Allocation of risk factors associated with construction contracts in Ghana

Risk is innate and broad in the construction industry. It cannot be ignored but managed, minimised, shared, transferred or accepted. Therefore the efficient management of risk is fundamental to the success of all construction projects. Risk identification is the first step of managing risk; however its allocation to any of the contracting parties tells whether or not it can be successfully controlled. In Ghana, some studies of risk in the construction industry have been conducted. However, none directed towards allocation of risk factors in construction contracts has been done. This study therefore was aimed at optimizing the allocation of risk factors associated with construction contracts in Ghana. Hence the study sought to explore the current risk allocation practices in construction contracts, identify the effects of the current practices of risk allocation on contracting parties and project objectives, identify the obstacles to optimal risk allocation and further provide solutions to remedy the effects of current risk allocation practices in construction contracts. In light of this, literature was reviewed and seventeen (17) current risk allocation practices, thirteen (13) clauses that unfairly allocate risk, ten (10) effects of the current risk allocation practices, eleven (11) obstacles to optimal risk allocation and nine (9) remedies to the effects of current risk allocation practices in construction contracts were found. A survey was conducted on clients, contractors and consultants in the Greater Accra and Ashanti regions with the aim of finding the efficient way of allocating risks among construction project contracting parties in Ghana. The data collected were analysed using relative importance index and Spearman’s rho correlation. Based on the analysis of the data, it was found that the four (4) main current risk allocation practices were: owners allocate risk by aversion; higher-tier parties use disclaimer clauses to prevent contractors from making genuine claims; sufficient time is not allowed at the tendering stage for risk assessment before risks are allocated and contractors assume high risks in order to secure jobs due to competitive markets. No damages for delay; consequential damages; differing site conditions and waiver of claims were also identified as the four main contract clauses that unfairly allocate risk among contracting parties. The four (4) main effects of current risk allocation in construction contracts found were: disputes between contracting parties; adversarial project environment and aggressive relationships between contracting parties; additional resources (time and funds) to manage the misallocated risks and more construction claims leading to escalated final project account. The four (4) obstacles to optimal risk allocation that were found were: differing risk attitudes and perceptions among project participants; aversion to risk by project participants; lack of a joint risk management mechanism which include all project participants at the early stage of the project and static risk allocation for a dynamic construction industry. The survey concluded that , current risk allocation practices in construction contracts are sub-optimal. And can be improved through: • Effective negotiation and communication between contracting parties at all stages of the project life cycle • Building trust and teamwork among contracting parties. • Allocation of risks to the party that has the resource and expertise to manage them. • Use of unambiguous language in writing contract terms. • Any choice of a procurement route should be made in cognisance of the terms of agreements that will be used in the contract.

Source: KNUST