Absorb the Risk Others Won't Touch

“Ivar tapped into the new funds available there to finance construction projects throughout Europe. He developed superior technology and methods of engineering design, as well as novel contractual features. In particular, he was willing to change the standard terms of construction contracts to reallocate risks to him. His appetite for risk was unique among men in the construction industry. For example, from his experience at Fuller Construction in New York, Ivar knew how frustrated builders became when there were lengthy delays. Construction firms had not been willing to take on the risk associated with delays; instead, they put that risk on their clients. But Ivar understood a fundamental proposition about the allocation of risk: both parties to a deal can gain when the party in the best position to bear a risk takes on that risk. Construction firms, not clients, were in the best position to reduce delays. Therefore, as Ivar realized, the best way to minimize construction delays was to shift the risk of loss that arose from such delays to him and Paul Toll. Then, Kreuger & Toll would have the incentive - and, crucially, the ability - to speed up a project. And here was the punchline: clients would pay more if they knew the job would be done on time. Kreuger & Toll became the first firm in Europe to commit to finish projects by a fixed date.9 After completing some small projects, building some beams and a viaduct, Ivar secured a deal to build a six-story “skyscraper.” He promised that if construction wasn’t finished by a particular date, he would give the client a partial refund of 1,200 dollars for each late day.”