Draft FIDIC Policy Statement Insuring Project Risk The traditional approach of Clients to the risks inherent i
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Draft FIDIC Policy Statement Insuring Project Risk The traditional approach of Clients to the risks inherent in any construction project has been to transfer those risks to the other members of the project team by way of contract terms. The risks transferred in this way are then insured, to the extent that this is possible, usually by way of liability insurance. The handling of project risk in this way is flawed as: - (a) the process brings with it a lack of certainty; (b) the process is inefficient (c) there is lack of clarity (d) the threat of litigation, real or perceived, encourages defensive attitudes, has a corrosive effect on relationships and inhibits team-building and team-work (e) the process of insuring liability rather than project risk inhibits constructive feedback. Accordingly: It is FIDIC's policy that alternative approaches to project risk should be actively encouraged. It is Clients who are most likely to make the entire profit on projects over the cost of construction. The Consulting Engineer will only make a small margin on his fee and the Contractor a smaller margin on the construction costs. Accordingly: It is FIDIC’s policy that Clients within construction be encouraged to retain, manage and insure project risk to a significant degree. Traditional contracts are adversarial and will not easily work in situations where clients retain significant risk. In addition, the adversarial approach does not sit easily with the concept of partnering arrangements, which are becoming increasingly common within construction. Accordingly: it is FIDIC’s policy that new forms of construction contracts be developed such that: - except in certain circumstances, the parties to a project agree to waive their rights to sue; all parties to the project, including to a significant degree the client, agree to share loss according to a pre-agreed formula; beyond that ceiling the balance of risk rests in theory with the Client but in practice would be transferred to a professional risk taker – an insurance company. The medium of liability has not proved successful either as a means of financing project risk or of creating the cohesiveness between client and the construction team necessary to minimise that risk. Indeed, historically, the mismanagement of the financial risk of construction has materially increased the costs of those risks. Partnering is unlikely to work effectively in the shadow of litigation should a project or its finances go wrong. Accordingly: It is FIDIC’s policy that a more holistic approach to project risks be adopted in order to encourage innovation, achieve savings through greater efficiencies and more effective risk management to the benefit of both the construction industry and society as a whole. For projects where this new approach is not adopted, please refer to FIDIC’s Policy Statements on Professional Risk, Responsibility and Insurance and Limitations of Liability.