Although construction is considered a highly lucrative industry, it still has risks. If not handled quickly and effectively, it can cause delays or even stop a project. Some risks are direct. These include conditions known from the start. The indirect risks include unforeseen events that occur as the project nears completion. This is when contractors are most vulnerable.
Contractors must recognize and anticipate potential risks to save time, money, reputation and possibly even their lives.
What are the key risk factors? How can you avoid them?
A lack of sufficient legal and contractual knowledge
In today’s construction market, a great attorney and insurance coverage can help you to succeed, especially in large-budget projects. General contractors have contractual responsibility and liability to clients. On the other hand, general contractors are contractually bound to subcontractors by terms and conditions. Contracts are everything, you should read each one carefully. To understand unfamiliar terminology or language, you may need professional assistance. It is important to understand all terms and conditions of the contract. Clients hold the general contractors responsible for the project. The general contractor must know and understand the scope of work and communicate expectations to subcontractors. Additionally, a smart general contractor will ensure that all subcontractors fully understand any (sub-)contracts signed between the general contractor or those subcontractors.
Failure to submit invoices or files in a timely manner
Scheduling and deadlines are important. Be familiar with the specific project schedules. Know the timeline for filing claims or lawsuits and notifying clients about any unforeseen conditions. From a legal standpoint, this could cover a general contractor. To keep the project on schedule, cash flow is crucial. So timely billing can help avoid delays, liens from subs, potential claims pertaining work or delay payments, and also prevent delays. It is possible to lose track of deadlines and not file a claim. If this happens, the general contractor may end up financing the project himself or going out of business. These risks can be avoided by relying upon project documentation (including emails and minutes from meetings). As a backup to the actions taken, not just on “good-faith” relationships.
Inadequately managing change orders
Negotiating change orders requires special finesse. Clients who take too long to make decisions can cause project costs to spiral out of control, even for the general contractor. Slow decision-making can cause delays in schedules and lead to a lackluster process for registering changes orders. The biggest risk associated with change orders is when contractors don’t pay for subcontractors and themselves for the time it takes to complete the work. Create new documentation when you receive a change order. Make sure that the client accepts the additional time to complete the project without liquidated damages. Check all contract language to make sure it allows for the change and removes liability from the general contractor for the additional time.
Changing the scope of a project or increasing it’s deadline
Requesting changes to your project schedule can lead to increased costs and additional time. Change orders can be a lucrative call for contractors. However, you need to pay extra attention to change orders that are made during the project’s final phase. As a project nears its conclusion, contractors are at greatest risk. Contractors can get stuck if the original contract does not cover any changes or increases in project scope. The most skilled contractors will quickly respond to any changes that are requested (again, making certain to cover extra time as well as additional costs) and take care to avoid long-term loss for short-term gains. You should consider whether you are able to keep the project going beyond the initial scope. These changes are often unavoidable and can be unpredictable. They pose the greatest risk for general contractors. In these cases, it is important to revise the contract and put in writing any changes that may be necessary. Be creative, even to the point where you say “no!” to a change request.
Inadequate accountability for critical documentation
The construction industry involves a lot more paperwork. Contractors should assume full responsibility for all documentation that is presented to them and their teams as the project progresses. As educators and enforcers, general contractors should ensure that all subcontractors are able to file the necessary documentation. Because many subcontractors depend on the general contractors to complete the paperwork for them, it’s dangerous to assume they already know these procedures. Make sure all paperwork is properly filed and received on time. Keep all records safe in case of a claim or lawsuit. A good idea is to hire subcontractors that understand the importance of document execution.
Take safety measures as a given
The personal safety and well-being of workers on construction sites is one of the most important risks. It is the responsibility of the general contractor to be aware of both federal and local safety guidelines such as the Occupational Health and Safety Act and the building regulations for the city. Be sure to obtain all necessary construction permits. You could face severe penalties or fines if you don’t follow the safety guidelines. Or, worse, your employees may file lawsuits or insurance claims if they do not comply with them. Fieldwork is a safety issue. Make sure the supervisor and site safety manager are on top of it.
Risky business
Construction is a high-risk business. Knowing the key risks and how you can address them is essential. This knowledge allows contractors to fairly balance the demands from clients and those of subcontractors. It helps to manage projects to a successful conclusion.