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Assumption of Risk

Who Takes Responsibility? Owner? Contractor? Or the Party Best Able to Manage the Risk?

 

STUDENT PAPER

By Marie Osée Tchoyo Agoume

SKEMA Business School

Paris, France

 



ABSTRACT

Appropriate risk management in projects counts for at least 50% of its success. As such, clearly identifying, qualifying, determining the risk probability and giving adequate responses is the base for risk management. However, attributing a risk responsibility between present parties i.e. the owner and the contractor will enable a better control of the risk. The aim of this paper is to show who takes responsibility of a risk between the owner and the contractor. The owner and the contractor can either assume all risk solely, they can share the risk evenly or split it based on which party can best manage the risk. The result of the analyses carried out shows that, it is better to split the risk based on who is best able to manage it or share the risk among both parties, depending on the type of contract and risk.  The paper goes further to give some recommendations on how to reduce risk occurrence.

Keywords: Risk management, Contractor responsibility, Owner responsibility, Project risks, Responsibility, Risks, Parties, Contractor and owner responsibilities, Best able to manage


INTRODUCTION

It is a natural tendency to worry about risks. The PMI define risks as “an uncertain event or condition that, if it occurs, has a positive or negative effect on a project’s objectives.” Therefore, to successfully manage a risk, it must first be identified, assessed, prioritized and later acted for. So, identifying risks in projects helps the project manager to anticipate responses or avoid bad scenarios, that might lead to an early closure of the project. A clear risk owner and risk “actionee”[1] should therefore be identify, to better attribute responsibility between the owner and the contractor.

“A project owner bears the owner rights and owner responsibilities of the project”[2]. The business dictionary defines the contractor as an independent entity that agrees to furnish certain number or quantity of goods, to another independent entity called project owner. As such, there are generally at least two parties in contracts, and depending on the risk type, one or both parties take responsibility, as risks could be potential loss for the project. This can either be the contractor or the project owner.

Moreover, “Project success depends, among other factors, on the ability to successfully manage the interaction between the key stakeholders—namely, the project owners and management team of each project”[3]. It is therefore not bold to say project success highly depend on the ability of both the contractor and the owner to take appropriate corrective actions vis-à-vis a risk in a project, to help reduce its chances of occurring.

However, should the risk occur, someone must take responsibility for it. The project owner or the contractor? The aim of this paper is to answer the following questions:

  • What are the limits of the owner’s responsibility in risk management?
  • What are the limits of the contractor’s responsibility?
  • In which case both parties can manage risk together based on who can best manage the risk?
  • In which case can both parties they can split the risk?
  • What actions should be taken to reduce risk occurrence on both the contractor and the owner side?

The above questions can be summarized into two main questions: Should risk occur in projects, who takes responsibility?

The expected result of this paper is, on the one hand to show the responsibility of each party in risk management approach and on the second hand, to recommend preventive actions to reduce risk for each party.

More…

To read entire paper, click here

 

Editor’s note: Student papers are authored by graduate or undergraduate students based on coursework at accredited universities or training programs.  This paper was prepared as a deliverable for the course “International Contract Management” facilitated by Dr Paul D. Giammalvo of PT Mitratata Citragraha, Jakarta, Indonesia as an Adjunct Professor under contract to SKEMA Business School for the program Master of Science in Project and Programme Management and Business Development.  http://www.skema.edu/programmes/masters-of-science. For more information on this global program (Lille and Paris in France; Belo Horizonte in Brazil), contact Dr Paul Gardiner, Global Programme Director [email protected].

How to cite this paper: Tchoyo Agoume, M. O. (2018). Assumption of Risk: Who Takes Responsibility? Owner? Contractor? Or the Party Best Able to Manage the Risk? PM World Journal, Volume VII, Issue X – October.  Available online at https://pmworldjournal.net/wp-content/uploads/2018/10/pmwj75-Oct2018-Tchoyo-Agoume-assumption-of-risk-student-paper.pdf

 



About the Author


Marie Osée Tchoyo Agoume

Paris, France

 

 


Highly motivated to be a good and respected project manager tomorrow, Marie Osée TCHOYO AGOUME is a young Cameroonian who began her studies in her native country, Cameroon, where she got a bachelor’s degree in advertising and a master’s degree in corporate communication and marketing at the Advanced School of Mass Communication. In 2015, she went forward to pursue her studies in France at SKEMA business school, where she is enrolled in a Master’s degree program in project and programme management and business development. She likes working in a multicultural environment as well as facing the challenges of complex projects. In her previous role, she had the opportunity to work in CRM projects as an assistant in customer retention. Her dream is to work with one of the UN humanitarian organisms, as she is very interested in working with refugees, disabled and homeless people.

 

[1] The Risk Actionee is someone who is assigned to carry out a particular action and they support the Risk Owner. (PRINCE2 wiki)

[2] Olsson, N., & Berg-Johansen, G. (2015). Project ownership in theory and practice. Project owners type 1 and type 2.

[3] Krane, H. P., Olsson, N. O. E., & Rolstadås, A. (2012). How project manager-project owner interaction can work within and influence project risk management – (Turner & Mueller, 2004)