CCNP Risk Allocation 2 — Questions and Answers
Question 1: 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?
- Schedule risk to the owner
- Cost overrun risk to the contractor (Correct answer)
- Cost underrun upside away from the owner
- Quality risk to third parties
Correct 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.
Question 2: Under a Fixed-Price Incentive Firm (FPIF) contract, the 'point of total assumption' (PTA) represents:
- The price at which the government assumes all cost overrun risk
- The cost level above which the contractor bears 100% of additional costs (Correct answer)
- The target cost agreed upon at contract award
- The maximum fee the contractor can earn
Correct 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.
Question 3: Which indemnification clause structure best protects a service provider against claims arising from a client's pre-existing IP infringement?
- Mutual indemnification with carve-outs for pre-existing conditions (Correct answer)
- Unilateral indemnification favoring the client
- Gross negligence standard with no carve-outs
- Silent indemnification defaulting to statutory law
Correct 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.
Question 4: A force majeure clause that lists 'pandemics' explicitly as a covered event differs from a general catch-all force majeure provision primarily because:
- Listed events require less evidence to invoke but catch-all provisions cover more events
- Catch-all provisions always supersede specific listings
- Specific listings create certainty but may exclude unlisted extraordinary events (Correct answer)
- Listed events require higher evidentiary standards than catch-all provisions
Correct 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.
Question 5: In construction contracts, a 'differing site conditions' clause primarily allocates what risk from the contractor to the owner?
- Labor strikes and work stoppages
- Subsurface or latent physical conditions differing from contract representations (Correct answer)
- Design errors and omissions by the architect
- Weather delays beyond seasonal norms
Correct 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.
Question 6: A 'consequential damages waiver' in a commercial contract typically excludes recovery for:
- Direct repair costs and replacement expenses
- Lost profits, loss of business, and revenue shortfalls (Correct answer)
- Personal injury and property damage claims
- Agreed-upon liquidated damages amounts
Correct 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.
Question 7: 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:
- A general indemnification clause covering all environmental matters
- A baseline environmental assessment with indemnification tied to pre-closing conditions (Correct answer)
- Force majeure provisions referencing regulatory changes
- Limitation of liability caps applied to environmental claims
Correct 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.
CCNP Risk Allocation 2
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?