Contract Strategies for Major Projects

CHAPTER 9It's All About Risk

Years ago, a VP of projects for one of the big oil companies complained to me, “Why do these darned [he used a different word] contractors take on risks they can't manage?” If it had been a real question instead of an outraged whine, I would have answered, “Because you make them, and they want to eat.” But thinking about that incident led me to some insight into what contracting is really about: it's about risk allocation and assignment. At some level everybody on both sides of the table knows that, but we often do not behave as if we know it. During the awkward dance of contract negotiations, a forthright give and take around who is taking responsibility for which risks and why rarely happens.

In this chapter, I want to discuss what “risk” really means in projects. We often don't use the word very carefully or even in a manner that some would deem correctly. Second, I want to explore the principles of risk averseness and risk pricing and how those principles apply to owners and contractors. Then I will discuss the big areas of risk that need a careful look in every contract negotiation.

The Meaning of Risk

In its simplest form, risk refers to anything that is probabilistic rather than fully determined. By that definition almost everything is risky. When we speak of project risks, we are usually talking about things that could turn out worse than we expect. That doesn't narrow the field very much!

Strictly speaking, most of the things we call ...