Document Detail

Title: RS210-1 - Equitable Risk Allocation
Publication Date: 9/1/2006
Product Type: Research Summary
Status: Supporting Product
Pages: 46
Describes why transferring risk to lower-tier parties often is inappropriate and causes higher contingencies. Introduces the Two-Party Risk Assessment and Allocation Model, a software tool that encourages compromise during the risk allocation process. Includes examples of contract language tables and legal case studies.

NOTE: Actual tools included separately with IR210-2 and IR210-3.
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Many industry participants allocate construction risks by the process of aversion. Owners have a tendency to shift risk to the primary contractor, who in turn pushes risk to the lower-tier parties in the contracting arrangement. As a consequence, parties with the least amount of control and influence over many of the risk-producing factors and decisions often carry the majority of the construction risk burden.

Adding to the problem, the construction industry has yet to accept a conclusive and widely accepted practice. Many feel that prevailing risk allocation strategies are ineffective and detrimental to overall project success. New research by the Construction Industry Institute (CII), however, encourages risk allocation in a compromising and educated manner, recognizing the unique circumstances of each specific project.

In 2004, CII formed the Contracting to Appropriately Allocate Risk Research Team. Composed of a wide representation of industry players, the research team reached several conclusions during its investigation. First, the industry has much to learn concerning appropriate risk allocation. Secondly, it is not appropriate or logical to specify that a particular risk should be allocated a certain way for any and every project. Lastly, inappropriate risk allocation may lead to increased costs for both owners and contractors.

The research team developed the “Two-Party Risk Assessment and Allocation Model” that encourages contracting parties to compromise during the risk allocation process. It is designed to assess and allocate risk before project execution so that risk management efforts are minimized.

The research and the model are described in the following pages. The model is important because it facilitates involvement from any two contracting parties early in a project and helps in appropriately allocating each particular risk to the party that is best equipped to handle it.