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Exculpatory clauses are statutory clauses that shift potential risks from one party to another. The party assuming the liability of a risk is expected to have the necessary experience, knowledge and capability to manage and control that risk. Edward Fisk and Wayne Reynolds state that "the principal guideline in determining whether a risk should be transferred to another is whether the party assuming the risk has both the competence to assess the risk and the expertise necessary to control or minimize it" (p. 268) [2]. For example, in a design-bid-build project delivery method, the designers are expected to be liable for the drawings and specifications, while the contractor is responsible for the construction methods and means. Conversely, owners are responsible for making payments on time with no delays.
Typically, it is the owner who seeks to shift a particular construction risk to the other parties (designer or contractor) [10]. When they do that, owners use exculpatory clauses in the construction contract. Kerry Powell argues that exculpatory clauses take various forms [8]. The exculpatory clause may state that the owner is not responsible for any damages or delays. Conversely, the clause may provide that the owner is not liable for any misrepresentation or inaccuracy of the plans, specification and/or soil report presented to contractors bidding on the construction project. According to Z. Khan, exculpatory clauses are often found in "both the instructions to bidders and in the terms and conditions which form the agreement between the owner and contractor" (p.1) [5].
Hartman suggests that contractors in North America use a risk premium between nine percent and 19 percent as part of their contingency plan to alleviate the risks associated with accepting exculpatory clauses [3]. Hartman added that contractors have risk premiums incorporated in:
* the risk of doing business;
* subcontractor prices; and
* unit rates.
Therefore, the project cost to the owner will be more than it should be due to inappropriate risk allocation techniques.
Owners have an interest in using exculpatory clauses with the perception of reducing project costs. They tend to use those clauses to shift risks of construction to the contractor [10]. However, the evidence suggests that using these clauses may have a negative impact on the project final cost [7]....