By Caitlin Sweeney
The first line of risk management is reading the entire contract before signing, right? Wrong. That may be the golden rule of contracts, and we’ll get to that, but the first line of risk management starts a few steps prior.
Since construction is considered a high-risk industry, it’s ideal for your team to come together to analyze risk as early as the bid phase of the project. Some of the most common risks to your construction project are:
Thankfully, appropriate risk management provides a clear idea of how to eliminate or mitigate as much of the risk as possible. When you do have to take responsibility, the risk management process helps you manage the loss and build a better future.
When analyzing risk, it’s important to have team members from all parts of a project to come together to better communicate and identify risks, reduce unforeseen problems, and recognize interrelated risks.
By planning a risk response and implementing it, you avoid, minimize, transfer, and accept the risk.
Remember that golden contract rule? Read the contract thoroughly before signing. It’s very surprising how many details can be missed because some parties skim over the contract before signing. Since everything on a project flows from the contract, it’s incredibly important to minimize risk by reading every detail.
Whether you are an architect, owner, contractor, subcontractor, or engineer, each party must understand what is expected from them and what their liability is on a project.
For example, a typical owner/architect agreement will include these basic elements:
But, where is the allocated risk section? Usually, risk is allocated in the parts of the contract that outlines 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, if a worker is injured on the jobsite, the owner is “indemnified against” claims for bodily injuries to workers, so the contractor will be responsible for the worker’s loss.
The Insurance and Bonds Exhibit can be added to AIA Documents A101 ® —2017, A102 ® —2017, and A103 ® —2017. This comprehensive exhibit allows the parties to set forth the various insurance coverages and policy limits that will be purchased and maintained by the owner and contractor for the project.
The surety bonds are essentially promises by a surety or guarantor (a bank or insurance company) to pay the owner if the contractor fails to meet its contractual obligations. These forms are an important precaution that guard against broken contracts and strengthen the trust between the owner and contractor.
The A310-2010 Bid Bond is a simple, one-page form most commonly used on public projects. This form establishes the amount due to the owner from the surety should a selected bidder fail to execute a contract per specifications.
The A312-2010 Performance and Payment Bond incorporates covering the contractor’s performance, and the contractor’s obligation to pay subcontractors and others for materials and labor.
For more information on Risk Management, visit the AIA Risk Management Program page.