Rock tunnel construction is associated with considerable geotechnical uncertainty, often due to limited knowledge about the ground conditions. This warrants the use of stringent risk management procedures to reduce the likelihood of cost increases, delays, and structural failure events. The observational method is often promoted as a tool to achieve cost-effective designs in cases of large geotechnical uncertainty, but its practical use is still limited. One reason may be the lack of guidelines and experiences from previous projects where the observational method has been used. In this paper, we therefore present a case study of the design and construction of the tunnel under the Hvalfjörður fjord in Iceland, where the observational method played a key role in the risk management that was performed to deal with the challenging geological conditions at the site. The project was a success and completed four months earlier than originally planned. In light of the case study, we discuss the definition of the observational method in Eurocode 7 and the related contractual aspects to consider in such projects.