Attitudes of Contractors and Employers Towards Transfer of a Time-Related Risk in Construction Contracts

Abstract

Risk allocation through contractual provisions involves financial considerations. To enhance the cost effectiveness of risk adjustment exercise, we have to assess the risk behaviors of both contract parties, which are termed as contractors' request to pay and employers' willingness to pay in this paper. Owing to the significant impact that inclement weather imposes on project delays, the paper focuses on the risk shift of deleting Extension of Time provision due to inclement weather. Within the expected utility approach for studying one's risk behavior, we should adjust for risk perception and risk attitude to obtain one's subjective values. This is supported by empirical studies showing significant differences between expected utility and subjective values. Some researchers have reported high correlation between attitude and behavior, but others have found only insignificant relationship. Therefore, in this study, the term situational variables is introduced to fill in the possible gaps between risk attitude and behavior, on the ground that such variables may not have any significant correlations with one's risk perception or attitude, but may relate to some other commercial decisions instead. This paper aims to examine the relationships among one's risk behavior and its major constituents — expected utility, risk perception, risk attitude and other situational variables, together with the proposed methods in calculating the request to pay and willingness to pay.