Construction Legalities: How to Allocate Risk to Various Parties

Summary: Drafting a well thought-out contract can result in minimizing damages and losses when a claim arises.

The success of a construction project depends largely on how owners, contractors, lenders, or subcontractors address project risks. Now, this is what is called “risk management” in construction terms. Now, one of the major factors of risk management is known as risk allocation, which refers to one party assigning responsibility for a certain risk to another party. The aforementioned party that was essentially “handed” the risk will then have to bear that responsibility. However, another part of the risk management process involves how a party handles the risk itself so the overall damage is minimized – which is crucial due to the fact that projects costs hundreds of thousands, if not millions, of dollars.

How Contracts Can Be a Risk Management Tool

Within contracts risk can be primarily handled through indemnity and insurance requirement provisions. Now, it’s important to understand that one of the most important risk management tools at your disposal is the contract itself. Managing risks can be handled by carefully preparing and reviewing the contract itself. Remember, if any claim were to arise and a construction claims management team were to look at the contract, there must certainly be terms that are within the fine print that show who’s within the right and the wrong. This is why the contract is the key to resolving any legal issues.

Allocating Risk to Parties

One fundamental risk management concept that owners and contractors need to keep a close eye out for is allocating responsibility to a certain party. From the perspective of risk management, it’s quite important to assign a project risk to the party that is qualified to control and manage it.  For instance, the project owner would want to allocate the risk of design errors to the owner, who most of the time holds the contract with the architect and is in a reasonable position to address and minimize any losses.
Another way to allocate risk is through an indemnity provision, which is a section in a contract that requires one party to pay for losses incurred by a specific party as a result of claims. This can essentially defend the owner from and against claims for any injury or property damage that occurs during work. It can be a legal asset when it comes to any potential claims. Seasoned construction attorney such as Lyle Charles, believe that placing an indemnity provision within a contract provides a cushion if and when a claim does arise during a project.