Water Design-Build Council Blog

Allocation of Risk and Liability in a Design-Build or CMAR Project

Posted by Admin on Wed, Nov 12, 2014 @ 11:30 AM

28157476_sRisk and liability allocation in a design-build or CMAR contract generally follows the principle that risks should be allocated to the party in the best position to manage them. Whether it is the owner or the design-build or CMAR firm that prepares the contract, a risk allocation matrix can provide a useful starting point.

A risk allocation matrix identifies potential risks across a project and then allocates or shares these risks between the owner and a firm. The objective is to reduce the owner’s risk-related costs by taking into account the following concepts.

Loss prevention

What measures can be taken to prevent or reduce the likelihood of adverse occurrences? Moreover, who can most efficiently do so?

Loss control

What steps can be taken to minimize the extent of damage if an undesirable event occurs – despite the loss-prevention measures put in place – and again, who can most efficiently do so?

Third-party coverage

What forms of insurance are available to contribute to the cost of losses incurred, and how cost-effective are those insurance options as compared to other risk management alternatives?

Absorption of risk

What risks should remain with the owner because transfer to the constructor or funding by a third party is not cost-effective or even possible?

In complex design-build or CMAR projects, contract terms should attempt to achieve a balance in the allocation of risks, thus achieving an optimum price for the owner, fostering a successful project and productive relationship, and establishing appropriate expectations.

For example, it is rarely in the owner’s best interest to impose project risks on a design-build or CMAR firm that are not truly within their control, as a means to offset cost. Such inefficient risk-shifting can reduce the number of respondents to the RFQ/RFP, resulting in excessive contingencies – “risk premiums” – paid by the owner, making it more difficult for design-build or CMAR firms to obtain required bonding and insurance.

It should also be noted that it is not possible to shift all risks to the design-build or CMAR firm. The owner’s project risk does not drop to zero under any circumstances. In short, risk can be reduced or mitigated, but not entirely eliminated.

The success of a project can be jeopardized if the service provider is forced to accept risks that are not within their control or within their ability to efficiently finance.

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Topics: WDBC Admin