Sharing of endogenous risk in construction

In risk management of complex procurement projects in construction, the buyer can affect the level of risk by careful project specification, or shift risk over to the supplier. Each of the alternatives imply costs for the buyer. The major specification cost is the reduction in net present value due to postponing of the project. Risk sharing by the buyer is costly even if the buyer is risk neutral, since lower risk exposure for the contractor implies weaker incentives and higher construction costs. We model this trade-off in a risk sharing model with endogenous risk.