General contracting and the construction industry at large is an inherently risky profession. From physical injuries to significant dings to your wallet, it's important to ensure that you're ready for anything to come your way. Taking steps to mitigate the impact of potential risks while also minimizing loss is the name of the game, but how do you go about it effectively? Let's break it down risk by risk:
Documentation Errors
According to the Arcadis 2023 North American Construction Disputes Report, the top causes of disputes nationally were errors and omissions in contract documents. As time goes on, the increasing complexity and size of commercial and public construction contracts, combined with growing cost-saving pressures and rushing to complete projects, create risk of more errors prior to construction.
Problems primarily stem from just the sheer amount of documentation needed, including but not limited to:
- Drawings
- Submittals
- Contract documents
- Notices
- Pay applications
- Lien Waivers
- Change orders
This error also leads to the 3rd highest dispute caused by poorly drafted or incomplete and unsubstantiated claims.
Delays
This will be the number one risk you run into with every job. However, it's important for you, your team, and especially your customers to know that pushing back project completion time affects everyone on the job.
Delays happen due to varying reasons, including:
- Poor project management
- Permitting and inspections
- Supply chain disruptions
- Change orders
- Accidents
- Adverse weather
Although delays can happen at every level of your project, and some are out of your control, it's important to establish clear communication amongst your team. When delays happen, the faster the communication within your team, the faster that action can be taken to avoid or reduce the delay going forward.
Change Management
Any changes to contracts after construction begins, especially material or process changes, can significantly risk a project. Again, without proper communication between everyone involved, you run the risk of losing precious time and money.
At the end of the day, changes that are made appropriately and considerably should not have a negative impact (or at least as little as possible). In a perfect world, each subcontractor would submit a change order that details the cost and schedule adjustments, wait for approval, and then begin work on the project once given the go-ahead.
In the real world, however, in an effort to avoid delays, some may begin work prior to approval leading to payment disputes, lack of trust, and many other logistical issues.
Effective change management starts during the preconstruction phase. Investing time and effort in thoroughly investigating site conditions and accurately reviewing drawings and site plans can significantly reduce the need for changes once construction begins. Throughout the project, owners and contractors should implement a clear and efficient communication process for managing changes, aiming to minimize the time between receiving Requests for Information (RFIs) and approving change orders.
Subcontractor Default
Subcontractor default poses a significant risk, particularly on complex projects requiring numerous specialty contractors to complete specialized tasks. As project size increases, so does the number of subcontractors involved. Accelerating construction often necessitates trade stacking and tight schedules, leaving little room for error. If a subcontractor defaults or fails to perform, it can impact the entire project, especially if their work is on the critical path.
Supply Chain Issues
Building material shortages and price escalations can still significantly impact schedules, construction costs, and profit margins. While the global supply chain has improved since the height of the COVID-19 pandemic, challenges remain, affecting construction projects worldwide. Material prices, particularly for lumber, remain volatile, and some contractors continue to face difficulties obtaining necessary supplies.
Supply chain issues can arise from various factors beyond pandemics. These include shipping and trucking issues, natural disasters, business closures, spikes in demand, fuel prices, economic recessions, and strikes or labor disputes.
Many construction contracts include an escalation clause to balance the risk of price spikes between the contractor and the owner. However, construction managers and owners should closely monitor global supply chain developments to mitigate the risk of material shortages. Maintaining a flexible and diversified supply chain is becoming increasingly essential for construction projects of all sizes.
Poor Project Management
Ineffective project management results in miscommunication, delays, and disputes. When a general contractor or construction manager lacks clarity on expectations or fails to properly schedule subcontractors, it can lead to wasted time and materials. This mismanagement can also have a ripple effect on other projects, posing increased risks for specialty contractors. Delays caused by poor project management can disrupt the schedules of specialty contractors, complicating labor and equipment coordination across multiple jobs.
Labor Shortages
Labor shortage can pose a risk in construction projects of any size. Finding qualified and reliable employees is increasingly challenging across all industries. There is always a risk that the planned workforce for a project might not be available as expected.
If a contractor takes on a project and later realizes they lack the necessary manpower, it can cause delays for everyone involved, extending the project timeline and reducing profitability. In union projects, the risk is heightened by the potential for strikes. Solidarity among union locals can lead to your entire union workforce walking off the job in protest of working conditions on a different project, beyond your control.
Unclear Project Expectations
Keeping a project on track is difficult when the project's path is unclear. A poorly defined scope of work is a management issue that often affects all levels of the project. Contractors working under a fixed-price or lump-sum contract should closely monitor factors such as:
- Site conditions
- Customer input
- Materials pricing
These elements can increase project costs and decrease profit margins. To mitigate these risks, contractors can use mechanisms like cost-plus contracts, which help avoid the impact of an undefined scope. Enhancing communication at every project level can lead to a better-defined scope, helping you stay profitable by preventing scope creep.
Health and Safety Risks
The construction industry consistently ranks as one of the most dangerous sectors. Businesses and project sites frequently face health and safety hazards, aiming to keep their workforce healthy and avoid financial losses from increased workers' compensation insurance premiums or penalties for safety violations.
The two top health and safety organizations, the Occupational Safety & Health Administration (OSHA) and the American Industrial Hygiene Association (AIHA), have independently identified their top four health and safety risks in construction:
OSHA Focus Four:
1. Falls
2. Caught in or between
3. Struck by
4. Electrocution
AIHA Focus Four:
1. Manual material handling
2. Noise
3. Air contaminants
4. High temperatures
Both organizations offer a variety of training and educational resources to support contractor safety programs.
Payment Disputes
The time to get paid in construction is among the longest of all industries. Slow payments create risks for everyone involved in a project at all levels of the chain. Payment problems disrupt contractor cash flow and increase the risk of default. They also heighten an owner's risk of lien claims on the property as contractors and suppliers take action to recover unpaid amounts.
Payment disputes frequently arise due to:
- Funding/financing delays
- Change orders
- Retainage
- Lien waivers
- Back-charges
- Work quality disputes
Comprehensive documentation, clear communication, and strict adherence to contract requirements are vital for contractors to prove their case if it ends up in court.
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