All building and construction projects entail various risks. While some of these risks are insurable (workers' comp, property damage), up to two-thirds of them are not. This is because each construction situation differs in terms of size, financing, and contractor expertise, making it difficult for insurance actuaries to calculate the risk accurately. Therefore, real estate developers and contractors have had to develop other ways to offset risks.
Contractual Indemnification
Offsetting risk by specifically indemnifying certain parties from some risk by contract is a common practice. However, this can only go so far because there are state regulations about contracts and fair indemnification. Additionally, court cases have largely ruled that there are limits to how much the "larger party" can indemnify itself against the "smaller party".
Surety Bonds
Posting surety bonds for indemnifying various parties from risks in construction projects is also a common practice, and is sufficient in many cases. A surety bond involves three parties -- the principal, the obligee and the surety provider. The principal pays the surety provider a premium to provide a specific amount of money as surety that he will complete his obligation to the obligee. If the principal does not meet the obligation, the surety provider pays the obligee the specified amount.
Cooperative Network Risk-Sharing (Risk Register)
The concept of the various owners, suppliers and contractors all getting together and working cooperatively to fairly share the risk is a new idea that is starting to catch on, especially for larger construction projects. Related to this trend is the idea of creating a "risk register." This is a continually updated document available to all concerned parties. It details all of the risks, responsibilities and contingency measures related to the specific project. A risk register enables all parties to see exactly what the risks are, and which ones have been mitigated and/or indemnified (and by whom), and which have not.
