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4.3 Risk Management

Delivery of capital projects can be seen as a risk sharing arrangement. Risks need to be identified prior to commencement of a project and tracked during its progress. Initial identification of risks can define the project delivery options.

With small-scale projects undertaken in-house all the risk is carried by the owner/client. Conversely, with large‑scale projects, the owner/client can reduce risk by packaging the project in such a way that the contractor carries the risk by ultimately, in the extreme case, transferring ownership of the project to the contractor for a specified period of time.

There are usually commercial consequences in transferring risk to contractors as they will include a risk premium in their bid price to allow for risk. Where there is high contestability for the project, the premium for risk may be reduced by tenderers in order to secure the project. Consequently, contractual arrangements need to clearly define who is carrying/sharing the risk for the project so that completion of the project is secure and resort to litigation minimised. A detailed description of the various project delivery packaging options is documented in Austroads (2007).