Risk Allocation in Lump-Sum Contracts—Concept of Latent Dispute

Abstract

This paper presents findings of a pilot study and investigation into construction contracts. The investigation evaluated the effectiveness of written contract language to communicate risk apportionment between contracting parties. This topic is important. Ineffective risk apportionment or the misunderstanding of risk apportionment between contracting parties generally leads to a dispute after the occurrence of a risk event. Contract disputes usually increase project costs and lead to an adversarial contract relationship. A survey was designed to measure perceptions of risk apportionment assigned by construction contract clauses. Perceptions were obtained by asking owners, contractors and consultants to indicate the degree of risk apportionment they perceived as having been assigned between an owner and a contractor by specific contract clauses. Survey results indicated that contracting parties consistently interpret risk apportionment of contract clauses differently. In other words, in terms of how a contract clause assigned risk, the contracting parties seldom interpreted such clauses in the same way.