Pricing Risk in a Construction Contract: What Each Transfer Costs

Every risk you push onto the contractor comes back as a number in the price. This is what the common transfers cost, what moves them and when carrying the risk yourself is cheaper.

Risk transfer is a purchase. When you ask a contractor to carry ground conditions, regulatory change or material price movement, it adds an allowance, and you pay that allowance whether or not the risk materialises. Looking at the cost of each transfer alongside the cost of carrying the risk yourself turns a drafting habit into a commercial decision.

What this number does and does not include

This breakdown covers the cost of allocating risk, not the cost of the risk occurring. It assumes a competitively tendered contract with capable bidders, because a contractor with no competition prices risk differently and a contractor that cannot price a risk at all will either qualify its bid or decline. The alternative to every transfer below is retaining the risk and holding a contingency against it, so each line should be read as a comparison rather than as a standalone figure. Legal and regulatory conditions in this area change, so the allocation you drafted on a previous project should be re examined rather than copied.

Ground and subsurface conditions

Transferring ground risk asks the contractor to accept whatever it finds below the surface at no additional cost. Because a contractor cannot know what is there any better than you can, it prices a defensive allowance, and the allowance is set by the worst credible case rather than the likely one. This is usually the most expensive single transfer in a building contract, and it is the one most easily reduced by spending money on investigation instead.

• Pushes it up: Thin or old ground information, a site with a history of previous structures, proximity to water, and a short tender period that prevents bidders doing their own checks.
• Brings it down: A thorough and recent ground investigation that bidders may rely on, trial pits in the critical locations, and a clear statement of the baseline against which a difference is measured.
• How to control it: Commission the investigation yourself, give bidders a right to rely on it and define a measurable baseline so that only genuine departures from it become your risk.

Design responsibility for parts of the works

Where the contractor designs an element, it carries the consequences of that design. The price includes its designer fee, an allowance for the professional liability exposure and a margin for the risk of interfaces it cannot fully control. Transferring design of a specialist system such as a facade or a plant installation is often good value because the specialist knows the product. Transferring design of something your consultant has already detailed is paying twice.

• Pushes it up: Fragmented design responsibility across many small elements, demanding performance requirements, and unclear interface definitions between designed packages.
• Brings it down: Whole package transfer with clean physical interfaces, performance requirements written in measurable terms, and a single named designer for each package.
• How to control it: Decide package by package, write performance requirements that can be tested, and make the interface between designed and specified elements explicit on a drawing.

Material price and currency movement

A contractor asked to hold prices for a long programme either buys forward, which costs money and storage, or carries the exposure, which it prices. For imported materials the exposure includes shipping and currency as well as the commodity. The alternative is an escalation mechanism tied to a published index, which pays out only when the market actually moves and is usually far cheaper than the allowance a bidder would otherwise build in.

• Pushes it up: Long programmes, high imported content, a single material dominating the cost, and procurement that cannot be committed early.
• Brings it down: Early procurement of the dominant materials, an index linked escalation clause with a clear base date, and permitting advance payment against secured materials.
• How to control it: Identify the two or three materials that dominate the cost and treat them individually rather than applying one escalation policy to the whole contract.

Programme risk and liquidated damages

A high rate of liquidated damages, or a very tight completion date, is priced. The contractor adds either an acceleration allowance in its method or a risk allowance in its overhead, and it also becomes much more aggressive about claiming extensions of time. Setting damages at a level that reflects your genuine loss keeps the mechanism credible and keeps the allowance proportionate.

• Pushes it up: A completion date earlier than the contractor realistic programme, a damages rate far above any demonstrable loss, and owner obligations the contractor doubts you will meet.
• Brings it down: A date derived from a tested programme, a damages rate calculated from real consequences, and sectional completion where only part of the works is genuinely urgent.
• How to control it: Calculate the damages rate from documented loss, record the calculation, and consider sectional completion so that pressure sits only where it is needed.

Regulatory approvals and utility connections

Making the contractor responsible for approvals from authorities such as the municipality, civil defence or a utility provider transfers a process it cannot control. It prices the uncertainty, and when an approval runs long it has a strong basis for claiming time. In many cases the owner is better placed to pursue an approval, and the sensible allocation is for the contractor to prepare and support the submission while you carry the timing risk.

• Pushes it up: Approvals with variable timelines, submissions dependent on information the contractor does not hold, and connections that depend on third party works.
• Brings it down: Owner led submissions with the contractor providing information to a schedule, early pre application engagement, and a defined float allowance for each approval.
• How to control it: Split each approval into preparation, submission and pursuit, and allocate each part to whoever actually controls it. Requirements and processing arrangements change, so confirm the current position with the relevant authority at the time.

Existing structures and occupied premises

Work inside an existing or occupied building carries risk the contractor cannot survey fully: hidden services, unexpected structural conditions, restricted working hours and the obligations that come with people remaining in the building. Asked to carry all of it, a bidder prices an allowance that often exceeds what the problems actually cost. Opening up before tender converts that allowance into information.

• Pushes it up: No opening up before tender, poor record drawings, continued occupation with uncertain restrictions, and a single phase requirement where phasing is really needed.
• Brings it down: Pre tender opening up and survey, accurate record information, agreed working hours written into the preliminaries, and a defined phasing plan.
• How to control it: Spend on investigation and clear working restrictions before tender, and define a provisional sum for genuinely unknowable remedial work rather than asking for a fixed price on it.

Force majeure and events outside both parties control

Some events can be allocated but not sensibly transferred. Asking a contractor to bear the cost of events neither party can influence produces either an unpriceable risk, an inflated allowance or a qualification. The usual balanced position is time relief without cost for the contractor, with each party bearing its own losses, supported by insurance where cover exists.

• Pushes it up: Unusual drafting that removes time relief entirely, and definitions so narrow that genuine events fall outside them.
• Brings it down: A balanced clause with time relief, a clear definition, and insurance cover arranged for the risks the market will take.
• How to control it: Review the clause alongside your insurance cover so that the two are consistent, and ask the broker to confirm what the policy actually responds to.

Costs that never appear on the first page

• The cost of your own contingency, which does not disappear when you transfer a risk unless you consciously release it.
• Security and guarantee costs, which the contractor passes on and which rise as the risk package grows.
• Insurance premium differences, since allocation changes who insures what and at what excess.
• Management time spent administering a risk sharing mechanism such as escalation or a provisional sum.
• The claims cost of an allocation the contractor regards as unfair, which shows up as a more adversarial approach to every other issue.
• The price of a smaller bidder field, because an aggressive risk package deters exactly the capable contractors you wanted.

Keeping the budget honest

For each significant risk, write down the allowance you believe a bidder will include and the contingency you would hold if you kept the risk instead. Transfer the risk only where the allowance is lower than your contingency, or where there is a reason beyond money, such as a funder requirement or a fixed opening date. Record the decision, because the reasoning is what protects the allocation when it is tested a year later.

• At procurement strategy, when the risk register is first written and allocation is still free.
• At tender issue, when the particular conditions and the pricing document give effect to the allocation.
• At bid evaluation, when qualifications reveal which transfers bidders would not accept and at what price.
• Before execution, when the final risk position and the security package are confirmed together.
• At the first serious claim, when you learn whether the allocation you drafted works in practice.

Domira builds and supervises projects across Saudi Arabia, and the commercial discipline above is how its projects stay inside their budget and their programme. Send the drawings, the contract or the site and Domira will tell you where the risk actually sits.