Abstract

Environmental companies face the risk of liability claims that can, significantly, affect their resources and financial future. At the same time most small- and medium-sized companies do not rely on sophisticated risk-management procedures. We propose here a method that allows for distribution of the liability risk among different projects and which can be applied in a straightforward manner by this type of companies. This procedure relies on incorporating the cost of future claims within a project’s revenue, thus treating liability costs as legitimate business revenues. Part of the premium charged, denoted as risk price, is to be used to meet future claims and part to administer the funds collected.

Projects of similar magnitude awarded during the same fiscal year share the same risk price, administrative expenses, and risk markup. For projects of similar magnitude that are (or will be) initiated at various years these variables are weighted according to a project’s exposure horizon from an expected occurrence of a liability claim. For proposals of variable revenue, awarded at different time-periods, liability costs are distributed proportionally to a project’s budget and time-lag from a claim. Our procedure does not render small or recent projects non-competitive and it provides an easy-to-implement risk-management tool to environmental companies.