Contract and Risks

Contract and Risks

Disagreement and conflict

Purpose of contract
Liability and Responsibility
Transferring and Allocating Risk in the Contracts
Principles of Control
Contractual Links
Risk Avoidance by Warranties and Collateral
Warranties
Risk Transfer by Surety Bonds
Contracts and Risk Tactics

Disagreement and conflict

Disagreement and conflict may destroy best
intentions of the contracting parties
Source of disagreement and conflict :

Inadequate and defective contract documentation

Inappropriate types of contract arrangements
Inappropriate methods of tendering
An unreasonable burden of risk being allocated to one
of the parties
Unsuitable personnel for the type of project
Breakdown in personal relationships and
communication

Disagreement and conflict

Burden of contractual risk being carried by a party who is not
equipped or capable of carrying that risk
Insolvency of one of the parties
Interface and co-ordination problems (when more than two
parties are involved)
Vague specially written conditions of contract or changed
conditions in standard forms of contract leading to poor
interpretation
Ambiguous specifications clauses with decisions left at the
discretion of either party
Methods rather than results being specified in the specification
with contractor being responsible for providing the desired
results
Deficient drawings or design with discrepancies between
architectural, structural and engineering services drawings

Purpose of contract

To establish rights, duties, obligations and responsibilities of the

parties
To allocate risk
Obligations/duties inherent risk of unable to fulfill
Contract trade offs between :
Price for undertaking works, and
Willingness to take controllable and uncontrollable risk

Standard form of contract allocate risks by express and implied

terms compromise of different sector/stakeholders :
Public sector client : accountability, mostly do not accept uncertainty in
contract price lump sum
Private sector : more prepared to take certain risks

Risk : Controllable and uncontrollable

Controllable and uncontrollable

risk
Controllable :
Variations in human performance

Uncontrollable : high risk premium for

contractor covered in higher prices
Inclement weather
Inflation
Ground conditions

Owner should anticipate high prime from

uncontrollable risk

Liability and Responsibility

Which party bears the risk of :
Adequacy of design risk of liability for latent defects as
a result of error in design
Cost of construction-risk of how much it will cost
Liability for latent defects: result of bad workmanship,
faulty materials, poor specification (professional team,
prime contractors, specialist cont, suppliers?)
Safety and indemnification of accidents
Completion deadlines
Quality of workmanship and materials : fitness for
purpose and ensuring quality is acceptable

Transferring and Allocating Risk in

the Contracts
Risk transfer : employer contractor,
contractorsubcontractor
Risk allocation : employer-contractor-subcontractorsuppliers
No point in passing risk to ill equipped party to bear the
risk
If standard form of contract used, special conditions of
contract assign risks allocation which are not stipulated
in the standard form
Allocation of risk apportionment of liabilities
Risks borne by employer and contractor are not limited
to those allocated by the contract certain risks are
allocated by operation of law (ketentuan hukum yang
berlaku)

Principles of Control
Element of control : significant factor to risks bearing
parties
Risks shall be allocated to the party who is in a better
position to control the occurence of adverse items
Example of complex control situation: part of design by
an architect which is not according to a particular
regulation, where the contractor carry the liability if he
does not check the drawing prior to construction work
Element of control, hence liability, may change as a
result of some intervening acts risk is transferred to
other parties
Flexibility of contractual arrangement to cope with
changes during complex construction process

Contractual Links
Contract and subcontract between
employer, contractor, specialist, suppliers
Standard form of contract (employer and
contractor)
Special form of contract (contractorsubcontractor)
Liquidated damages of subcontractor
contain liquidated damages of the main
contract between contractor and employer

Risk Avoidance by Warranties and

Collateral Warranties
Warranty = jaminan untuk suatu kesepakatan
untuk melakukan sesuatu hal
Contoh pemakaian:

Risk Transfer by Surety Bonds

Surety : a party that assumes liability for the debt , default, or failure
of another
Surety bond is not an insurance policy, but a contract describing
conditions and obligations
Insurance : protects a party from risk of loss
Suretyship guarantees performance of a defined contractual duty
Contract bonds : three party agreements that guarantee the work will
be completed in accordance with the contract documents and that
construction costs will be paid
Bonds = risk transfer
Surety company : insurance company, bank, special surety company
Surety bonds:
Bid bond
Performance bond
Labour and material payment bond

Types of contract and risks

Contracts and Risk Tactics