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May 12, 2022

Risk Mitigation In The Construction Industry

Here at DigiBuild, one of the core challenges we are targeting is risk. 

For proper construction risk management, you need to know the types of risks inherent in construction projects. These can be financial, contractual, operational, and environmental and can be caused by both internal and external sources.

Here are some of the most common risks faced in today’s construction market.

  • Safety hazards that lead to worker accidents and injuries
  • Managing change orders
  • Incomplete drawings and poorly defined scope
  • Unknown site conditions
  • Poorly written contracts
  • Unexpected increases in material costs
  • Damage or theft to equipment and tools
  • Natural disasters
  • Issues with subcontractors and suppliers
  • Availability of building materials
  • Poor project management

Some significant risks are initially out of your control.

Elections

As with any transfer of power, great change was expected as  President Joe Biden stepped into office. On day one of his administration, President Biden signed executive orders intended to halt major projects that included major oil pipelines and the border wall. His proposed stimulus plan called for a $15 minimum wage, and there was  renewed emphasis on environmental and other reviews on future projects. These key shifts meant nearly every large member of the construction industry needed to adjust their operations. For some companies, it meant a shift in priorities for the types of jobs they would focus on getting.  For others, it meant making immediate adjustments to planning, staffing. and exependitures. 

COVID-19

After almost  two years of wearing masks and social distancing, we are now seeing a rise in workers' compensation claims from those getting sick on the job against contractors and against owners under various scenarios. COVID-19 impacts will continue to be felt in many markets where builders are still struggling to replace or build their workforce. Many projects have already been postponed due to COVID-19 restrictions, and these postponements are turning into cancellations in some cases.

Insurance Market

What could be the most significant and long-lasting impact on the market, however, is the emergence of exclusions for communicable diseases in commercial general liability (CGL) policies. If a subcontractor employee gets sick, the subcontractor may be protected by workers' compensation insurance. If that employee, however, sues the prime contractor—alleging, for example, that the prime contractor's negligence in not enforcing COVID-19 precautions caused the employee to get sick—the prime contractor will generally make a demand for indemnity against the subcontractor. With an exclusion for communicable diseases, this means that the subcontractor would become liable both to defend its prime contractor and to pay any judgment against the prime contractor. Carriers are inserting the exclusion for communicable diseases into policies because they do not know how to evaluate that risk at this time for underwriting purposes, and it is impossible for anyone to know the full extent of the risk until we have some idea how juries and judges will treat such suits.

Supply Chain

The unprecedented series of supply chain shocks, prompted by a surge in consumer demand at a time when factories and logistics companies were hobbled by coronavirus lockdowns, is not over, with many companies now saying there is a real struggle paying shipping rates and fees on top of the  ongoing delays.  The higher costs have trickled down to consumers in recent months, helping push inflation to 40-year highs. Ordering mountains of inventory that won’t be sold or used for many months is a tricky proposition, it ties up working capital and carries more risk than many companies would prefer to take. It is difficult to predict demand so far in advance.

Recent  deep-dives into how the world’s largest companies are being impacted by – and are defending against – supply chain risk show these findings:
  • Global supply chain risk management and resilience will be the top business priority for 50% of organizations in two years’ time
  • 66% are not assessing their global supply chain on a continuous basis
  • 83% have suffered reputational damage because of supply chain problems
  • 88% of construction leaders say visibility into their supply chain is more important that two years ago
  • 74% of enterprise organizations still use manual methods for supply chain risk management.

When risks come to fruition, they can have a serious impact on costs, schedules, and performance of your project which will  almost certainly lead to delays and disputes down the road. The good news is most of these risks can be managed and mitigated with proper planning and good project management.

Preventing Risks

Avoiding the wrong projects:

This may mean turning down a project or negotiating the contract to remove the project risks. There’s no shame in walking away from a project if the risks outweigh the potential rewards.

Mitigate risks from the insurance side:

  • Identifying and reviewing exposures to financial lost
  • Reviewing insurance coverages to mitigate those exposures
  • Obtaining coverage options from insurance providers who serve the construction industry
  • Reviewing alternative solutions – premium costs, coverage forms, and deductibles
  • Structuring an insurance program that maximizes coverages while keeping an eye on costs

Before, during and after construction, a contractor is exposed to risks that can threaten to stop a job. It is vital to create a risk management program that closes gaps and supports the continuous running of your business. Good construction risk management requires a high level of collaboration and communication with all parties involved. Keeping everyone on the same page and working together will allow you to identify and manage risks before they become a problem.

Technology & Risk

Here at DigiBuild we are focused on how technology can mitigate risk. There are a number of technologies that can make job sites safer and prevent on-the-job injuries or damages such as drones, PPE, and virtual modeling to name a few. Our technology mitigates risks when it comes to information and documentation.

Pulling from the 11 risks listed above, all 7 of these below can be mitigated to a large degree by being able to easily access secure and accurate information and documentation.

  • Managing change orders
  • Incomplete drawings and poorly defined scope
  • Poorly written contracts
  • Unexpected increases in material costs
  • Issues with subcontractors and suppliers
  • Availability of building materials
  • Poor project management

These risks can manifest in any number of ways but the common thread is that someone in the chain made a decision that was either based on bad judgment or bad information. Having a construction management software tool that can provide real time and the most current construction details, material lists, timelines, and project overview can go a long way to eliminating decisions based on outdated and inaccurate information. There will still be errors or mistakes made but when they do happen, that same software  project management  tool becomes the source of the guaranteed truth as to where it all went wrong, protecting your business from costly legal fees and missed payments.

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