Risk Allocation and the Matrix of Contracts
The core principle of Project Finance is that "risk should be allocated to the party best able to manage it." This document explores the Risk Allocation Matrix, which maps project risks across a network of bilateral contracts.
Construction Risk: Transferred to the contractor via an EPC (Engineering, Procurement, and Construction) contract, often featuring "Fixed-Price" and "Turnkey" provisions.
Operating Risk: Managed through an O&M (Operations and Maintenance) agreement.
Revenue Risk: Mitigated by a Take-or-Pay or Offtake Agreement, where a buyer commits to purchasing the project's output at a set price.
Supply Risk: Covered by a Fuel Supply Agreement (FSA) or raw material contract.
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