--- title: "Risk transfer with example" subject: "Project Engineering" chapter: 5 key: "semester_7/project_engineering:risk-transfer-example" source: https://www.bctengineer.com/q/semester_7/project_engineering/risk-transfer-example site: BCT Engineering --- # Risk transfer with example Project Engineering · Chapter 5: Project Risk Analysis and Management - Asked in: 2073 Shrawan, 5 marks; 2070 Chaitra, 2 marks (asked 2 times) - Video: [Life Insurance Basic Concept: Risk Transfer](https://www.youtube.com/watch?v=-dS1i65mKl0) — Preet Banerjee - Answer checked by Claude Opus 5.5 (high effort) on 2026-10-14 - Page: https://www.bctengineer.com/q/semester_7/project_engineering/risk-transfer-example - Whole chapter: https://www.bctengineer.com/md/semester_7/project_engineering/chapter-5 ## Question Explain with a suitable example how risk transfer is taken as risk response planning. (What methods can be used in risk management after identifying a major risk?) ## Short answer For a highway bridge, flood damage risk is transferred by Contractor’s All Risk insurance, a performance bond guarantees contractor performance, and a lump-sum contract shifts cost overrun risk. These cost a premium but shield the owner from large losses. Other strategies include avoid, mitigate, and accept. ## Answer #### Risk transfer in risk response planning **Risk transfer** is a response strategy in which the project owner shifts the negative impact and responsibility of a risk to a third party, who accepts it for a fee. The risk still exists, but the loss is borne by the other party. It is chosen after analysis, mainly for risks with low probability and very high impact, or for risks the other party can manage better. #### Example: construction of a highway bridge Risk: flood or earthquake damage during construction, and contractor delay or failure. 1. **Insurance:** the contractor takes a Contractor's All Risk (CAR) policy; if flood damages the work, the insurer pays for repair. 2. **Performance bond:** a bank guarantee (usually 5 to 10% of contract price) is taken so that the bank pays if the contractor fails. 3. **Fixed-price (lump sum) contract:** the cost overrun risk is transferred to the contractor. 4. **Liquidated damages:** delay risk is transferred by a clause charging the contractor per day of delay. The owner pays a premium or a higher price, but is protected from a very large loss. #### Methods used after identifying a major risk - **Avoid** the risk (change plan, design or site) - **Transfer** it (insurance, contract, guarantee) - **Mitigate / reduce** it (preventive action, extra investigation) - **Accept** it (with a contingency reserve) - **Monitor** it and prepare a contingency plan with triggers ## Check yourself The answer's key points as multiple-choice questions, with the correct option and why. 1. In risk transfer, what happens to the risk itself? A. It disappears B. It still exists but the loss is borne by the third party who accepts it for a fee C. It is shared equally with no payment D. It is ignored until it occurs Answer: B. The risk remains; only the impact and responsibility move to another party. (Key point: Transfer concept) 2. What is the purpose of a performance bond (bank guarantee) of about 5 to 10% of contract price? A. To pay for flood repairs B. To make the bank pay if the contractor fails C. To fix the price of materials D. To charge the contractor for each day of delay Answer: B. The guarantee protects the owner against contractor failure by transferring that risk to the bank. (Key point: Performance bond) 3. Which pair correctly matches a clause with the risk it transfers? A. Fixed-price contract: delay risk; liquidated damages: cost overrun B. Fixed-price contract: cost overrun risk; liquidated damages: delay risk C. Insurance: contractor delay; CAR policy: price rise D. Liquidated damages: flood damage Answer: B. A lump-sum contract puts cost overrun on the contractor, and liquidated damages charge the contractor per day of delay. (Key point: Delay and cost risk transfer) 4. Which list gives the methods used after identifying a major risk? A. Avoid, transfer, mitigate, accept, and monitor with contingency plan B. Only insure and accept C. Brainstorm, Delphi, SWOT, interview D. Estimate, bid, award, complete Answer: A. The answer lists avoid, transfer, mitigate/reduce, accept, and monitoring with a contingency plan and triggers. (Key point: Methods after identifying a risk) ## Related in Project Engineering - [Risk transfer, reduction as response techniques](https://www.bctengineer.com/question.md?key=semester_7%2Fproject_engineering%3Arisk-transfer-reduction-response-justify) — Project Engineering, chapter 5, asked 2× - [Risk response planning strategies](https://www.bctengineer.com/question.md?key=semester_7%2Fproject_engineering%3Arisk-response-planning-strategies) — Project Engineering, chapter 5, asked 3× - [Risk, sources, risk response planning](https://www.bctengineer.com/question.md?key=semester_7%2Fproject_engineering%3Arisk-define-sources-response-planning) — Project Engineering, chapter 5 - [Risk planning; internal, external; risk reduction](https://www.bctengineer.com/question.md?key=semester_7%2Fproject_engineering%3Arisk-reduction-internal-external-planning) — Project Engineering, chapter 5 - [Need of risk management; hydropower risk types](https://www.bctengineer.com/question.md?key=semester_7%2Fproject_engineering%3Arisk-management-necessary-hydropower-types) — Project Engineering, chapter 5 - [Risk management; qualitative, quantitative; steps](https://www.bctengineer.com/question.md?key=semester_7%2Fproject_engineering%3Arisk-management-qual-quant-steps) — Project Engineering, chapter 5 ## Related in other subjects - [Importance of risk response planning](https://www.bctengineer.com/question.md?key=semester_7%2Fict_project_management%3Arisk-response-planning-importance) — ICT Project Management, chapter 12 - [Risk management plan](https://www.bctengineer.com/question.md?key=semester_7%2Fict_project_management%3Arisk-management-plan) — ICT Project Management, chapter 12 - [Impulse response, transfer function and distortionless transmission](https://www.bctengineer.com/question.md?key=semester_6%2Fcommunication_systems%3Adistortionless-transfer-function) — Communication Systems, chapter 1 - [Impulse response and transfer function significance](https://www.bctengineer.com/question.md?key=semester_6%2Fcommunication_systems%3Aimpulse-response-transfer-significance) — Communication Systems, chapter 1