Six risk-management challenges every contractor faces

Generally considered a lucrative industry, construction still involves risks that, if not dealt with effectively and quickly, can bring a project to a halt or put a general contractor out of business. Some of the risks are direct. They include known conditions present from the start of the project. Other risks are indirect, reflecting unforeseen conditions that unfold as the project moves toward completion — when contractors are most vested and vulnerable.

To save time, money and even their reputation, it is important for contractors to recognize or anticipate these risks and have the competence, resources and processes for addressing and mitigating them.

Critical risk factors and how to avoid them

Lacking sufficient legal or contractual knowledge: In today’s market, a great lawyer and good insurance coverage can serve as a backbone to success in the construction business, especially when it comes to big-budget projects. On the one end, a general contractor holds contractual responsibility and liability towards a client; on the other end, a general contractor is contractually bound with subcontractors through terms and conditions. Contracts are, therefore, everything. Read each one thoroughly. Hire professional assistance, if necessary, to understand any unfamiliar language or terminology. Know the details of the contract, particularly any unique aspects of it. Clients hold the general contractor responsible for the project; therefore, the general contractor needs familiarity with and clarity on the scope of the project and must be able to explain expectations to his or her subcontractors. In addition, a wise general contractor will double-check to make certain subcontractors understand all details of any (sub)contracts written between the general contractor and those subcontractors.

Not submitting invoices or filings in a timely manner: Schedules and paperwork deadlines exist for a reason. Know each project’s specific schedules, particularly the timeline involved for filing any paperwork related to the project, such as claims and/or lawsuits, or in notifying the client of any unforeseen field conditions. This can cover a general contractor from a legal standpoint. Also, cash flow is important to keep the project on track, so timely billing can help prevent delays, liens by subs or potential claims pertaining to work or payment delays. When deadlines are not followed, it might become too late to file a claim or to take legal action and, in the blink of an eye, the general contractor might soon end up self-financing the project or even run out of business. Avoid such risks by relying on project documentation (including meeting minutes, emails, etc.) and not merely on so-called “good faith” relationships as a back-up to actions taken.

Poorly managing change-order requests: Negotiating change orders requires special finesse. Slow decision-making by a client can create hemorrhaging of project costs, including those of the general contractor. The lack of a well-defined and effective process for registering change orders, which are often the result of slow decision-making, can wreak havoc on schedules. One of the biggest risks associated with change orders comes when a contractor doesn’t cover himself or the subcontractors for the time involved to finish the change-order work. When faced with a change order, make sure by creating new documentation that the client agrees to the additional time necessary to complete the work without the project running up against liquidated damages previously established. Revisit all contract language and ensure that it accommodates the added time and that it removes the general contractor’s liability for the additional time it will take to complete the revised scope.

Facing project-scope changes/increases when the deadline is rapidly approaching: Change-order requests result in increased costs and more time. Although change orders generally serve as a lucrative call for the contractor, special attention needs to be paid when such work gets introduced during the completion phase of the project. Contractors are never more vulnerable than when a project is coming to a close. They can land in a dead-lock situation if any change or increased project scope that comes toward the end of the job is not well-documented or covered by the language of the initial contract. Savvy contractors will respond quickly to such requested changes (again, making sure to cover additional time as well as extra costs), taking care to avoid long-term losses for the benefit of short-term gains. Rethink whether it is even wise to continue with the project past the initial scope, particularly if the added work is the result of a lack of vision by the design team or simply a change in taste by the client/owner. Unavoidable and often unpredictable, such changes can pose the greatest risk to general contractors. When this situation arises, revise the contract, in writing, to cover the added scope of the job. Or, be innovative, perhaps to the point of saying “no” to a change order.

Lacking accountability for critical documentation: Again, the construction business involves a lot of paperwork. As such, it is in contractors’ best interest to assume complete responsibility for making sure they and their teams, including subcontractors, are on the top of all documentation presented as projects move forward. general contractors need to serve as educators and enforcers, ensuring that all subcontractors understand how to file their own documentation, such as payment requests, completely and in a timely manner. It’s risky to assume that subcontractors already know such procedures because many often rely solely on the general contractor to do the paperwork for them. In addition to ensuring all paperwork is filed correctly and on time, make sure to save all records as a backup in case they are needed as proof of action in a claim or lawsuit. Another good measure: hire subcontractors who understand the value of paperwork execution.

Taking safety measures for granted: Perhaps no risks are more consequential than those involving the personal safety of workers on the site of construction. It is the general contractor’s responsibility to understand both federal and local safety guidelines, such as those of the Occupational Safety and Health Act and/or local city’s building regulations. Remember to apply for and secure all required construction permits. Not following specific safety guidelines can, at the very least, result in hefty fines or penalties; at the most, it can result in insurance claims or lawsuits filed by on-site personnel. Make sure that the site supervisor and site safety managers are on top of all safety-related issues when it comes to fieldwork.

Risky business

Construction is a risky business. That’s why it is important to know the critical direct and indirect risks involved as well as how to address them. This knowledge helps contractors fairly balance the demands of clients and the demands of subcontractors to help manage projects to their successful conclusion and toward the hefty rewards that can come with a properly executed project.