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Project Risk Management Primer

Posted: May 11, 2016 | Project Management

By Tom Porter, JD, DBIA

The term “risk management” can sound downright intimidating to construction project members. It may conjure up images of complicated insurance programs structured and controlled at the corporate level or beyond. But, in fact, most important risk management activities occur at the project level, under the control of the same project managers, superintendents, engineers, and other management staff who oversee the day-to-day construction operations.

The project level is where money is made when operations are properly managed. It is also where losses to the bottom line develop if risks are not successfully controlled. This article offers a list of best practices for jobsite staff to follow for the successful implementation of project risk management.

1. Understand the contract. Project personnel may have little influence over the terms in the contract; nevertheless, their ability to deliver the job successfully depends on understanding those terms thoroughly. That cannot be done without carefully reading the contract, understanding the content, and regularly referring back to the terms as the project proceeds.

The contract’s business terms will offer insights on the existence of opportunities to enhance the projected fee, and where you may be at risk for fee erosion. The contract is also likely to set out the documentation requirements you must meet during each phase of the project. For instance, between contract award and mobilization at the jobsite, the contractor may have a duty to provide such items as a CPM schedule, a safety plan, a quality plan, a crisis management plan, a submittal log, a list of proposed subcontractors, and a schedule of values, just to name a few. The contract often sets out the due dates and the formats required for these submittals. The contract also serves as the rule book regarding the procedures you must follow in response to expected (and unexpected) developments at the job.

Choose subs wisely. To be sure, there is tremendous pressure to select the subcontractor that offers the lowest price. Recognize, however, that uncritical selection based on what appears to be the lowest price may cost much more in the long run. The least expensive subcontractor isn’t always the best one.

Before finalizing your selection, assemble the accessible information on the relative merits of each sub under consideration. Aside from the bid spread, this includes: data from your company’s prequalification system; experiences shared by the owner, the architect, or other project teams within your company who have previously worked with the sub; insights gained from pre-bid and post-bid reviews or other communications; and information available on the Internet.

Understand that not all subs are equivalent in capability and quality. Choose firms that are suitable for the size and conditions of your particular project. Once you make your selections, use bonding or subcontractor default insurance (SDI) in accordance with your company’s policy – a further hedge against future problems.

2. Plan for safety. The most important ingredient in successful construction risk management is safe project operations. Corre­spondingly, the most important ingredient in safe project operations is planning.

At the front end of the project, consider the overall safety plan. Customize your company’s generalized safety program for the particular circumstances of your jobsite. Review the site and layout to determine optimal traffic patterns and sequences of operations. Identify unique risk points such as utility lines crossing the site, or adjacent structures that could be damaged by vibration. Determine emergency response protocols and decide where injured parties will be taken for urgent care.

Safety planning is also key for the day-to-day operations of the construction phase. Assure that each day, and before each new task, all workers involved participate in a safety discussion covering methods, tools, hazard identification, and injury prevention strategies. Best practice is to capture these meetings and plans in writing. Pay special attention to planning any added-risk situations, such as critical crane picks or confined space operations.

3. Plan for quality. Quality, like safety, is greatly enhanced by planning. Carefully analyze the specifications and create compliance checklists for each division of work. Be sure you have the right project staff, with the right skill sets, who will be available at the right times to oversee the commencement of new work activities and establish workmanship standards. Correlate the trade contractor submittals to the specifications, and have a process for verifying that the materials actually delivered to the jobsite correspond to the approved submittals. Determine at the beginning of the project what commissioning requirements apply, and the steps that must be taken throughout the job to achieve them at project completion.

4. Build effective relationships. Sometimes management of risk can be viewed as pushing all your potential liabilities onto other parties, who may be resentful when they realize this. A more enlightened approach strives for positive relationships grounded in fairness. The lead contractor, for example, should pursue win-win dynamics in relationships with the owner, the design team, the code officials, and the subcontractors. All those parties have the ability to make your life much more difficult, with a corresponding increase in your project risk profile. With honest and genuinely collaborative relationships, they can be your allies in identifying risk scenarios early and implementing solutions.

5. Get written approval for changes. The parties make a deal about the price of the work at the beginning of a project, but then circumstances change. Eager to please the customer and keep the project moving forward, the contractor frequently performs the changed work before the effect on the price is determined and agreed upon. That is risky enough. But contractors run an even greater risk when the change itself lacks written authorization. A field order document or construction change directive is best; an email giving the go-ahead is not bad; signed daily time tickets can also be persuasive. But if you have none of these, the customer has the leverage to force you into a negotiation where you usually face a haircut on the value of the work performed, if not outright denial of your change request.

6. Anticipate problems. Even if you think that the Plan A you developed is ideal, events may force you to rely instead on Plan B or C, D, or E. If you anticipate possible problems and have backup strategies to address them, you are less likely to suffer the full impact of the risk event. Be ready for bad weather: have snow removal services on standby, stockpile extra stone as may be needed to remedy wet conditions, rent backup power generators, and have hurricane, tornado, or earthquake response plans completed and communicated. Develop alternative sequences in case the critical path on your initial schedule is disrupted by late deliveries. Even if you don’t think you’ll experience any labor unrest, head off that impact by using project labor agreements, or perhaps by having signs ready for a dual-gate system.

7. Be alert to sub default warning signs. Be on the lookout for signals that subcontractor performance may fall short of requirements. Low staffing levels, if not corrected promptly, may raise questions about the sub’s ability to meet the schedule. If you hear rumors that workers, suppliers, second-tier subs, or union funds are not getting paid on time, initiate a full and immediate investigation and take corrective action, which may include joint check arrangements. If the performance issues become more serious, suspend payments and notify the sub’s surety or your SDI carrier.

Issue required notices. Depending on the problem encountered and the party responsible, you are likely to need written notices. Be familiar with the provisions of your company’s standard terms and conditions for how and when notices are to be given to your sub­contractors. For each project, review the notice requirements of the contract with your customer and be prepared to comply within the specified timeframe. Consider all the possibilities for notices to sureties or insurance carriers, including general liability, professional liability, pollution liability, builder’s risk, and other property or crime coverage. Review the requirements for the form of notice – sometimes this can be as simple as an email. In any event, don’t procrastinate in issuing the notice.

8. Get help. Your firm is likely to have senior executives experienced with addressing risk issues. As problems develop, do not cover them up. Instead, communicate up the ranks and engage senior management in devising a solution. If your company has a defined-risk management function or in-house counsel, those expert resources may be available at no cost to your project.

About the author: Tom Porter has worked in the construction industry for over 30 years. He is a graduate of Michigan Law School and holds a DBIA certification. Tom is recognized as a leading expert in project delivery. He has served as a speaker and instructor for industry organizations such as DBIA, AGC, the American Bar Association and the American Arbitra­tion Society. Tom currently serves as Vice President – General Counsel for LeChase Construction, an ENR-100 building contractor, and is the author of Profit, Risk & Leadership, the definitive reference for anyone who leads or does business with a 21st century construction firm. In this book, he shares practical solutions that have been proven to work in the real world of today’s construction industry. Find out more about Tom’s book, Profit, Risk & Leadership, at www.bnibooks.com

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