The efficient allocation of risk in contracts

Chapman, C.B. and Ward, S.C. (1994) The efficient allocation of risk in contracts. Omega, The International Journal of Management Sciences, 22, (6), 537-552. (doi:10.1016/0305-0483(94)90046-9).


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This paper considers how project risk should be allocated between clients and contractors, where significant project risk is characterized as uncertainty about project costs requiring explicit attention and policy or behaviour modification.

The risk efficiency of cost reimbursement and fixed price contracts given different degrees of client and contractor risk aversion is considered first, using a novel form of model. Then the potential for efficient risk sharing is considered in a mean-variance framework. The concern in both cases is with clarifying the rationale for conventional wisdom and resolving conflicting rules of thumb. Finally, practical application of the analysis with a mixture of controllable and uncontrollable risks is discussed.

Item Type: Article
Digital Object Identifier (DOI): doi:10.1016/0305-0483(94)90046-9
ISSNs: 0305-0483 (print)
Related URLs:
Keywords: risk allocation, contracting, dominance, utility, decision making
Subjects: H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management
Divisions : University Structure - Pre August 2011 > School of Management
ePrint ID: 35674
Accepted Date and Publication Date:
Date Deposited: 26 Jun 2006
Last Modified: 31 Mar 2016 12:03

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