Schedule Risk Management - Construction Project Scheduling and Control - page 380

can provide some level of protection against the adverse consequences of unknown
problems that might affect the completion of the project. Builder's risk policies provide
insurance that will replace materials and provide for damage repair that can be invoked
fairly quickly in the event of vandalism or property losses, allowing the project to
resume production and minimize risks of delayed completion.
An astute owner realizes that the more a risk is shifted to the contractor, the higher
the cost and, sometimes, the longer the performance time of the project will be. A fair
risk allocation is essential for a successful and economical project that is completed
in a timely manner. Unfair risk allocation results in risks being distributed among
members of the construction team, creating disharmony and adversarial relationships
among those very team members who are needed to resolve the problems at hand.
As noted in the CMAA's Capstone: The History of ConstructionManagement Prac-
tice and Procedures (2003):
Following the timely identification and assessment of risks, a rational approach to risk
allocation can proceed based upon the following general principles :
• Risk should be assigned to the party who can best control it.
• Risk should be assigned to the party who can bear the risk at the lowest cost.
• Risk should be assigned to the Owner when no other party can control the risk or
bear the loss.
• Assumption of risk by the other parties to the construction process results in
increases in cost (visible or hidden) to the Owner.
The risk management plan is the means by which the management team can
identify all risks and determine how to deal with those risks. It provides much bet-
ter protection through a fair and objective allocation of risk and produces a clear
understanding of the risk objectives by the entire project team.
In some contracts, owners may try to shift some risks to the contractor as part of
what they perceive as negotiation. A contractor's profit is usually proportional to the
risk taken by the contractor. It is important for any owner to understand that there
is always a price for shifting the risk, whether the risk is declared or hidden. Perhaps,
in some instances, if the owner knew the real cost of shifting certain risks, the owner
would have preferred not to shift them. An example of shifting of risk is when someone
is buying a new car or home. A standard warranty usually comes with every new vehicle
and covers the manufacturer's defects up to a certain time period (e.g., 36 months)
or mileage (e.g., 36,000 miles), whichever comes first. Of course, the salesperson will
try to sell the buyer (owner) an “extended warranty” policy that extends most of the
original warranty terms in time and mileage and perhaps adds a few attractive items.
A buyer who considers himself or herself a good negotiator may manage to obtain this
extended warranty policy at “no extra cost.” This is a myth! In most cases, the buyer
would have received a price discount on the vehicle, roughly equivalent to the dealer's
cost on the extended warranty policy, in lieu of the policy itself.