Construction risk covers the risks associated with delivering the asset in working condition. It is expected that under SOPC 4 compliant contracts, construction risk would be held by the private sector; however it is important to consider carefully whether this is actually the case before any conclusion is drawn. The key aspects of construction risk include penalties for late delivery, exposure to cost overruns and changes in relevant prices, failure to meet specified standards, initial design risk and exposure to external factors such as environmental risks.
When considering construction risks it is only risk associated with the newly created assets that should be considered. Where newly created assets are developed on existing public sector land, whilst there may be potential to transfer risks associated with the ground conditions, it is more likely that the risks associated with the existing land will remain with the public sector. As the analysis is only concerned with the newly created assets this would not be an indicator that the public sector bears construction risk.
Where an existing asset is upgraded by the private sector it may be that some latent defect risk is retained by the public sector. Whilst this may suggest a sharing of certain aspects of the construction risk, it would not necessarily lead to the conclusion that the public sector bears significantly all of the risk associated with construction. The MGDD states "The construction risk applies only to the new capital expenditure under the responsibility of the partner, whatever the conditions in which the asset has been transferred".
In cases where the private sector partner is not responsible for latent defects, and these can be clearly separated from the majority of the capital spending, then it may be concluded that the private sector does not bear construction risk. However, in cases where the latent defect risk is significant compared to the total capital spending, then this could be indicative of either a sharing of construction risk, such that other factors should be considered in addition to the MGDD primary risk tests, or it could be indicative that the public sector bears construction risk, such that the asset should be considered as being on the public sector balance sheet.
In limited circumstances, the public sector could take risks in the a project that the private sector collectively is unable to bear. For example, where the public sector bears the risks associated with unexpected exogenous events beyond the coverage of commercially available insurance then, subject to an assessment of all relevant factors, this may not lead to an assessment that the public sector carries construction risk.