REALWorld Law


Allocation of risk

What risks in a construction or engineering contract are normally borne by the contractor? To what extent is force majeure relevant in such contracts?

United States

United States

The allocation of risk depends on several factors, including, among others, the project delivery method selected and the manner in which the contract price is calculated.


If the project delivery method is a traditional design-bid-build – whose defining characteristics include: (a) three principal participants (owner, architect, and contractor) and (b) two separate prime contracts (owner-architect agreement and the construction contract) – the general contractor is responsible for construction of the project as depicted in drawings, specifications, and other documents prepared by the architect and design team. Accordingly, the general contractor depends on the architect for the design of the project and the quality of the documents the architect prepares. The general contractor has little opportunity for input during the design process with respect to matters in which it has expertise, such as value engineering, cost estimating, constructability, construction scheduling, labour and material market analysis, equipment availability, design of specialized equipment and proprietary systems, and other similar issues.

Depending on the type of contract negotiated, the general contractor also may bear responsibility to complete construction of the project within a certain price. If the general contractor has agreed to construct the project for a fixed price or has guaranteed a maximum, not-to-exceed price, then the cost overruns (with certain exceptions) become the risk of the general contractor. Accordingly, the contractor assumes the risk of volatility in labour and material pricing. Conversely, if the contract is cost-plus, then the general contractor’s compensation is comprised of the actual cost of construction the project – whatever that cost may be upon final completion – plus a fee. In such a case, the owner bears the risk of escalating costs.

The general contractor also may assume the risk of completing the project on time and obligate itself to complete the project by a specific date or prior to the expiration of a certain period of time. Achieving completion of the project on time may be necessary for the owner to meet its obligations with respect to financing or third parties (eg future tenants in the facility being constructed), take advantage of business or seasonal cycles, otherwise generate needed revenue from the project, or limit expenses so the project remains viable. If the general contractor fails to complete the project within the agreed-upon time, then the owner may suffer losses due to the delay. Accordingly, the owner may require that the contractor guarantee the time in which the project will be completed and assume the risk if it is not. For example, the contractor could agree to pay liquidated damages, if the project is not completed by the agreed-upon date of final completion as set forth in the contract.

Another risk assumed by the general contractor arises from the architect’s limited role in the design process in a design-bid-build project (the design is completed by the architect before the project is bid or the contractor selected) and the corresponding limited remedies available to the contractor against the architect. Because the owner enters into separate contracts with the architect and the general contractor, the general contractor and architect are not in privity, ie the general contractor and architect have no contractual relationship. Lacking privity, the contractor’s remedies against the architect are limited, depending on the economic loss rule law in the US state in which the project is located. The general contractor’s only option to pursue a claim might be to bring the claim against the party with whom it has a contract – the owner.

Construction Management

The spectrum of a construction manager’s risks and responsibilities is wide and filled with variations. At one end of the spectrum, the construction manager operates as the agent of the owner. At the other end of the spectrum, the construction manager is ‘at-risk’ and operates similar to a general contractor.

At the ‘agency’ end of the spectrum, the construction manager does not assume the traditional risks of a general contractor. Rather, the construction manager’s role is to act as an advisor to the owner while monitoring the project. The construction manager typically will attempt to minimize the owner’s risks while at the same time expediting the process – for example, obtaining bids before the design documents are 100% complete.

At the ‘at-risk’ end of the spectrum, the construction manager bears risks similar to the general contractor in the design-bid-build project delivery method. With respect to guaranteeing a price, an ‘at-risk’ construction manager may bear additional risk because the price it guarantees is an estimate based on incomplete drawings. Methods of mitigating this risk include factoring in a larger contingency in the guaranteed price or providing an estimate when the construction management agreement is executed, with provision for a guaranteed price only after the design documents are complete.

The body of law governing an at-risk construction manager is less than an at-risk general contractor or an agent construction manager. As a result, disputes may be more difficult and more expensive to resolve.


Under the design-build approach, a single entity undertakes to both design and construct the project, providing the owner with a single point of responsibility for the entire project. The entity bearing that responsibility is often the general contractor who either has in-house design expertise or takes responsibility for subcontracting with an architect for the design. As a result, some of the risk factors that an owner confronts in the design-bid-construct approach now belong to the design-builder with whom the owner contracts; and the owner is relieved of some of the challenges that accompany holding separate and independent contracts for the construction and design of the project.

Calculating the cost of the project and preparing a proposal presents a difficult exercise for a design-builder and, accordingly, a risk. In preparing a proposal, the design-builder faces a dilemma. The design-builder is arguably best served by developing the design to a point where the design-builder is reasonably confident in its ability to predict all elements needed to produce a final design. If the design builder is comfortable with the design, reasonable projections are possible for cost, time, performance, characteristics, and other matters. Therefore, the design builder can reduce contingencies accordingly and submit a more reliable proposal.

However, the design-builder’s effort to produce a more reliable proposal consumes limited resources and is very costly. For example, the design-build project may be structured as a two-step process, with a ‘go’ or ‘no go’ decision to be made at a certain point by the owner regarding whether to proceed with the design-builder or the project. If the owner decides not to proceed, then the design-builder will not recover those costs if another party is awarded the contract or if the project is abandoned. But, the alternative of putting forth only minimal effort in preparing a proposal is a risky venture. The resulting proposal may not be responsive to the owner’s needs and, therefore, a wasted effort. Moreover, the less-developed proposal may put the design builder at risk. The design-builder has made a wager that it will be able to complete the project for the cost and time proposed, although the design-builder may not have studied the project in detail and as appropriate to make such a judgment.

Force Majeure. The term ‘force majeure’ generally refers to an unexpected event of nature or civil unrest beyond the parties’ control, such as a flood, war, strike, or storm. A force majeure clause attempts to relieve the contractor of certain of its responsibilities for time and/or price upon the occurrence of a force majeure event, generally either by extending the time allowed to perform the contract or by increasing the price beyond the limit of any guarantee.

The extent to which a force majeure clause shifts risk from contractor to owner depends on how the term is defined in a contract and the specific provisions made for force majeure. The contractor will want the term defined as broadly as possible in the contract; the owner will want to narrow the definition. The contractor will want the delay caused by the force majeure event to be compensable, ie the contractor is entitled to claim both time and money. Conversely, the owner will want the force majeure event to be excusable, ie the contractor is entitled to claim only time – and then only if the force majeure event increases the critical path of the project.

Accordingly, the contract negotiated by the parties will determine what constitutes force majeure and how it shifts risk between owner and contractor with respect to a particular project.