Controlling Risks

Risk management is not just providing for uncertainties - it is management of risks considering the combination of the probability (extent to which the risk event is likely to occur) and its consequence (severity of the outcome of the event). The two principles in risk management are:

• Principle of control: This suggests that the party which has the better ability to control a risk should be given the risk.
• Principle of capability: This suggests that risk should be transferred to the party which is most capable to absorb it.

The two principles are not mutually exclusive and both principles should be equitably applied in allocating risks in a construction contract document.

Two other characteristics of risk management are that:

• It begins in the project conception stage and continues throughout the execution of the project.
• It results from the combined efforts of both owner and contractor.

Projects involving substantial construction are most prone to risks and demand relatively the most elaborate attention to risk control. Handling of risk  in  construction  contracts  varies  considerably.  This  depends  on  the nature and location of the work, the owner and contractor involved and the prevailing contracting climate. Each of these varies over time and there are may be other outside influences also such as banks, governments and the insurance market.