July 11, 2024

The role of construction contracts in project risk management

By their nature, construction projects are among the most complex commercial activities, involving a long supply chain, multiple stakeholders and a substantial amount of investment.

Any large-scale construction project will carry risk. These will vary depending on the project, but may include:

  • Financial risk – Working over budget, cash flow problems, and fluctuating material costs can all push up the level of risk within a project
  • Legal considerations – Non-compliance with regulations, contractual disputes, and issues related to permits can lead to legal challenges and delays
  • Environmental issues – Certain sites carry an elevated risk of contamination or other disruptions
  • Safety challenges – Construction carries a higher risk than other sectors of injury or safety concerns.

Some are unique to the construction sector, while others are inherent (or a strong possibility) in any major commercial project – either way, they need to be managed effectively.

The best and most constructive way to do this is through strong, mutually developed contracts.

Forecasting and planning for risk

Planning ahead is essential when managing the risks of a construction project.

Before commencing construction, all parties should reserve time for a period of negotiation and discussion of all possible risks and how each party will be impacted by them.

This will help you and your solicitor to allocate roles and responsibilities in order to distribute risk across all parties and protect your working relationships.

Contracts are your opportunity to agree upon and outline:

  • A clear scope of work to avoid disputes related to project expectations and deliverables
  • Risk allocation and extraordinary circumstances
  • Dispute resolution mechanisms
  • Responsibilities for delays or quality issues
  • Payment terms and conditions to support cash flow management
  • Termination clauses
  • Liability limitations if applicable

Unless the project is on a very small scale, it’s unlikely that risks can be managed with just one contract.

Negotiation and support

The construction sector recognises that risk management is achieved best across a number of project- and relationship-specific contracts.

Standard form contracts exist to make risk management and the assigning of responsibility easier, particularly when many different parties are involved.

We can advise you on the types of contracts you might need to use, including the JCT and NEC family of contracts, as well as any amendments required to meet your project’s needs.

By putting the right contracts in place, including the associated negotiation and forward planning, you can avoid the most common disruptions and disputes that arise during construction projects – paving the way for smooth working relationships and a legal safety net if issues do arise.

Contact our specialist Construction Law team to discuss your next project and how you can mitigate risk.