Residual risk in building development
The development of buildings is carried out in several phases, all involving hazard, uncertainty and risk. Risks which may occur on construction projects can sometimes be designed out or avoided. Remaining risks may be:
- Transferred to the contractor.
- Shared by the employer and contractor.
- Retained by the employer.
According to NRM2: Detailed measurement for building works, the term ‘residual risk’, or ‘retained risk’ refers to risks retained by the employer, that is, unexpected expenditure arising from risks that materialise, which are retained by the employer rather than being transferred to the contractor.
The employer may ask the contractor to provide a price for taking on a risk themselves before deciding to retain a risk.
Residual risks retained and managed by the employer or their project team are described as the employer’s residual risk exposure. Risk allowances should be included in cost plan to provide for this exposure.
Government Functional Standard, GovS 002: Project delivery; portfolio, programme and project management, Version: 2.0, published on 15 July 2021 by HM Government, defines a residual risk as: ‘The risk remaining after the risk response has been applied.’
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