67R-

11

CONTRACTRISKALLOCATION-
ASAPPLIEDI
NENGINEERING,
PROCUREMENT,AND
CONSTRUCTI
ON
 AACE® International Recommended Practice No. 67R-11

CONTRACT RISK ALLOCATION – AS APPLIED IN

ENGINEERING, PROCUREMENT, AND CONSTRUCTION
TCM Framework: 7.6 – Risk Management

Rev. January 14, 2014

Note: As AACE International Recommended Practices evolve over time, please refer to web.aacei.org for the latest
revisions.

Any terms found in AACE Recommended Practice 10S-90, Cost Engineering Terminology, supersede terms defined in
other AACE work products, including but not limited to, other recommended practices, the Total Cost Management
Framework, and Skills & Knowledge of Cost Engineering.

Contributors:
Disclaimer: The opinions expressed by the contributors to this recommended practice are their
own and do not necessarily reflect those of their employers, unless otherwise stated.

James E. Arrow, DRMP (Primary Contributor) Dennis Read Hanks, PE CCP DRMP
Christopher P. Caddell, PE CCP DRMP Donald F. McDonald, Jr. PE CCP PSP
Patrick B. Egger Ruben A. Sanchez, CCP
LeRoy Graw

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AACE® International Recommended Practice No. 67R-11
CONTRACT RISK ALLOCATION – AS APPLIED IN
ENGINEERING, PROCUREMENT, AND CONSTRUCTION
TCM Framework: 7.6 – Risk Management

January 10, 2014

TABLE OF CONTENTS

Table of Contents ..........................................................................................................................................................1

Introduction ...................................................................................................................................................................1
Scope .........................................................................................................................................................................1
Purpose ......................................................................................................................................................................1
Background ................................................................................................................................................................2
Recommended Practice .................................................................................................................................................2
The Contracting Process in the Construction Industry – An Introduction .................................................................2
Inappropriate Risk Allocation ....................................................................................................................................2
Contract Negotiations................................................................................................................................................2
Risk Allocation Considerations and Principles ...........................................................................................................3
Contingency Funding .................................................................................................................................................4
Preferred Allocation and the Interpretation of Contract Risk ...................................................................................7
Frequently Misallocated Contract Risks ....................................................................................................................7
The Contract Brief ....................................................................................................................................................11
Quantitative Contract Risk Assessment ...................................................................................................................11
Summary ......................................................................................................................................................................11
References ...................................................................................................................................................................11
Contributors.................................................................................................................................................................12

INTRODUCTION

Scope

This recommended practice (RP) of AACE International defines the contract risk allocation principles as applied in
engineering, procurement and construction (EPC). Such principles address for example; contract basics, legal risk
allocation principles, general risk allocation principles, typical contract forms, common contract risks, and
quantitative contract risk assessment. Much of the discussion focuses on construction; however, the principles
apply to contracts for any element of an EPC project.

Purpose

This RP is intended to provide guidelines for making equitable contract risk allocations that reduce the potential
for disputes and enhance the likelihood for project success.

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Background

This RP summarizes and clarifies contract risk allocation practices in the context of the TCM Framework and risk
management processes. It has been developed as a reference or overview document and may not be relied upon
as legal or specific risk action advice. In addition, it is recommended to seek the advice and input of experts in
contracting, claims, and dispute resolution as appropriate.

RECOMMENDED PRACTICE

The Contracting Process in the Construction Industry – An Introduction

Construction often involves numerous contracting parties, technological challenges and difficult working
conditions. As a consequence, the allocation of contract risk is typically a controversial process with each party
attempting to reduce negative risk as much as possible. Effective risk allocation can provide the foundation for
good working relationships, which should ultimately benefit any construction project. All parties to a construction
contract will find more benefit in being more risk aware.

Contractual risk transfer is a risk treatment practice within the risk management process that involves the
allocation of risk among contracting parties. When performed effectively, risk transfer equitably allocates risk
among parties according to their ability to control and insure against risk.

Construction contracts, both prime and major subcontracts, are often the most important documents on an EPC
project. This is certainly true if a contract covers the entire EPC scope. The contract provides the means to clearly
define the roles and responsibilities of each party so that it establishes which has assumed, negated or excluded a
particular project risk. All parties to a contract should be mindful that risks can never be fully transferred,
completely allocated or wholly assigned to one party.

Inappropriate Risk Allocation

Attempts to protect the party with the higher bargaining power typically results in one-sided onerous contracts
that generate self-inflicted (iatrogenic) risk. Examples may include:
• A potential reduction in the quality and/or quantity of bidders as they may seek opportunities elsewhere.
• Failure to recognize and allocate risk.
• Bidders unable to recognize and price for inequitable contract terms may submit a bid price or duration
that later proves too low or short.
• Disputes (in an attempt to recoup losses).
• Contractor insolvency (further driving up cost and schedule delay while an alternate contractor is sought).

The Construction Industry Institute (CII) defines [3] inappropriate risk allocation as:

“The practice of allocating risk without separately considering which party may be in the optimum position to
evaluate, control, bear the cost, or benefit from the assumption of the risk.”

Contract Negotiations

Negotiation skills are beyond the scope of this RP, however, during the pre-meeting or pre-negotiation period it is
very important to develop a negotiating position based on fact-finding and analysis. Parties must begin managing

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threats and opportunities long before any contract is signed. Beginning with the earliest procurement and
contracting strategy development and continuing into detail planning for each specific negotiation, strategic
questions should be posed; e.g. what defines an acceptable outcome and what are the opinions of key
stakeholders on critical issues?

Key pre-meeting objectives to be defined include:

• The initial offer;
• Goal for settlement; and
• The walk-away (or no deal) point.

In addition to strategic planning, tactical planning should determine the approach and technique to use. When
possible, a collaborative problem solving approach is recommended.

Prequalification of bidders is important to understanding the risk allocation process; including but not limited to,
the review of financial statements, public records, visiting relevant locations and speaking with parties who hold
relevant past experience, etc.

Risk allocation is considered optimal when an agreement has been reached to allocate the three attributes, price,
quantity, and remedy, in favor of the party most able to manage the underlying uncertainty.

Contract Law – An Overview:

Typically, in contracts there are two parties. A promisee is a person to whom a promise is made and a promisor is a
person who makes a promise.

When a binding contract is prepared, an element of risk is consequently reallocated between the parties in some
measure. For example, by making an agreement to provide goods or services, the promisee is likely to have
transferred his or her risk of nonperformance to a promisor who is much better placed to be able to manage all
associated risks. Prior to placing a contract, time is well spent verifying that risks are not transferred to a party that
is unable to manage the uncertainty in question.

The optimal allocation of risk depends on the unique circumstances of the project. There may be situations in
which traditional risk allocation practices may need to be modified in order to adapt to the project objectives.
Therefore, great care should be taken not to run afoul of traditional logic that may attempt to dictate that,
“standard forms can’t be amended”, “we’ve doing business this way for years” or “this is the way it has always
been done”.

When negotiating contracts, all stakeholders should read, analyze and understand their obligations. Professional
services should be sought as required to ensure compliance with applicable laws and special statutory risks such as
the Foreign Corrupt Practices Act and Export Administration Act (anti-boycott provisions). A well prepared contract
will effectively balance threats and opportunities for each contracting party. A potential risk imbalance may be
addressed by a proportional risk premium.

Risk Allocation Considerations and Principles

Inappropriate risk allocation is an industry-wide issue. The following list of risk allocation considerations helps
negotiating parties decide which party should assume each particular risk. They are intended to get both
contracting parties to consider the most important risk allocation concepts that have the most potential of being

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overlooked or disregarded.

Legal Risk Allocation Considerations:

• Courts may construe provisions exactly as written unless they are against public policy or statute.
• Courts may construe a contract provision in a manner that will do substantial justice to the parties.
• By signing a contract you have accepted what is in it.
• Contractual ambiguities may be construed against the drafting party.
• General disclaimers and ambiguities may be unenforceable.
• Contractual provisions cannot reallocate intentional wrongdoings or illegal activities.
• If the contract is silent regarding damages, the offending party may be held responsible for "reasonably
foreseeable" damages.

General Risk Allocation Principles:

• Many risks cannot be eliminated but they can be controlled.

• Eliminating one risk may cause another risk to arise.
• Care should be taken to evaluate risk interdependencies and predict the "domino effect" or cumulative
impact if one interdependent risk should occur.
• Optimum allocation of risk may only be achieved through cooperation or shared responsibility.
• Ignoring a risk will not eliminate its potential impact.
• Risks that are not contractually allocated will be assumed, knowingly or unknowingly, by one or both of
the contracting parties.
• Optimum allocation of risk is likely to vary from project to project.
• Any party may be able to assume a risk if:
a) they understand the underlying cause and subsequent consequence of a risk,
b) they are granted an appropriate risk premium for taking responsibility or ownership.
• The party assuming the risk should have the capacity to manage the risk.
• If the consequence of risk allocated to a party is foreseeable, then they have the responsibility to account
for that risk in their price or funding. (See also: Quantitative Contract Risk Assessment.)
• Transferring risk to a contractor will often increase their price, so owners should consider if it may be
more effective for them to retain and manage the risk.
• Exploiting the benefit of opportunities should be incentivized and the benefits to all parties should be pre-
negotiated.
• As part of their strategic planning and negotiation, parties should assess the potential for profit offered by
each risk or risk mix (i.e. basket of interdependent risks).
• To help avoid an adversarial contractual relationship, parties should strive for clauses that facilitate
harmony; e.g. it would be inequitable for an owner to attempt to include a "no damages for delay" clause
in conjunction with a liquidated damages clause.
• Lessons learned from inappropriate risk allocation should be meticulously documented and considered in
future endeavors.

Contingency Funding

The burden of contingency funding and its management may fall to different entities. Whoever underwrites the
risk of cost or schedule overrun must be capable of utilizing the appropriate contingency and, irrespective of the
contractual arrangement, the principles of contingency derivation and management remain unchanged.

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There are a variety of possible contractual arrangements. If we look at the extremes, there are lump sum and
reimbursable contracts. In the case of lump sum or fixed price contracts the risk burden is typically placed on the
contractor and, in the case of reimbursable contracts, risk is often allocated to the owner or client entity. Between
these extremes, there are many permutations.

Figure 1 can be used to illustrate which party typically carries the greater risk under different contract types.

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OW
NE
R

RISK

T OR
AC
NTR
C O

CONTRACT TYPES

CPFF-GMP
FFP-LOET
CPFF-SCS

FP-PPR

FP-EPA
CPFF-I

FP-AF
CPAF

CPFP
CPFF
CPIF

FPIC
FCP

FFP
TM

UR
CC
LH

CS

Lump Sum Reimbursable

Description
(contractor's burden) (owner's burden)
LH: Labor Hour Contracts FALSE TRUE
TM: Time and Materials Contracts FALSE TRUE
CPFF-SCS: Cost plus Fixed Fee with Agreement to Share any Cost Savings FALSE TRUE
CPFF-I: Cost plus Fixed Fee with Incentive FALSE TRUE
CPIF: Cost plus Incentive Fee (Alliance) FALSE TRUE
CPAF: Cost plus Award Fee FALSE TRUE
CPFF: Cost plus Fixed Fee FALSE TRUE
CPFP: Cost plus Fixed Percentage FALSE TRUE
CS: Cost Sharing FALSE TRUE
CC: Cost Contract FALSE TRUE
UR: Unit Rate Contracts TRUE FALSE
FFP-LOET: Firm Fixed Price, Level of Effort Term Contracts TRUE FALSE
FCP: Fixed Ceiling Price Contracts (w/ Retroactive Price Redetermination) TRUE FALSE
FP-PPR: Fixed Price Contracts with Prospective Price Redetermination TRUE FALSE
CPFF-GMP: Cost plus Fixed Fee with Guaranteed Maximum Price (reimbursable
TRUE FALSE
with upper fee limit)
FP-AF: Fixed Price Contracts with Award Fee TRUE FALSE
FPIC: Fixed Price Incentive Contracts TRUE FALSE
FP-EPA: Fixed Price Contracts with Economic Price Adjustment TRUE FALSE
FFP: Firm Fixed Price TRUE FALSE
Figure 1 – Allocation of Risk between Owners and Contractors

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When an unforeseeable event occurs, parties to a contract will typically renegotiate and modify the original
contract to prevent a promisor (i.e. contractor) bearing an unexpectedly large loss. If a new agreement cannot be
reached, common law doctrines of increased cost or decreased value may, in some cases, offer relief to the
promisor. For example, the unexpected loss, triggering relief, may either cause an increased cost or a decrease in
value of the promisee’s reciprocal obligation or compensation. Alternatively, the common law doctrine of
impossibility and commercial impracticability may release the promisor from their obligation on the grounds of “an
unforeseeable supervening event” that increases the cost of either performance or damages liability to a level
beyond the anticipated range of values at the time of contracting.

When such common law doctrines cannot be readily applied, remedy is typically anticipated by the principle of
legal precedent (i.e. a legal decision to resolve conflict will be based on similar or analogous cases determined in
the past).

Preferred Allocation and the Interpretation of Contract Risk

The preferred contract clause is one where both parties:

1. Hold the same preference concerning with whom risk should be allocated and,
2. Mutually agree upon their interpretation of where or with whom risk has been allocated.

Hartman’s 1998 study [11] of Canadian construction contracts helped illustrate that contracting parties hold
common beliefs around who should be taking specific risks, however, most clauses do not clearly describe or
allocate risk. In addition, contracting parties frequently interpret the same contract clauses differently.

A well understood contract clause provides some common ground for discussion but clauses characterized by a
large disparity of opinion must be discussed and their meaning agreed upon before signing a contract. Failure to
achieve consensus is likely to result in the potential for latent disputes. In addition, where one or both parties
believe there is significant inequity, an unreasonable premium may be associated with the risk. The potential for
unreasonable premiums or latent disputes are both risks that pose a threat to successful project execution and, in
such circumstances, it would be good business practice to review and perhaps negotiate the relevant clause(s).
Alliances and partnering arrangements may offer an opportunity to establish more effective contractual
relationships.

Frequently Misallocated Contract Risks

Research findings published by CII (The Construction Industry Institute) [3] describe common risks typically
misallocated between the owner and the contractor. In ascending order, these contract risks (from the most
frequent to the least frequent) are:
1. No damages for delay.
2. Consequential damages.
3. Indemnity insurance.
4. Ambiguous acceptance criteria.
5. New or unfamiliar technology.
6. Force majeure.
7. Schedule acceleration.
8. Cumulative impact of change.
9. Owner-mandated subcontractors.
10. Insurance.
11. Differing site conditions.
12. Design responsibility.

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13. Waiver of claims.

14. Standard of care.

This list may not be comprehensive for every industry type, market niche or geographic region. Before undertaking
any contract negotiation, the importance of timely contract review cannot be understated. The following risk
allocation strategies provide additional information to better understand the issues at stake:

A. Indemnity

i. Critical issue: “Hold-harmless” clauses attempt to limit liability for the personal injuries of contractor
employees, owner employees and third parties. In addition, liability for damage to property is often
limited by indemnification clauses.
Contractors will endeavor to avoid providing full indemnification for the owner without qualification
because, in such cases, even though the owner could be completely responsible for the damaging
event, the contractor could be forced to indemnify the owner. In addition, contractors may face
excessive insurance costs if indemnity is not appropriately limited to third party personal injury (TPPI)
or property damage (PD) since they may incur a liability for the owner’s existing property and/or
construction work in progress.
Owners may believe clauses that provide mutual, comparative levels of indemnification are unfair. As
an example, they may consider that contractor employees are more likely to be injured than owner
employees.
ii. Typical contract clause(s): Sound practice is to include a clause for the limitation of contractor
indemnities to third party claims for personal injury or property damage arising from willful
misconduct or negligence of contractor. In addition, there should be provisions detailing the owner’s
assumption of responsibility and risk of loss of, or damage to, property owned by or in custody of
owner.
iii. Owner’s likely position: “The contractor agrees to indemnify and hold harmless the owner, its
officers and agents, against any claim for injury or damage to persons, corporations or property
arising out of the performance of the work on the project, regardless of whether the injury or
damage is caused in whole or in part by the act or negligence of the owner its officers or agents.” In
other words, with such a clause the owner is indemnified even if the event was caused by their own
negligence.
iv. Contractor’s likely position: A similar broad-form clause as shown above but drafted in favor of the
contractor.
v. Possible compromise/remedy: Remedial language would specify quid pro quo for personal injury and
a cap for contractor’s liability for TPPI and PD (except in the case of gross negligence or willful
misconduct). The cost of project specific insurance should be included in the price and there should
be flow-down liabilities to subcontractors and vendors.

B. Consequential Damages

i. Critical issue: Consequential damages for an owner may include loss of revenue and loss of beneficial
occupancy resulting from delays. Consequential damages for a contractor may include loss of
potential business and loss of advantageous weather conditions resulting from delays. The critical
issue concerns expressed waivers of consequential damages. In such instances, owners may feel that
contractors have little incentive to perform in a timely manner. Conversely, contractors may feel it
inequitable for owners to hold them responsible for consequential damages or indirect losses that
may reach excessive amounts and potentially drive them out of business.
ii. Typical contract clause(s): Typically, in contracts neither party is liable to the other for indirect losses,
and there is a preference for early or optional termination (particularly in jurisdictions where such
losses are normally permitted).

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iii. Owner's likely position: A contract silent on the issue of the consequential damages could cost a
contractor millions per day. Alternatively, there may be language specifically stating the owner’s right
to collect consequential damages but remains silent on the contractor’s ability to collect similar
remediation.
iv. Contractor’s likely position: Some contract models provide mutual waiver language that allows the
owner to collect liquidated direct damages only. This may disadvantage the buyer if damages arise
that were not foreseeable at the time the contract was executed. Also, care should be made to
ensure that any agreed level of liquidated damages not only serves as an incentive for performance
but that consideration is made for the contractor to remain solvent if such damages do become due.
v. Possible Compromise/Remedy: An example of a contract clause is, “Except for the extent that
liquidated damages are provided for in the Contract, Owner and the Contractor waive all claims
against each other for consequential damages. By way of illustration, but not limitation,
consequential damages includes: (1) Owner’s loss of profit, economic loss, loss of reputation, loss of
goodwill, loss of revenue, business interruption, arising out of or related to Contract Documents, and
(2) Contactor’s loss of profit, economic loss, loss of reputation, loss of goodwill, loss of revenue, loss
of financing, increased financing costs, business interruption, and/or loss of management or
employee productivity or of the increased cost of the services of such management or employee
productivity arising out of or related to all of the Contract Documents. Nothing herein shall be
construed to limit Contractor’s liability for damages for third party claims that may be asserted
against the Contractor or Owner, including bodily injury or damage to tangible property arising out of,
results from, or related to the negligence, errors or omissions, or services provided by Contractor.”

C. Force Majeure (FM)

i. Critical issue: “Acts of God” clauses, particularly those considering catastrophic damage, need to
eliminate the risk for potential disputes. Contracting parties typically rely on insurance companies to
provide protection; however, there is always the possibility that insurance providers may become
insolvent so it is very important that contract documents clearly address the risk factors surrounding
a force majeure event. Such factors may include but not be limited to; “catch-all” phrases vs. specific
events, foreseeability, burden of proof, definition of triggering events, reasonable efforts/due
diligence, impacts of events, notice provisions, relief (suspension, termination, “time is of the
essence” clauses, time only vs. time and money).
ii. Typical contract clause(s): A force majeure article typically provides that a party is not in breach of
contract if its delay in completion is caused by an FM event or “any cause beyond the reasonable
control of the party affected”.
iii. Favors buyer: If the contract is silent on FM, a “time if of the essence” clause or “no damages for
delay” is common. To clarify, such an approach favors the buyer since time relief is the sole remedy
to the contractor for any delays. Alternatively, there may be explicit language restricting recovery to
time only, e.g. “Contractor agrees that its sole remedy for Force Majeure, shall be an extension of
time, which extension shall be documented by Change Order”.
Some contracts may also attempt to provide time only relief for a subcontractor, and in addition,
stipulate stringent notice requirements. In such cases where an absolute time frame if specified (i.e.
notice with x number of days), the drafting party is unfairly benefited because the statute of
limitations is limited to a fixed number of years depending on the location.
Some contracts typically allow a limited time by which to extend the contract time. For example, in
the case of weather related claims: “…Claim shall be documented by data substantiating that weather
conditions were abnormal for the period of time, could not have been reasonably anticipated and had
an adverse affect on the schedule construction.”
iv. Favor seller: Language granting the seller damages for FM events in the form of time, money and
termination rights without limitations.
v. Possible compromise/remedy: All FM triggering events must be clearly and unambiguously defined.

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Language may specify that the contractor may be granted both time and money relief but the
contractor must bear an initial cost of FM events with a maximum set amount expended for all FM
events cumulatively. The amount limits must be specified in the contract.
Contract language should provide for “equitable adjustment” for unavoidable costs. It should not be
limited to physical property, but also define cost items that may be recovered as indirect damages
(e.g. overhead items including plant hire, rental equipment, project team salaries etc.).
The contract could include language limiting time and money recovery only after a specified number
of days in which damages have been incurred as a result of a FM event.
An FM event that results in a rebuild should be covered by Builders Risk Insurance (or equivalent),
however, language could provide time relief for FM impacts not covered by insurance or not included
in the contract price or contingency.

D. Change Process

i. Critical issue: Definition of the change process (notice provisions), applicability, definition of
triggering events, burden of proof, consideration, performance and authority. Studies have shown
that an excessive number and/or degree of changes have a negative impact on contractor
productivity. As a consequence of this impact, towards the later stages of a project, contractors may
file a claim for the cumulative impact of change.
ii. Typical contract clause(s): Include contract provisions that enable either party to propose a change.
iii. Buyer's likely position: Language specifying that the contractor effectively account for any impacts
within each change order submittal and that payment for that change is in full and final settlement.
iv. Seller’s likely position: Language that attempts to account for the cumulative impact of change by
specifying a fixed amount of compensation for a given number of agreed changes or disruptions.
v. Possible compromise/remedy: Include a broad definition of change that allows for both cost and
schedule relief and that facilitates a speedy resolution of disputes (e.g., identify documents that are
required to demonstrate causation, liability and resultant injury). In addition, an arbitrator may be
used to determine if cumulative impact has occurred and to what extent the contactor should be
compensated.

E. Standard of Care

i. Critical issue: Standard of care clauses are often ambiguous. As an example, contract language may
state “the design professional should perform their duties to the highest and best industry
standards.” Similarly, construction standard of care clauses often require performance in a
“workmanlike manner”. Such ambiguous statements often lead to claims and disputes, and may
result in potential unlimited liability.
ii. Typical contract clause(s): Language in which the contractor warrants that it will perform its services
in accordance with the current standard of care and diligence normally practiced by firms in
performing services of a similar nature, and that the contractor will correct any defects.
iii. Buyer's likely position: Include contract language specifying the “highest” or “best” industry
standards.
iv. Seller’s likely position: Contract language specifying “generally accepted” standards.
v. Possible compromise/remedy: Where possible, standard of care clauses should define metrics that
unambiguously define both the expected standard of care and what constitutes a defect or
deficiency. Appropriate levels of contingency should be allocated to fund any foreseen potential for
rework and diligent QA/QC should be employed to help ensure standards are met (thereby mitigating
the need for rework).

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The Contract Brief

The contract review is an integrated process, that raises risk awareness and helps proactively manage risk. The
contract brief is typically a short document capturing key governing clauses, making specific reference to pertinent
terms of contract and addenda that require special attention or focus. Ideally, the contract brief can be used by
the project or proposal team, before entering into contract, to better understand the obligations that may be
imposed.

Quantitative Contract Risk Assessment

The assessment of contingency to underwrite the risk of cost overrun and schedule delay is described in the
section on the burden of Contingency Funding. In addition to contingency, additional funding may be identified as
necessary to ensure that pricing is sufficient to cover the risk of contractual liabilities. After the compilation or
periodic review of the contract brief, a list of commonly misallocated risks may be used to illustrate the likelihood
of a related event arising and the subsequent most likely, optimistic and pessimistic outcome in terms of cost.
Quantitative risk analysis may then be used to determine an appropriate level of contract liability funding.

SUMMARY

The allocation of risk can be a contentious process. The construction industry continues to evolve different
contracting strategies but, simplistically, the extremes may be seen as lump sum or cost reimbursable. Typically
lump sum contracts place the burden of risk on the contractor; while in the case of reimbursable contracts, risk is
allocated to the owner or client entity. Without proper care, risk is likely to be misallocated to a party that is not
best placed to manage it. When risks are misallocated, the project outcome is more likely to be suboptimal
resulting in inefficiencies for one or more parties.

Clarifying common contract language assists in the equitable allocation of contract risk. This allows for the
effective determination of the risk premium associated with a contract.

Prior to contract negotiations, contract clauses that will have the greatest bearing on project success should be
researched. Used in combination with standard quantitative risk analysis techniques, such research can be used to
determine the expected value of contract liability funding.

The final price or contract sum will account for the negotiated risk premium. This RP defines the risk premium as
the sum of project contingency and the expected value of contract liability funding.

REFERENCES

1. Arviso, B. A. & Moser, S. J., Using Informed Decision-Making Process when Working “At Risk” on Contracts,
Contract Management, November 2006.
2. Buchanan, R. K. & Wilson, C. T., Risk Management Through Contracts and Insurance: A Primer, Buchanan Law
Group and RiskSmart Solutions, 2008.
3. Construction Industry Institute, Equitable Risk Allocation Research Summary 210-1, the University of Texas at
Austin, September 2006.
4. Construction Industry Institute, Equitable Risk Allocation: A Legal Perspective, Implementation Resource 210-
3, the University of Texas at Austin, February 2007.
5. Duane, J. P., Fixed-Price Contracting – Risky Business?, Contract Management, March 2003.
6. Engineering & Construction Risk Institute, Contract Best Practices: Critical Issues, ECRI December 2006.

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7. Engineering & Construction Risk Institute, Contract Issues for Different Commercial Structures and Different
Scopes of Services, ECRI December 2006.
8. Fu, Lyn, Contracting Strategies for Today’s Environment (presentation to Rice Global E&C Forum), Curver
Robbins & Fu, 2011.
9. Grace, M. J., Pre-Construction Cost Control for Hard Bid Projects, AACE Cost Engineering Journal, February
2010.
10. Jones, G., Comprehensive Contract Review from Beginning to End, Contract Management, September 2003.
11. Hartman, F. T., Snelgrove, P. & Ashrafi, R., Appropriate Risk Allocation in Lump-Sum Contracts – Who Should
Take the Risk?, AACE Cost Engineering Journal, July 1998.
12. Katz, G. I., Sources of Contractual Liability, International Risk Management Institute, Inc. October 2001.
13. Hymes, S. J., Identifying Risk Transfer Traps, CDR.10 AACE International Transactions 2005.
14. Masiello, S. M., Schag, M. D. & Wick, S. B., Commercial Contract Liability, Contract Management, September
2002.
15. Mouton, J. & Farrow, C. B., Risk Allocation in Design-Construction: A Historical Perspective, The Construction,
Building and Real Estate Research Conference (RICS Cobra), September 2010.
16. Noor, I. & Tichacek, R., Contingency Misuse and other Risk Management Pitfalls, AACE Cost Engineering
Magazine, May 2009.
17. Triantis, G. G., Unforeseen Contingencies. Risk Allocation in Contracts, University of Virginia School of Law,
1999.
18. Wilson, M., Contractual Risk & Indemnity, Faithful + Gould PowerPoint, June 2010.
19. Hollmann, John K., PE CCE, Editor, Total Cost Management Framework: An Integrated Approach to Portfolio,
Program and Project Management, AACE International, Morgantown, WV. (latest revision)
20. AACE International, Recommended Practice 10S-90, Cost Engineering Terminology, AACE International,
Morgantown, WV. (latest revision)

CONTRIBUTORS

Disclaimer: The opinions expressed by the contributors to this recommended practice are their own and do not
necessarily reflect those of their employers, unless otherwise stated.

James E. Arrow, DRMP (Primary Contributor)

Christopher P. Caddell, PE CCP DRMP
Patrick B. Egger
LeRoy Graw
Dennis Read Hanks, PE CCP DRMP
Donald F. McDonald, Jr. PE CCP PSP
Ruben A. Sanchez, CCP

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