On the allocation of risk in construction projects

The willingness of contracting parties to take on risks is an important consideration in the allocation of project risks. A number of factors contribute to willingness to bear risks, but not all motivate conscientious, effective project risk management. A party's willingness to take on risk is reflected in the premium that he or she is able to charge for doing so. However, contractors face a number of difficulties in being able to price risk properly. The regarding of contractors as quasiinsurers suggests pricing rules that are analogous to insurance practice, and important complications associated with adverse selection and moral hazard.