Risky Business - a new take on allocating risk in construction contracts
Real Estate & Construction and Hotels & Leisure Focus
Paul TaylorPartner,Regional Head of Arbitration
Construction contracts are, at their very heart, a written agreement of how risks are to be allocated between the parties to a construction project. Those risks can be categorised as legal, contractual and commercial by their nature.
Where standard form construction contracts such as the FIDIC suite have attempted to make that allocation within the conditions of contract, it is most often based on a consideration of who can best bear the obligation and consequences of any particular risk on a project, including the ability to insure in order to cover its occurrence.
At its simplest level, the Employer (and its designer) would be responsible for the design of the project and the contractor would be responsible for the construction of the project in a traditional construction contract. However, both the design and construction risk are passed over to the contractor in a ‘design and build’ situation and the Contractor will, quite properly, increase and build into his price sufficient sums to cover that increased set of risks that he is taking on.
By way of further example, under the contract, the risk of failing to give the Contractor timely access to the site is a risk that, if realised, then imposes a potential contractual and financial consequence on the owner or Employer. However, the risk of failing to provide suitably qualified personnel to construct the project, falls to the Contractor, who may suffer damages or a penalty if his failure leads to a delay to the project completion date.
Where those risks are clearly set out and allocated in the wording of the clauses of the contract, the law (whether through judgments in courts or awards in arbitration) will uphold the bargain that the parties agreed upon. Under civil law jurisdictions such as the UAE, the legal position is that, in the absence of ambiguity, ‘the intention of the parties is to be deducted from the indication given by the words used in the contract.’[1] So, it follows that where it has been agreed in the contract wording how a particular risk will be allocated, or rather to whom, that is indeed where that risk and its consequences (financial or otherwise) shall sit prima facie.
Understanding and agreeing where risks lie, therefore allows a Contractor to build into its pricing a financial measure of that risk occurring and its consequences. Equally, it allows an Employer to assess the risks for which it might be responsible and the consequences to its project and its profitability.
In certain cases, the Contractor may be able to insure against such risk and its consequences, for example under its Contractor’s All Risk (‘CAR’) policy, or the Employer might insure certain risks under a Project Insurance policy.
In addition, certain risks could either be shared or not be specifically allocated solely to one or the other party, and might be matters that come under the ‘force majeure’ provisions of a contract. However, this middle ground often became the subject of legal cases where it was not actually clear what was agreed or intended (‘Covid claims’ being an example).
Recognising and addressing how a whole new world of geo-political risks, which have never previously all collided into the current perfect storm, can be fairly allocated and managed is going to impact the future of the construction industry and the legal industry.
The traditional position has been turned on its head in recent years to the extent that understanding and then pricing the range of new and unprecedented risks is in itself a huge risk for Contractors. This has led to claims and disputes which are usually expressed in terms of:
how can I accept price responsibility for that risk ; and
how could I have foreseen those consequences.
The traditional view would have relied on the agreed contractual clauses as acceptance of both situations, but the nature of the risks that are now affecting construction contracts has changed significantly beyond localised ‘site’ issues and into ‘geo-political’ issues.
By way of a short-list of some of those ‘new world’ factors, which the construction industry has had to grapple with, and the types of global risk that now dominate the contracting battleground include: blockades/embargos, tariffs, wars and conflicts, political instability, regime change and revolution, climate change, financial and economic crises, and pandemic and epidemic. All of those in turn impact the more recognisable risks of material supply chain, labour and resource, financial security, access and permits, and final sign off.
Whilst force majeure clauses might seek to cover some of these, and insurance policies might seek to avoid covering some of these, it is a far cry from the position where the estimating and commercial teams of a contractor could with some accuracy foresee and accept traditional construction risks as part of their decision on whether to bid and at what price.
Given the types of ‘new world’ risks that now have to be managed, allocated and then mitigated, and which have potential and actual consequences far beyond anything that could previously be foreseen, the whole process of risk allocation needs to be re-considered to ensure that it is fair and reasonable to both Employer and Contractor. Engagement in the pre-tender and bidding stage to identify where in this brave new world those risks now are best allocated, or shared, or insured, has to be something that the construction industry addresses, and the standard contract forms re-focus on and re-set the risk dial to reflect today’s realities. Failure to do so, or simply doing what we have always done, will result in increasingly divisive positions and inevitably more and more disputes, increased numbers of contractors unable to financially survive and projects becoming unviable or abandoned.
If the dial is not re-set and sensible, modern views taken to fairly allocate the massive risks that now present themselves, more big contracting companies will fail, more projects will be jeopardised and more owners will not get the quality of construction that they expect in the finished project.
Only by the key stakeholders together communicating and understanding where the new balance of risks lies and can be managed now, will the situation be addressed.
[1] Taken from James Whelan’s Commentary on the Civil Code (Federal Law No. 5 of 1985), regarding Article 266
For further information,please contact Paul Taylor.
Published in June 2025
