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Looking at some strategies for allocating risk in construction contracts, P.1

For both property owners/developers and contractors, careful negotiation of construction contracts is important to ensure a party’s rights and interests are protected. One important aspect of construction contract negotiation that should always be thoroughly explored is risk allocation.

Risk allocation refers to the shifting and balance of risk between parties to a contract. There are a variety of tools and strategies that can be used to shift risk in commercial contracts, and it is important for parties to a construction project to consider the ways in which they are exposed to risk and to negotiate measures to minimize that risk. 

One way of allocating risk in construction contracts is to establish payment terms minimize potential losses. Typically, payment terms call for either advanced or deferred payment as a way to manage risks. Property owners will benefit from terms which call for deferred payment, while contractors benefit from advanced payment. Parties need to work out a balance of risk appropriate to the circumstances of each case.

Another way risk can be shifted in construction contracts is through warranties and representations. There are a variety of express warranties that can be made in construction contracts, including general warranties on the quality of materials, the conformance of work to contract specifications, and the work’s lack of defects, as well as warranties specific to the particular project.

Implied warranties, such as warranties of good workmanship and of provision of sufficient information, may also be recognized in some cases. Implied warranty protections vary from state to state, though, and may not be as readily recognized as express warranties, which is something to keep in mind when drafting construction contracts.

In our next post, we’ll continue looking at this topic, and the importance of working with an experienced construction law attorney when drafting construction contracts. 

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