Allocation Of Risk In Construction Contracts

• Published date: 29 February 2024
• Subject Matter: Corporate/Commercial Law, Real Estate and Construction, Contracts and Commercial Law, Construction & Planning
• Law Firm: Thomson Snell & Passmore
• Author: Caroline Watkins

"Ensuring that risks are owned or jointly owned by the party or parties best able to manage and bear them, and understanding how they intend to handle them, is key to delivering value for money and successful outcomes."

Construction Playbook, September 2022

The benefits of getting the allocation of risk correct in a construction contract are invaluable.

In the context of any commercial contract for work in which the external (and sometimes internal) influences pose considerable risk in themselves, proceeding without a proper consideration of the allocation of risk at the outset can spell cost and confusion (and costly confusion) when those influences rear their heads.

Types of risk

Construction is well known for hefty associated risks and there are a great many factors that create uncertainty throughout a project. Force majeure, unforeseen ground conditions, adverse weather, inflation, political events, consents, economic conditions, changes in law and compliance, design defects and discrepancies can all entail considerable shifts in cost and time after the date that work begins under the contract. It is for the parties to determine between them how those risks will be both allocated and managed, and to document the same effectively in the contract terms.

Principles of risk allocation

In deciding on the party with whom the risk should lie (or where the needle falls between), a key consideration is which party is most capable of managing the risk and/or dealing with the consequences.

The following principles are helpful guidance:

1. Which party can best control the risk and/or its associated consequences?
2. Which party can best foresee the risk?
3. Which party can best bear that risk?
4. Which party ultimately most benefits or suffers when the risk eventuates?*

All risks under the contract should be taken into account when drawing up or responding to the contract terms to ensure that the risk is balanced - the effort put in at the start can offset a considerable amount of grief later on.

In the case of Clin v Walter Lilly & Co Ltd [2021] EWCA Civ 136, the Court of Appeal held that the obtaining of a conservation area consent fell to the employer as an implied contractual obligation to use all due diligence to obtain such consent; and that such contractual term was breached. The employer's contention that such implied term a. did not exist and b. that the consent was not actually lawfully required points to the lack of understanding on the employer's part as to the...