By Mike Landucci, Vice President Woodruff Sawyer & Co.
Managing risk is important for companies of every size, but it's essential for small and medium sized contractors who want to achieve sustainable growth over the long term.
While large firms typically have the means to dedicate personnel and resources to specific risk management functions (including safety), that may not always be the case among smaller, flatter organizations where individuals often wear multiple hats.
The demands on your time as an owner are seemingly never ending and, while unintentional, it is easy for safety and risk management to fall down the list while running a profitable business.
It is important to understand what can be managed internally, such as developing a culture of safety, and when you should leverage outside resources to help accomplish your overall risk management goals.
As we all know, successful construction firms leverage their relationships to get the work done properly.
Partnering with attorneys, bankers, CPAs, and surety and insurance professionals with deep expertise and experience in construction can add significant value when developing a sustainable risk management program.
This article offers risk management tools for your operations and ideas to consider when making purchasing decisions for your insurance program.
Operational Elements of a Successful Risk Management Program:
If you are in the construction industry, you are in the business of managing risk.
No matter the industry segment, size of operation, or scope of contract, there are five key operational elements you should consider when building your risk management platform.
1. Project Screening and Risk Assessment – Having a systematic and consistent process to evaluate a project’s potential risk prior to bidding is a sound approach that has helped many contractors avoid disastrous projects.
Collaboration among all stakeholders, inclusive of the executive team, estimating, project management, safety and finance on potential project risks will ensure your company’s enterprise risk tolerance is being communicated and adhered to at all levels of your organization. Included in this evaluation is risk assessment of the contract documents proposed for a project.
Successful firms ensure risk allocation in the contract documents is fairly assigned to the party best able to control the risk (i.e. Design liability or unforeseen site conditions).
2. Owner/Subcontractor/Vendor Prequalification – Delivering a successful project ultimately depends on how well all project participants manage risks.
Whether acting as a subcontractor or general contractor, having a process of prequalification to your upstream and downstream parties, as well as vendors, will allow you to anticipate inherent risks and operate effectively around them.
An example for general contractors is a strong contractual risk transfer process inclusive of subcontractor prequalification. You should ensure your agreements have enforceable indemnity provisions including comprehensive insurance requirements in order to preserve your limits of insurance. Finally, development of a process to verify subcontractors of all tiers can perform the work is crucial to timely and profitable project delivery.
3. Safety – An effective safety program is found in a company’s culture, rather than buried in a safety manual.
A culture of safety, managed not from the top down, but up and down throughout the varying levels of the organization is what we have found to be most successful.
Examples of this approach include tailgate meetings, pre-task planning, job hazard analysis and buddy systems for new hires. Active communication between the office and field on safety issues, current metrics and innovative solutions can enhance operational safety and drive down incidents and costs on the job.
4. Project Execution – Constructability reviews, cost management, schedule oversight, quality assurance and control and performance assessments are all ways to measure project execution and mitigate inherent project risks that may arise.
Having a systematic process to deliver measurable results for projects of all size is a key focus for leading firms. Identifying your inherent strengths, and finding opportunities that leverage these strengths, will drive operational efficiencies and better results to the bottom line.
5. Financial Management & Reporting – Access to real time data and metrics allow today’s contractors to make quick, informed business decisions.
Leveraging technology, including construction-focused accounting and project management systems, provides decision makers with the insight and information required to identify potential issues earlier on in the project cycle.
Furthermore, the ability to provide current financial data to your CPA, banker, sureties and insurance partners allows for better collaboration and communication among your trusted team.
Working with your key business partners to integrate these operational elements into your everyday business practices will ultimately serve to lower your total cost of risk.
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