Effective Wording to Improve Risk Allocation in Lump Sum Contracts

Abstract

This is the second paper addressing the results of an investigation into the subjective nature of contract interpretation. The first paper presented the findings of the investigation which showed how contracting parties interpret contract clauses differently. This paper reports the testing of a revised Canadian Standard Lump Sum Contract against its predecessor. The intent of this study was to measure the improvement of the wording-not in legal terms, but in terms of what the potential signatory to, or administrator of, the contract understood. The measure, as in the previous study, was the extent to which there was a “meeting of the minds” in interpretation of who was bearing particular risks. Unlike many contracts used today that are written by the owner or its representative, this standard form contract was drafted by a committee representing contractors and consultants, but not owners. An interesting observation was that owners were generally prepared to assume more risk than they perceived was being allocated to them while contractors wanted less risk.