Risk Allocation Flashcards

A contractor proposes a 'shared savings' clause where cost underruns are split 50/50 with the owner. This arrangement primarily shifts which type of risk?

Answer: Cost overrun risk to the contractor

Shared savings arrangements incentivize the contractor to control costs, effectively shifting cost overrun risk to the contractor who bears the consequences of inefficiency.

Under a Fixed-Price Incentive Firm (FPIF) contract, the 'point of total assumption' (PTA) represents:

Answer: The cost level above which the contractor bears 100% of additional costs

The PTA is the cost level beyond which the contractor absorbs all additional costs because the price is capped at the ceiling price.

Which indemnification clause structure best protects a service provider against claims arising from a client's pre-existing IP infringement?

Answer: Mutual indemnification with carve-outs for pre-existing conditions

Mutual indemnification with carve-outs for pre-existing conditions ensures each party bears responsibility for risks within their own control.

A force majeure clause that lists 'pandemics' explicitly as a covered event differs from a general catch-all force majeure provision primarily because:

Answer: Specific listings create certainty but may exclude unlisted extraordinary events

Specific enumeration of events provides contractual certainty and ease of invocation but may leave gaps for unenumerated extraordinary events.

In construction contracts, a 'differing site conditions' clause primarily allocates what risk from the contractor to the owner?

Answer: Subsurface or latent physical conditions differing from contract representations

Differing site conditions clauses transfer the risk of unforeseen subsurface or hidden physical conditions to the owner, who has superior knowledge of site history.

A 'consequential damages waiver' in a commercial contract typically excludes recovery for:

Answer: Lost profits, loss of business, and revenue shortfalls

Consequential damages waivers bar recovery for indirect losses such as lost profits, lost opportunities, and downstream business impacts.

When negotiating an environmental liability clause, allocating pre-closing contamination risk to the seller and post-closing risk to the buyer is best documented through:

Answer: A baseline environmental assessment with indemnification tied to pre-closing conditions

A baseline environmental assessment establishes the condition at the time of transfer, enabling precise allocation of pre- versus post-closing contamination liability.