Contractual risks arising during construction

Among the most common risks encountered during the construction of a project
by a civil engineering contractor under a standard type of construction
contract, are the following:
1. Design errors, quantification errors.
2. Design changes found necessary, or required by the employer.
3. Unforeseen physical conditions or artificial obstructions.
4. Unforeseen price rises in labour, materials or plant.
5. Theft or damage to the works, or materials and equipment on site.
6. Weather conditions, including floods or excessive hot weather.
7. Delay or inability to obtain materials or equipment required.
8. Inability to get the amount or quality of labour required, or labour strikes.
9. Errors in pricing by the contractor.

Most standard conditions of contract apportion the normal risks of construction to the party best able to control the risk. The apportionment will vary from form to form but many have been agreed within the industry as giving a reasonable balance between employer and contractor and it is generally unwise to upset this for normal types of civil engineering work.
Thus under the ICE conditions of contract using a bill of quantities, risks 1, 2 and 3 are carried by the employer. Design changes can cause much extra work, cost and delay to a contractor but may be forced on an employer by circumstances outside his control. To safeguard his position, an employer should not enter unsuitable contracts which do not give him power to adopt reasonable design changes at reasonable cost.
Risk 4 is usually carried by the contractor in times of low inflation.
Risk 5 is carried by the contractor who has to insure against it, although the employer may also insure against consequent damage to works he owns, and to any new works he takes over.
Risk 6, delay due to weather conditions, has traditionally been a contractor’s risk and this has posed many problems for contractors because the effect of inclement weather (mostly wet weather in the UK) can vary according to the type of work undertaken. Any form of earth or road construction can be severely affected by wet weather, whereas much building work need not be so affected. The ICE standard conditions entitle a contractor to an extension of the contract period for ‘exceptional adverse weather conditions’ but do not authorize additional payment on account of it. The ICE ‘Engineering and Construction Contract’ referred to in Section 4.2(f) attempts to define ‘exceptional weather conditions’ as a basis for claim, and allows time and payment if these are exceeded.
Risk 7, delay in obtaining materials, is carried by the contractor in most cases, except where the employer stipulates in the contract that a specific supplier shall be used, when liability for delay may lie with the employer (see Section 14.2).
Risk 8, failure to get labour, is usually shouldered by the contractor, mainly because this lies within the ability of the contractor to control, and not the employer.
Usually any requirement that the contractor should shoulder all or most risks arises because the employer prefers to have a fixed financial commitment, or because he has only a limited allocation of funds which he has no authority to exceed. Some overseas governments will not authorize any expenditure above the tendered sum. This fixing of the price and placing all or most of the risks on the contractor can be expected to lead to generally high prices. Also if unexpected circumstances occur which the contractor has not allowed for, he may tend to adopt ‘short-cut’ methods which do not produce the most satisfactory work, or he may be forced to finish the work at a loss.
For complex projects, and perhaps where major cost reimbursement or target cost projects are envisaged, a formal risk assessment may be necessary in which a risk register is set up, defining how each risk is to be dealt with and which party is to carry the liability should the risk occur. In summary this may involve:
• identification of risks likely to arise by discussion between all interested parties involved;
• analysis of each risk as to likely frequency, severity of impact on cost and delay, both maximum and minimum;
• identification as to who is best able to manage the risk and/or who should carry the costs which may arise;
• definition of risks falling on the contractor so that he can include for them in his prices or insure against them.
The analysis of risks may be accompanied by a mathematical probability exercise to try to assess the most likely outcome for the employer’s financial planning purposes. As a general principle, it is usually best not to pass to the contractor risks which are most difficult to assess as regards likelihood or cost, since a contractor may then need to increase his price substantially to protect his position, causing the employer to pay for a risk which may never arise.