Risk management under standard forms of construction contract

We discuss in this paper the extent to which UK and international standard form construction contracts and consultant appointments include binding provisions for proactive risk management, and consider the effectiveness of those provisions in avoiding or resolving disputes.

The driving forces behind the growth of a risk management culture

In broad terms, risk is the impact of uncertainty on objectives, but is also often expressed in terms of a combination of the consequences of an event and the associated likelihood of occurrence of an event1. Applied to a construction project, risks can typically be classified based upon their possible timing of occurrence (pre, during or post construction phase), and their effect if they eventuate: personal injury or loss of life, material damage to the works being constructed or to the property of others, and pure economic and/or time loss for the construction team, for example when unforeseen physical conditions are encountered at site and make the construction operation more onerous than anticipated2. Construction is plagued by risks3, and has been long perceived as a risky venture due to the wide matrix of risks which affect a construction project4.

In contrast with this inherent uncertainty associated to the construction process, society at large expresses increasing demand for health and safety, as well as environmental hazards to be better controlled5 and casualties to be limited if not nullified6. And project parties, and in particular project lenders/financers require an increasing level of certainty on quality, time and cost of a project and to see corresponding risks on those be minimized7. Risk inherently exists in construction and cannot be ignored. However for Sir Latham, it can be “managed, minimised, shared, transferred or accepted”8, for the better interests of project parties and of society.

This emphasis did echo a growing culture of risk management, openly and proactively addressing risk in construction operations, rather than keeping them hidden and open to prejudices when they eventuate, which started to emerge in the 80’s upon the cornerstone work of Max Abrahamson, who defined that a construction party should bear a risk when it can control its occurrence, control its effect, or transfer it by insurance and/or have a preponderant economic benefit of running it9.

Standard forms of construction contracts, and consultants appointments, have accordingly over the last decades increasingly tried to capture and allocate those risks, hence moving away from an initial no-risk sharing approach10. As per Phillip Capper11, ‘the management of construction risks is better achieved by more pro-active contractual strategies’, and we shall see below to what extent those forms of contract, in the UK and on the international scene, include nowadays binding provisions for proactive risk management, and how effective those are in avoiding or resolving disputes

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(1) ISO 31000 (2009), 1.
(2) Bunni (2011), 43.
(3) Tah (2000), 107.
(4) Bunni (2011), 33.
(5) See for example in England & Wales the impact of an increasing legislation, through Health & Safety at Work
Act 1974, CDM Regulations (1994, 2007 and now 2015), the Environmental Protection Act 1990, and the
overarching influence of European Directives
(6) Bunni (2005), 94
(7) Scriven (1995), 73
(8) Latham (1994), 13.
(9) Abrahamson (1983)
(10) Bunni (2011), 141