Contracts for construction projects, like most contracts, are in large part about assigning risk to each party but also minimizing unnecessary risk. Typically, risk (and therefore, liability) is assumed by the party that has the most control over specific aspects of the project. A well-crafted contract can reduce financial risk and prevent disputes over who takes responsibility if something doesn’t go as planned.
The term “contractual risk transfer” refers to the assignment of risk by one party to another in a contract. For example, a general contractor will often require their subcontractors to assume liability for risks that they’re in the best position to mitigate since they’re the ones actually doing the work.
Other liability may be assigned to parties such as architects, suppliers, property owners and others involved in the project. A key objective of anyone signing on to a contract involving a construction project is to ensure that they aren’t assuming liability for something over which they may have no control. That’s why insurers typically require risk transfer provisions to make sure that their client isn’t assuming liability for something they shouldn’t.
Words and clauses that can unfairly shift risk
Any party signing a construction contract should get a thorough legal review. Among the things a legal professional will be on the lookout for that could unfairly shift risk are:
- Indemnification clauses
- Warranties and guarantees
- Waivers
- Insolvency
- Hold harmless agreements
- Attorney’s fees and legal fees
There are many more ways that a party can incorporate language that shifts its risk and liability to another party. That’s why it’s critical to know what to look for. It’s also crucial to review every revised draft of a contract thoroughly to ensure that something wasn’t snuck into it.
The financial and reputational stakes can be extremely high for everyone involved in a construction project. Having experienced legal guidance throughout the contract writing, review and negotiation process can save businesses a lot of time and money and help the project proceed as smoothly as possible.