Risk transfer, reduction as response techniques

Risk response planning selects the action for each analysed risk. The main strategies for threats are avoid, transfer, reduce (mitigate) and accept. Risk transfer and risk reduction are both response techniques because each one plans an action, an owner and a cost before the risk occurs, and each one lowers the final effect on the project objectives.

Risk transfer

Transfer means shifting the negative impact and ownership of the risk to another party, usually in return for a payment (a premium or a higher contract price). The risk does not disappear, but the loss is paid by the other party.

• Insurance (contractor's all risk, workmen's compensation, third party)
• Performance bond / bank guarantee, advance payment guarantee
• Fixed-price (lump-sum) contract, which transfers cost risk to the contractor
• Subcontracting special works, warranties and indemnity clauses

Justification: it is planned in advance, it has a cost, and it reduces the owner's exposure to a major loss (e.g. flood damage to a bridge is paid by the insurer). It is best for low-probability, high-impact risks.

Risk reduction (mitigation)

Reduction means taking action to lower the probability or the impact of the risk to an acceptable level.

• More soil investigation to reduce design risk
• Early ordering of cement and steel to reduce price and delay risk
• Training, safety measures, quality control, prototypes, backup equipment
• Splitting the work into packages and using parallel suppliers

Justification: it attacks the cause of the risk, it is planned with a budget and a place in the schedule, and it is usually cheaper than the loss. It is best for high-probability risks that are within the control of the team.

Conclusion on both

Because both are planned, resourced and assigned before the event, both are risk response planning techniques. In a hydropower project, for example, flood risk is transferred by insurance and geological risk is reduced by detailed investigation.