Minimizing Risk for the Contractor

I recall a conversation with one of my mentors shortly after I founded my construction company. As the topic moved to risk management, I remember him saying, “Your company will only be as strong as the weakest link in the chain.” Those words really stuck with me, and I would often look to identify the weakest link in my company. 

Contractors face many different types of risk. Because each job has a different environment and can pose its own challenges, minimizing risk is an ongoing process. Below are four areas to consider when evaluating risk.  

Project budget. There are many reasons you might go over budget, including an incorrect estimate, a contract misunderstanding, inadequate plans or specifications, delays, unexpected site conditions, and changes to the project, schedule, or scope of work.

Pricing the correct scope of work is important. You must fully understand where it starts and stops. Adding clarifications and exclusions to your pricing when plans and specifications are vague can help. Visiting the job site will reveal site conditions and make you aware of those challenges. Make sure you understand the contract and the risk you are accepting before you sign. Obtain help from a construction attorney if needed.

Financial issues. A project owner, contractor, or subcontractor filing bankruptcy in the middle of a project can stop a job in its tracks and create problems for everyone involved. The domino effect can reach third-party contractors and material suppliers and delay completion of the project.

Carefully check the financial affairs of the owner and contractor before awarding the contract. A contractor’s qualification sheet can give information on bank and material supplier references to confirm good standing. A contractor who is in financial trouble on other jobs can affect your job. A contractor's price that is too low can cause financial problems in the middle of the project. Getting comparable pricing for the same work can help determine ballpark pricing. Make sure project payout terms are clear and agreed upon by all parties.

Project safety. Having a worker injured or killed on the job is a contractor’s worst nightmare. Having to deal with the emotional stress of this type of situation can be overwhelming. Other ramifications can include the project being stopped or delayed, damage to existing infrastructure, bad publicity, and heavy fines.

Many general contractors today take into consideration the safety record of a subcontractor before awarding a contract to them. A bad safety record can cause a contractor to lose a project, even if their pricing is favorable. Safety can never be compromised. Every construction company must cultivate an ongoing safety culture that develops each employee as a competent member of the team. When companies come together on a project, additional training and safety meetings tailored to that specific project may be required by the general contractor.

External influences. There are many external influences that pose risk for contractors, including weather, union issues, civil unrest, vandalism, theft, and economic downturn.

Project timing should be reviewed. Evaluating unforeseen scenarios for the type of project and location may warrant some flexibility in the schedule. It is important to keep up with and consider current events and weather. Proper job-site security, such as adequate lighting, fencing, and signage, can keep children out and hamper theft.

Having the right insurance company that understands the construction industry and your business is critical to risk management. As Acuity’s Construction Consultant and a former contractor, I know construction and am here to partner with you to manage your risk and offer many resources for your business. Acuity recently hosted a construction attorney webinar that featured three construction attorneys who specialize in representing contractors. You can watch it here: www.acuity.com/attorney-webinar.