their agreements.
When modifying a standard form, be wary of the “ripple effect.” Because standard form
construction contracts are complex documents that often reference other parts of the
contract, changes made in one may have effects in another. Pay particular attention
when changing the definition of a word or term.
Do not become “contract complacent.” Read the contract, even if it is a standard form.
New projects and circumstances may necessitate a “fresh look” at specific boiler plate
language.
Custom-drafted and industry-drafted forms do not mix. Industry-drafted forms usually
are coordinated only with other industry-drafted forms from the same organization (for
example, AGC forms with other AGC forms). It is difficult to make custom forms
compatible with industry-drafted forms. In addition, industry-drafted forms from different
organizations usually are not compatible.
Every contract form, including those drafted by industry organizations, contains the bias
of the drafter. Any contract contains a bias, whether drafted by an industry organization
or by counsel for one of the contracting parties. Therefore, you should know both the
terms and conditions of and when to use the various standard forms published by
different industry organizations.
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A Quick Introduction to Construction Risks and Contracting Practices
Appendix A
Contractor Self-Qualification
Do we have the right experience to perform this kind of work?
Has our experience with this type of work been profitable?
Do we have enough experience with projects of this size and complexity?
Do we have enough experience with this type of project delivery method?
Do we have available site supervision with successful experience running
projects of this type, size, and complexity?
Can we get a bond for this project?
Will a bond for this job eliminate or significantly reduce our capacity to bond other
foreseeable or more desirable work?
Do we have the home office support needed for this project?
Will the potential profit offset the project risks?
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A Quick Introduction to Construction Risks and Contracting Practices
Appendix B
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A Quick Introduction to Construction Risks and Contracting Practices
Appendix C
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A Quick Introduction to Construction Risks and Contracting Practices
Appendix D
Payment Security
Have the lien law requirements of the project locale been verified?
Have any pre-contract lien filing requirements been observed?
Have any required lien waivers been reviewed for lien law consistency and
fairness?
Have we complied with applicable tax/revenue bond requirements?
Have we complied with applicable state or local licensing requirements?
Have we qualified to do business in the project locale (jurisdiction)?
Are there applicable prompt payment requirements in the jurisdiction?
Is there a statute in the jurisdiction addressing the validity of a pay-if-paid
provision?
Do the contract documents try to make the law of a different jurisdiction
controlling?
Is there an applicable trust fund state in the jurisdiction?
Is there a bond we can look to for payment protection?
If yes, have we prequalified the bond surety?
Have we reviewed any documents that we are required to sign for the lender’s
benefit?
Does the lender offer any payment protection?
If the project involves public funds, have we investigated restrictions on how
public funds may be obligated?
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A Quick Introduction to Construction Risks and Contracting Practices
Appendix E
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A Quick Introduction to Construction Risks and Contracting Practices
Appendix F
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A Quick Introduction to Construction Risks and Contracting Practices
Appendix G
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A Quick Introduction to Construction Risks and Contracting Practices
Appendix H
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A Quick Introduction to Construction Risks and Contracting Practices
Appendix I
Summary Identification of Key Risk Allocation Clauses in the Contract
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