Successful innovation requires clarity around the identification and allocation of risk and the responsibilities of stakeholders in its management. The quest for water security in large cities has led to consideration of alternative water sources, which may involve new risks. In initiatives for integrated urban water management, stormwater is increasingly viewed as a resource rather than simply as a flood or pollution hazard, with implications for how risk is conceptualised and managed. This paper addresses the question of how governance arrangements and formal risk allocation interact with risk perceptions to either promote or constrain innovative initiatives involving the use of stormwater as a potable source. The local development scale at which such initiatives are often realised also poses new challenges for the management of risk, particularly where initiatives require devolved governance arrangements and fragmented responsibilities for managing different types of risk at different stages of project development. We compare two examples of innovative local development-scale test cases involving stormwater capture and treatment in different Australian cities. While both test cases involved devolved governance, there were different organisational arrangements and regulatory frameworks relating to land use planning and water services. Our conclusions endorse the importance of effective risk management in facilitating technological innovation at the local development scale, and an ongoing role for trusted government authorities in overseeing effective risk management.