What Does It Mean To Transfer Risk?

We deal so often in the transfer of risk that we sometimes don’t see the blank expressions in our clients’ faces when we explain to them that we can help in this area. We do eventually catch on that a little explanation is required, and we are more than happy to provide that information.

The transfer of risk is the very basis of every contract a construction company will sign. In exchange for services rendered for compensation, the construction company agrees to take on certain risks involved with the project. But instead of getting too deeply into the whole thing, let us take a step back and give you the broad explanation of transfer of risk.

Understanding Transfer Of Risk

If a property has an underground storage tank, then someone has to take the responsibility to remove it before construction can begin. In the construction contract, it will outline who is responsible for making sure the tank is removed and all environmental criteria are met. The proper removal of the tank is considered a risk, and the part of the contract that outlines who is responsible for the proper removal of the tank is the transfer of risk.

In cases involving potentially toxic materials, there will be a lot of clauses and clarifications involved to make sure it is clearly understood which party is responsible for what task. It may be cheaper for the job owner to assume the risk of removing the tank, but that still needs to be outlined in the contract for the sake of the contractor.

Why Is Identifying And Transferring Risk Important?

Sometimes it is the generic transfer of risk clauses that mean the most to both parties. What would happen if there was a tank buried on the property and no one knew about it until the construction company started digging the building’s foundation? In most contracts, there is a provision that covers unexpected risk and that clause would be the starting point of a massive change order, or a lawsuit.

Identifying and transferring risk is incredibly important to a construction company’s bottom line. If a company signs a contract that does not allow for the proper transfer of risk, then the resulting financial issues could put the company out of business. Risk management is one way to offset the problems of contract risks, and having a competent contracts officer is the other.

Can Risks Be Changed?

Every contract and every clause is negotiable. If a construction company feels that the insurance premiums involved with protecting against a certain kind of risk outweigh potential profits, then the company would ask to renegotiate the transfer of risk in the contract.

Sometimes a company wants to take on risk because of the potential for profit. For example, if the demolition of a site includes a significant amount of scrap steel, then the general contractor may decide to take on the risk of doing the demolition to profit from selling the steel.

Contracts are designed to transfer risk, which can be a very helpful thing for construction companies. Before you decide to sign a job contract, it is extremely important to have your risk management experts look the contract over to make sure that you are not taking on any risk that your company cannot handle.