The Procurement Glossary » Risk Allocation
Risk Allocation
Compliance & Risk
Definition
The contractual assignment of specific risks to whichever party is best placed to manage them.
Explanation
Good contracts allocate risk deliberately — through indemnities, liability caps, warranties and force-majeure terms — rather than leaving it ambiguous. Sensible allocation lowers overall cost by putting each risk with the party that controls it.
Example
The contract allocates transport risk to the supplier under DDP terms and IP risk via an indemnity.
Related terms
- Indemnity — A contractual promise by one party to cover specified losses or liabilities suffered by the other.
- Limitation of Liability — A clause capping the amount or types of loss a party can be held liable for under a contract.
- Force Majeure — A clause excusing a party from performance when extraordinary events beyond its control (e.g. disaster, war) prevent it.
- Incoterms — Standard international trade terms defining who is responsible for shipping, insurance, duties and risk at each point of a delivery.
Frequently Asked Questions
What is Risk Allocation?
The contractual assignment of specific risks to whichever party is best placed to manage them. Good contracts allocate risk deliberately — through indemnities, liability caps, warranties and force-majeure terms — rather than leaving it ambiguous. Sensible allocation lowers overall cost by putting each risk with the party that controls it.
Can you give an example of Risk Allocation?
The contract allocates transport risk to the supplier under DDP terms and IP risk via an indemnity.
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