Chapter 26 - § 26.1 • INTRODUCTION

• Jurisdiction: Colorado

§ 26.1 • INTRODUCTION

§ 26.1.1-Overview

Every construction project carries with it numerous risks to the parties involved. A typical first reaction might be to attempt to shift all of the risks to other parties. But this is not a very practical approach, because it may shift the risk away from the party that can best control or manage the risk. In effect, efforts to shift risk away from the parties best able to control or manage the risk actually increase the risk to the project. Among other things, it is often the case that the parties on whom such risk is shifted, or attempted to be shifted, are unable to properly insure the risk and lack the financial wherewithal to absorb the cost if the risk becomes a reality. Finally, certain clauses that purport to shift risk may not be enforceable, as discussed in § 26.5. In that case, the party attempting to shift the risk may end up with the risk, without having properly managed or insured the risk.

This chapter provides examples of types of common risk allocation and transfer clauses found in construction contracts. These sample clauses are not drafted for insertion into specific contracts. Rather, they are drafted to provide basic ideas as to the types of clauses that can be considered. Such clauses must be drafted to meet the facts and circumstances of the particular project and contract, and only after fully considering the validity and desirability of the clauses. In drafting construction contracts, bear in mind that the Uniform Commercial Code (UCC) generally only applies to construction contracts that involve the sale of goods, not all construction contracts.¹

This chapter attempts to provide an overview only of Colorado law, although foreign jurisdiction cases are sometimes cited as examples. No attempt has been made to cover all Colorado case law, and clauses should be carefully researched before being used. Note that the attitude of the courts toward the validity/enforceability of risk management clauses varies dramatically from state to state.

§ 26.1.2-Types of Risks Created by Construction Projects

There are many risks inherent in a construction project. But these risks are not shared equally by all parties involved in the project. So the critical question is what risks should be the risks of which parties. For example, being unable to obtain financing for a project normally is a risk for the owner/developer. Should financing ever be a risk of the subcontractor, and if so, under what circumstances?

This chapter is about the management, allocation, and transfer of construction project risks through contract clauses. Of course, many risks have been managed and allocated by the legislature. For example, the contractor, subcontractor, supplier, and laborer have always had a risk of not being paid, but the legislature has minimized and shifted much of that risk to the owner, by providing for mechanics' liens.² However, can the owner limit his or her liability to the contractor for not paying its subcontractors and override the legislative grant of mechanics' liens?³

Examples of Risks on a Construction Project

The following is a partial list of the common risks incurred by the...