Create a Plan for Project Protection

As the peak construction season begins to slow down, many companies will review what occurred in 2016 and begin to project for the remainder of the year. Unlike the fiscal year, an evaluation of your company’s risks and its approach to risk management does not end December 31. Contractors should regularly assess their own specific risks and determine whether they are fully utilizing the tools available to mitigate those risks. Management must be able to identify what risks they face and should articulate how they can minimize or manage them. Different companies and trades will have different risks or issues. In general, contractors have many of the same risks in common, including, but not limited to:

• Contractual
• Controlling costs
• Insurance
• Labor
• Managing growth
• Timely payment
• Trade licensing

To best identify strengths and weaknesses within these categories, contractors should look to maximize the use of resources they already have. Namely, you should routinely engage your insurance or bonding broker, lender, outside counsel and outside accountants to provide very specific information and analysis on which they should focus. Services provided by these skilled and knowledgeable professionals are regularly underutilized.

You are not taking advantage of your current insurance broker or bonding broker’s services if they are not providing you with a detailed analysis of your bond pricing, insurance policy coverages and the adequacy of the coverage limits. It should be an expectation that they provide this as part of their regular services under your fee agreement. Keep in mind that all of these professionals have undergone extensive training and likely have annual continuing education requirements to maintain their licenses or certifications. It is not necessary to have a top-ten broker in order to get reliable information and data analysis. However, if you are not getting these things, it may be time to shop the market for a new broker that better aligns with your company’s needs.

Identifying Risks

In some respects, contractual liability is the most obvious risk because it is a written commitment to perform work, and it ordinarily specifies the ramifications of failure to perform. Because most contractors have a standard subcontract, you should be familiar with the contract language of the companies you work for regularly. You should also be familiar with how that contractor manages its projects inside and outside of the contract language. A contractor that regularly refers to the contract language while managing the process should be recognized as a customer who needs more focus to be placed on amending the contract language. However, at the very least, your company should have a working knowledge of the contract language, whereby you can manage around the terms of the agreement. Examples of contractual risks include, but are not limited to:

• No right to cure for clean up or defects
• Indemnification for sole negligence
• “Pay if paid” or “no pay for delay” terms

The contractual liability tends to be an overlooked aspect of the risk management process. If a contractor is not reviewing every subcontract it enters into, it is at risk for not being in a position to address a majority of the risk factors that are present and will likely arise on multiple projects at any given moment. The issues that should be reviewed and understood by the contractor’s project management team should include the timing of payment, change order procedures, compensation for delays not caused by the contractor and indemnification and insurance requirements. Understanding what each contract provides and the liability that comes from it is essential. If you are not armed with the tools to provide that analysis, then you should consult with counsel to better educate yourself.

It’s no secret that there is a shortage of skilled labor in the market. Companies employing skilled labor need to maintain good licensing protocols and procedures, such as being aware of statutory and regulatory changes that happen in various states on an ongoing basis. States continually change their licensing requirements, add licensing requirements for new designations and attempt to take advantage of reciprocity between the states. Proactively assessing licensing renewals when necessary and obtaining licensing in states or jurisdictions in advance of acquiring jobs in that area are excellent opportunities to proactively increase your ability to perform work in new areas. If licensing needs are met by reactionary responses from on-site inspectors, you will experience a whole new set of challenges and problems with ramifications, which include fines, suspension of a master or primary license and potential removal from a jobsite.

Safety is an essential element for successfully operating as a contractor. An effective safety program requires coordinated efforts between human resources, project management and a designated safety group. Ineffective safety programs will result in workers’ compensation claims and costs and decreased productivity from employees.

Alternatively, there are real and tangible benefits that come from a proactive and vigorous safety program, such as a healthier workforce, appreciation from employees for your focus on their safety and wellbeing, fewer claims, lower insurance premiums and reduced Occupational Safety and Health Administration (OSHA) fines.

Utilizing Resources to Mitigate Risks

The next step is to determine how to mitigate any and all of the risks using the risk loss tools that virtually every contractor already has available. These include a lender, insurance broker, bonding broker and an outside accounting firm. Each of these entities analyzes significant amounts of information about your company. They should be using their data to share important elements with you to assist your company with making improvements. Insurance is a necessary component of every contractor’s risk management arsenal, regardless of whether it is treated that way. Every contractor should have at least one designated person who is responsible for having a baseline understanding of the company’s insurance coverage. The next step is to have a strong relationship with your insurance broker. By establishing a strong relationship, you will receive guidance from a professional who can be essential as you address issues of coverage and consider the appropriate levels of coverage limits to obtain. It’s a reasonable expectation that your insurance broker will help to train and expand the knowledge of your designated insurance person.

Depending on whether significant portions of your construction work consists of public projects or not, your bonding capacity may be a significant issue. Bonding companies are very sensitive to the financial stability of a construction company, and they take great efforts to fully understand your financial wellbeing. Every effort should be made to utilize the bonding company’s analysis in order to learn how they view you and how you should view your company. Ask for input and direction pertaining to how you compare your company to others in your trade when it comes to cash flow, sales and revenue. Some bonding and insurance brokers have a broad-enough customer base to be able to track and compare their clientele within specific industries. Utilize them as a resource in order to gain a better understanding of your company from an outsider’s perspective.

Finally, pay attention to the direction of your insurance premiums and bonding rates over the last several years. Bonding companies, in particular, but also insurance carriers, have done well financially over the last 4 to 5 years. If your financials are in order, then your rates and premiums should remain stagnant, and you may be in a good position to advocate for obtaining lower rates.