Elizabeth Manning is the managing editor of Construction Business Owner.
What is the best first step in building an approach to successfully mitigate risk?
Ann Hickman, CPCU, CRIS, ARM
International Risk Management Institute (IRMI)
You can’t chart a course to get where you want to be until you know where you are right now, so a key first step in establishing a risk management strategy is performing a risk assessment. A good place to start is to ask key members of your company what keeps them up at night. Based on their answers, create a preliminary list of operational concerns to explore.
If hiring an in-house risk manager is not feasible, find knowledgeable advisors who can identify deficiencies and concerns to help you craft a plan for managing risk. Because the construction industry is so complex and the risks are so great, it is imperative to find advisors with demonstrable expertise in construction.
Select a risk management or insurance advisor with credentials as a construction risk specialist to review your contracts, insurance policies, safety manuals and subcontractor management procedures. He or she can identify gaps between what you are doing and what you have coverage for and suggest strategies for addressing key risks. Also, educate yourself by attending seminars, taking courses and reading up on risk management topics, so you will be better able to understand and act on the advisor’s recommendations.
Gould Design Inc.
First of all, any plan has to be vigilantly upheld by the leadership in the company. Management must teach their employees the why and how of mitigating risk. If someone doesn’t understand, teach them. No plan will stand if the leadership doesn’t back it or practice it.
Try the Boyd theory, also known as the “OODA loop,” which refers to the decision cycle of observe, orient, decide and act. Use thoughtful preparation, observation and awareness. If you don’t see the risk, you cannot avoid it. Face the risk; fully identify and vet it. Make a plan specific to that risk. Don’t ignore the risk—make a decision on how to handle it. Keep it simple if you want anyone to follow the plan.
Once the groundwork is in place, you can act on your plan, while continuing to adapt as new information enters the scene.
Scott Wolfe Jr.
The construction industry has a trust problem when it comes to risks surrounding the payment process. Typically, when parties analyze risk mitigation tactics to avoid payment risks, they are really looking for ways to shift risk, which just transfers risk from one party to another.
Project participants resort to risk mitigation tactics when they don’t trust the other parties involved. Mitigating risk by transferring risk contributes to a vicious cycle. Instead, the best approach to lowering risk overall is to create a fair construction payment ecosystem that everyone can trust. The only way to create that ecosystem is to shift the industry paradigm.
When confronted with financial risks, parties must take a collaboration-first approach, rather than a protection-first approach. This starts with re-examining how the industry views mechanics lien rights, lien waivers and notices. Viewing these as tools to mitigate individual risk is a misunderstanding. Instead, they should be seen as collaboration tools that promote information transparency and provide communication opportunities at the time of payment or nonpayment.
Rather than viewing these tools as protective devices, embrace them as opportunities to empower more transparent, collaborative projects, which will lead to less risk overall.