CONSTRUCTION RISK MANAGEMENT: PROTECT YOUR INTERESTS WITH CONSTRUCTION CONTRACTS

Construction can be considered a high-risk industry. There is the light gauge section machine risk of bodily injury and fatalities on the jobsite, the risk of financial loss due to negligence, and the risk to your reputation should you become involved in a problematic project.
Appropriate risk management takes all these into consideration and provides a pathway to eliminate or mitigate as much of the risk as possible. When you must take responsibility, risk management processes help you take care of the loss and shore things up for the future.

Risk management for a specific project begins with the construction contract.

RISK MANAGEMENT 101
Risk management is everyone’s problem; therefore, everyone should be involved in developing a risk management process, implementing it, promoting it, and using it. Your team must come together to identify risks early, during the bid phase if at all possible.

Communication is imperative to timely identification of risks, reduces unexpected problems, and helps identify interrelated risks. This is where having your entire team involved in risk management makes the most sense. No one person can visualize all the connections throughout the project; a team composed of members from every part of the project will be more likely to bring additional information to bear.

dahezbforming CZ purling machine FX350

Risk management identification purlin line machine and implementation process:
Analyze: measure the risk by the impact it will have on project goals.
Prioritize: begin with those that could cause the largest losses or gains, and the risks with the highest probability of occurrence.
Reprioritize: as the identified risks are reviewed, reprioritize as new information becomes available.
For each instance, plan a risk response and implement it. You can:

Avoid risk
Minimize risk
Transfer risk
Accept the risk
One last thing: the cardinal rule regarding contracts of any sort is to read them carefully before signing them. Everything flows from that contract, whether it is a construction contract or an insurance contract.

THE PLAYERS
The typical parties in a construction contract are:

The owner
The prime or general contractor
Any and all subcontractor(s)
The architect and/or engineer; or contractor performing as design-build
Each person on this list must understand what their specific liability is with regards to this project, especially since the terms and provisions of insurance and contractual provisions of the GC and subs may impact the rights and liabilities of other parties.

For your own protection, build a relationship with an insurance broker and an attorney to help you review the construction and insurance contracts. They can help you identify coverage gaps and suggest amendments, endorsements, and other additions.

ALLOCATING RISK
Risk allocation is the act of assigning various risks to a specific party and that party should be the one who controls that portion of the project. For instance, the owner should be allocated the risk brought through design errors while the GC is responsible for bodily injuries and property damage from construction operations.

Risk is allocated through indemnity provisions within your contract. These are the parts of the contract that outline compensation or restitution when a problem covered by the contract occurs. Generally, these provisions require one party to pay for losses incurred by another party as a result of a claim made by a third party. For example:

When a worker suffers an injury on the jobsite, the contractor is responsible for that worker’s loss. The owner is said to be “indemnified against” claims for bodily injuries to workers.

The support for the indemnity provisions is found in the insurance contract. This is why it is so important for each party to properly identify the risk obligation it assumes and for each party to have a right to insurance coverage for those obligations.

A word to the wise: don’t rely on certificates of insurance from lower tier contractors or anyone else. These certificates are not contractually binding.

TERMINOLOGY YOU SHOULD UNDERSTAND
Subrogation: Gives the insurer the right to act in the stead of the insured. However, the insurer may not act against the insured, subrogate its insured, or sue when there is a waiver of subrogation.
Waiver of subrogation: Ensures the risk stays with the insurer and cannot be passed along to other project participants.
Liability: Same as responsibility, especially in legal terms.
Limitation of liability: States the amount of liability a party bears and legally shifts the rest of the risk to another party.
Indemnity: Security against liability. It can be full indemnity or it can be limited to specific events such as removal of liens.
Exclusion: These types of clauses can limit the liability of a party if that party breaches the contract.
Representations: These are statements of an existing or past fact, which are in effect per the contract. Failure to perform can create a breach of contract.
Warranties: These are terms that express lesser obligations between parties that may be outside the contract. These also have contractual effect. Failure to perform can create a breach of contract.
Disclosure obligation: The insured must fully and accurately disclose to the insurer all matters relevant in determining the nature and extent of any risk that is within the insured’s knowledge. Non-disclosure can void a contract resulting in loss of coverage.
PROPER COVERAGE
Typically, coverage is through various types of insurance, including worker’s compensation and automobile liability. What you need depends on your role in the project.

Owners are required to obtain builder’s risk insurance to ensure contractors will be compensated to rebuild in the event of loss. It provides coverage for natural disasters, unknown site conditions, and similar risks.
Contractors carry commercial general liability insurance to cover a range of liability exposure such as bodily injury and property damage. It does not cover the contractor for defective work.
Contractors may also be required to obtain wrap-up insurance for the specific project, to include the owner and subcontractors as insureds.
Architects, engineers, and contractors performing design-build functions carry professional liability insurance to cover errors and omissions when providing design or other professional services.
Note: It is the responsibility of the insured to prove and report covered losses to the insurer. It is up to the insurer to prove whether the loss falls under an exclusion within the contract.

Surety bonds are an additional instrument to insurance to cover risk. Surety bonds are used to manage the risk of non-performance and non-payment. An owner can require a contractor to obtain a performance bond to cover the liability that the contractor does not complete the project. Payment bonds obligate surety companies to make payments to subcontractors in the event the contractor does not do so. Some contractors also carry subcontractor default insurance.

RECORD KEEPING
If it isn’t documented, it didn’t happen. Appropriate documentation and record-keeping provides credibility in litigation and is required for contractual provisions. Good documentation is written as it happens, not after the fact. It sticks to the facts and is consistent across and within sources.

Develop a records retention policy so you know when, or if, you can destroy records.

Risk management requires team input and planning, selecting the right level and type of insurance, and good record keeping. Above all, it requires complete communication so everyone knows their liabilities so nobody loses his shirt.