Risk allocation in contracts: How to improve the process

Recent research and industry experts have indicated that inappropriate risk allocation through disclaimer clauses in contracts is a significant reason for increasing the total cost of a project. Most literature and studies on this topic suggest solutions for the symptoms to the problem but they do not address the root cause. Furthermore, most of these studies are in industries other than construction. However, those in construction do not go beyond single case studies or formulas and advice, which are based on having been more successful in practice, rather than a careful empirical research.

The objectives of this research were to test the current practice of risk allocation in the construction industry, uncover the rationale behind inappropriate risk allocation through the use of disclaimer clauses, and identify methods by which to overcome this rationale and improve the whole process. Thus, this research was based on a quantitative-qualitative triangulation methodology approach, consisting of three phases in parallel with the literature review. Phase one of this research was a quantitative section based on a mail-out survey across Canada. Phase two was a qualitative section based on a Modified Delphi questionnaire with a panel of experts. Phase three was a qualitative Modified Grounded Theory interviews based on the results that were analysed from the previous phases.

The results of this research identified that using disclaimer clauses to allocate risks is a common industry practice, validated the amount of premiums attached to the five most common disclaimer clauses in construction contracts, uncovered the rationale of using disclaimer clauses to allocate risks and recognized the relationship between trust and better risk allocation process in construction contracts. Additionally, this research presented a unique view which is based on empirical research that proposes a risk allocation framework based on trust relationships between the contracting parties to improve general business environment and reduce the total project costs in the Canadian construction industry.