Avoiding Issues: The Construction Company Guide to Risk Management

We’re seeing hope for the end of the COVID-19 pandemic. Postponed projects are coming back online, and new jobs are emerging. Yet there are still challenges; supply chain issues continue to be problematic, costs are rising and the economy remains questionable. This makes it vital to your company’s financial wellbeing to know whether the owners, vendors and subcontractors you’re working with can maintain their fiscal position. And this requires a proactive, aggressive approach to risk management.

Teamwork Makes the Dream Work

Your first step is to put together a risk management team to help ensure your strategic planning. This team needs both management and risk management personnel, especially people from operations, financial and legal departments. Representatives of your projects will provide status updates to that team detailing any of the following:

  • Labor and subcontractor problems
  • Potential changes
  • Claims
  • Notices
  • Directives from the owner
  • Project estimates
  • Actual costing
  • Schedule changes.

These issues and financial concerns should also be regularly discussed in meetings. Outside of meetings, accounting needs to remain on top of their accounts to be able to provide up-to-date information. Meanwhile, outside advisors keep your company updated on legal, tax and financial implications when you consider contractual obligations or business model changes.

The Importance of Job Costing Data

Job costing data includes supplier price increases, costs pertaining to COVID-19, additional project costs (like labor and equipment) and project change orders. Scheduling and delay costs that can result in future claims are also an aspect of this data

Job costing data allows accounting to create projections and cash flow forecasts to measure against actual figures, making it easier to monitor financial standing. A wide range of tools can help you project cash flow, deficit forecasts, take care of shortfalls, check working capital, and determine liquidity and whether you are able (or need) to borrow.

Evaluating Existing Contract Risk

Risk management should be a part of each project, with projects separated based on financial viability. Struggling projects should have alternative consideration, including financial guarantees from owners and assistance with periodic payments for subcontractors and vendors who are having problems.

Look at which contracts may necessitate changes, and prioritize those that will work collaboratively rather than cause problems. Quickly address options with your stakeholders, focusing significant resources on protecting your company’s legal rights so you can comply with contractual obligations.

Speak with your legal advisor to determine whether you must give written notice to the project owner if you foresee any continued COVID-19 shutdowns or delays based on the contractual and insurance requirements of the project. Make sure that if you do have to shut down, the site is secured. Use asset management software with Bluetooth or RFID technology to track inventory and prevent product or equipment theft, damage or loss.

Evaluating New & Potential Contract Risks

Estimating projects requires risk evaluation as part of your risk management efforts. Most construction companies focus on constructing their backlog while bidding on more jobs than they normally would. However, you need to provide reasonable proposals; low-ball proposals on a high-risk project could cost your company everything.

Develop a project rating system using factors such as your required minimum profit and whether you have the capacity and skills in your crew to take on the work. Consider the timeframe, bonding requirements and type of work. Then prioritize the projects that can provide your company with the best profit margin. Carefully consider the materials needed to ensure they are (or will be) available so supply chain disruptions won’t impact your work as readily.

Evaluating Subcontractors

While it’s necessary to subcontract work in many projects, this also expands your risk. When working with subcontractors, consider requiring more frequent financial statements, monitoring liquidity and leverage ratios and changes in their surety ability, WIP and manpower. Companies relying on credit lines and banks have a higher level of risk due to the stricter credit market.

As part of your risk management process, vet your subcontractors properly to minimize your risk exposure from them. You can find a range of prequalification forms online to use with your subcontractors.

Insurance Considerations

With the delays and shutdowns caused by COVID-19, it’s wise to consider insurance that covers the pandemic’s impacts on construction. Some options include:

  • Profit and business interruptions insurance
  • Insurance to cover supply chain issues causing income loss
  • COVID-19-related insurance for environmental, subcontractor default, worker’s compensation and management liability issues.

You can also diversify your suppliers, which may help manage risk.

Keep in touch with your insurance company to get details on policy extensions, delayed or shutdown project insurance price quotes. They’ll also help you stay on top of coverage and eligibility issues, rate increases and restrictions on coverage.

Proactive risk management is of utmost importance as the construction industry gets back to normal. Reach out to your construction CPAs if you have any questions.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.