chapter  8
9 Pages

Risk allocation in target cost contracts

The risk allocation may be stipulated in the contractual language and exculpatory clauses (e.g. ‘no damage for delay’ clauses and indemnification clauses) which are usually utilised to transfer one’s risk in common law to another stakeholder. Nevertheless, Ashley et  al. (1989) were sceptical of their enforceability, as even if the exculpatory clauses are enforceable, contractors tend to inflate their tender prices in order to transfer the cost to the employer. Ahmed et al. (1998) echo that misallocation of risk may lead to higher costs borne by employers because of bid contingency. Therefore, it is important to allocate the risk impartially and evenly in order to achieve project success.