Risk Management in Construction

We live in a constant state of expansion and development. In this day and age, it is important to completely understand the risks and benefits of proposed plans. For the first time since the recession, Construction is booming. The Census Bureau indicated cumulative U.S. construction project spends in 2015 reached $1 trillion, the highest recoded amount since 2008. While trying to accurately assess risk, it is important to have a fundamental knowledge of the potential risks construction owners may face. In order to manage upcoming projects, and prevent overpaying, Construction Today addressed four particularly important risk areas to keep in mind:


1. Contract language: The biggest risk to a construction owner lies in the contract itself. Too often contracts are muddied with unclear language that makes it difficult to determine reimbursable project costs. In the case of one recent academic institution, a lack of contract clarity resulted in a $2 million discrepancy in addition to costly legal expenses. Before running into a similar problem, draft your contracts using clear, transparent language so that every party involved knows exactly which costs will be reimbursed. One way to avoid confusion is to write clauses and provisions so that even someone unfamiliar with the project can easily understand the reimbursable costs.


2. Labor rates: Reimbursable labor rate costs associated with your contractor and subcontractors should be detailed. Before you break ground, it is important to review each of these labor rates to make sure they align with the provisions included in your initial contract. When labor rates are reviewed and approved up front, all parties are aware of the rates which will be billed on the project. This significantly reduces the likelihood of future disagreements. This strategy saved one company more than $500,000 after it discovered upfront that its subcontractor labor rates were much higher than industry averages and local union agreements.


3. Change orders: With any major construction project come last minute changes or unpreventable surprises that can increase the scope of work. If additional work requires you to deviate from your original plan, a change order will be needed. It is important to carefully review every new change and confirm that the pricing is fair to both the contractor and project owner and complies with the contract. This will avoid potential overcharges related to change order work.
eSUB’s change order software makes managing change orders a cinch by allowing you to send out and track your requests from one central location. Change order requests can be quoted as lump sum, by categories or granularity up to individual line items. Input descriptions of change and track status with automatic updates of contract amounts. Attach any type of electronic document to your change orders.


4. Insurance and bond costs: Today, many large contractors use complex self-insured insurance and bonding programs. A project owner should fully understand the costs and potential risks related to these programs. For example, if a performance and payment bond rate is inflated by even 0.1 percent on a $100 million project, the result is an overbilling of $100,000. Ensure you are only paying for insurance coverage and limits you have specified in your contract. Carefully review your insurance policies and costs to guarantee adequate coverage while also mitigating the risk of over-billings.

Reference materials: Construction Today

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