Contract documents

A Risk Management Plan for your construction company is an essential element of loss prevention and a key ingredient of financial success. Establishing a Risk Management Plan embraced by leadership and integrated your company’s culture and financial/project management processes will have a significantly positive impact on business performance.

Risk Management Approach for Contractors

The goals of risk management are to

• Protect the assets, financial well-being, and reputation of the company
• Minimize the impact and cost of risk through proactive project management, staff training, and organizational accountability
• Maintain appropriate levels and types of insurance, with the understanding that not all risks are insurable

We recommend the development of supportive project and business management policies and procedures appropriately scaled for the character and size of your company and projects.

Components of the Risk Management Plan for Contractors

1. Roles, Responsibilities, and Risk Allocation

1.1 Understand the duties and obligations of the key parties—and the risk allocation among them:

• General Contractor.
• Construction Manager.
• Subcontractors.
• Project Owner (Client).
• Design Professionals.

1.2 Establish fair risk allocation

• The project owner has the most to gain and therefore generally assumes overall project risk, except what is allocated by contract to the contractor and design professionals—both of which become an extension of the owner’s risk management team.
• Take into account which party can best foresee, control, bear and accept the aspects of project risk.

1.3 Understand the different standards applied to design and construction

• Design services are provided under a professional Standard of Care and do not promise perfection or guarantee of a satisfactory result.
• In contrast, construction work demands warranties and guarantees.

1.4 Recognize the need for both Commercial General Liability and Professional Liability insurance and understand how the coverage and claim process works for each.

2. Risk Analysis of the Client, Team, and Construction Project

• Prior to pursuing a project, analyze key factors in a Go/No-Go process and internal review.
• Perform due diligence on your potential client’s reputation, experience in project type, financial solvency, and litigation history, as well as any prior experience in working with them.
• Understand the client’s goals and expectations: Are they well defined? Do they have a realistic objective, program, schedule, and budget?
• Consider your internal team relative to the project: Does your team possess the qualifications and the expertise to win/succeed? Are the key staff—both executive/project leadership and support—available?
• Don’t forget about the design team and other consultants—their qualifications, experience, and collaborative approach matter.
• Understand the legal, regulatory, and procedural environment of the location of each project and project characteristics and complexities.
• Identify the design and construction technology required for the project (e.g., BIM).
• Be confident that you will be able to achieve pre-construction project delivery process alignment through early engagement and communication with the larger project team.
• Examine whether the project and potential future projects with the client are in line with your company’s strategic goals.
• Make an informed business decision by analyzing the risks (anticipated cost of construction, related contractor work effort, and the ability to negotiate and establish fixed-price commitments and fees) and rewards (a reasonable profit target).

3. Project Intent, Conditions, Scope, and Budget

3.1 Quantify project intent with a thorough “Initial Project Information” document that defines the project’s:

• Physical characteristics.
• Owner’s program.
• Construction/project budget, schedule milestones, and any multi-phase requirements.
• Sustainable goals (if any).
• Owner’s and contractor’s designated representatives.
• Owner’s consultants (including the design team).

3.2 Establish sufficient and realistic project and construction budgets including contingencies for:

• Project scope and design development.
• Market conditions.
• Changes in project conditions and during construction.

3.3 Do not accept or establish any unrealistic expectations or unattainable goals during the development of the scope and budget.

4. Construction Contract Review and Negotiation

4.1 Create a clear scope of responsibility along with fair and balanced terms and conditions with these elements:

• Thoroughly defined scope of services and work, duties, and obligations
• Clear statement of what is included and what is excluded
• Proper allocation of risk to other project participants

4.2 Establish a multi-step dispute resolution process

• Common to all members of the project team, including subcontractors.
• That uses a meet-and-confer process to resolve issues at the project level, followed by voluntary mediation prior to resorting to more formal processes such as litigation or arbitration.

4.3 Institute a standard process for contract review, negotiation and approval that:

• Involves your risk manager, project executive, project manager, attorney.
• Recognizes that you will never be able to achieve a “perfect” contract.
• Helps you make an informed business decision—before you sign on the dotted line—as to whether you can manage the risks of the project for the fees/price negotiated.

4.4 Educate construction team members on key aspects of the contract including:

• Roles/responsibilities of the parties.
• Schedule, budget, and deliverable obligations.
• Change-management process.

5. Subcontractor Selection, Contracting, and Management

• Select subcontractors based on their expertise and experience in the project type, as well as your prior experience with them.
• Make sure to align the terms and conditions of the subconsultant agreement, as well as the responsibilities, with prime agreement (your agreement with the project owner).
• Require proper levels of insurance based on scope and complexity of subcontractors’ work—and monitor for compliance.
• Manage the performance of your subcontractors during the project and evaluate them after project completion to determine whether to bring them back on for the next one.

6. Communication, Decision-Making, and Documentation

6.1 Recognize that:

• Effective communication throughout the project is essential to manage the project and your client’s expectations.
• Good documentation is your best source of defense in the event of a claim or dispute.
• Email is discoverable and lives forever.

6.2 Establish a communication plan for the project that:

• Aligns owner and project team requirements for meetings, milestones, and decision points.
• Defines authorship, filing, and management of project communications—including any document management system/software you may use, as well as your records access and preservation policies.

6.3 Fully understand the owner’s decision-making process and build in the necessary lead time to allow for the level of review, authority, and approvals required.

6.4 Establish a change-management process to:

• Identify issues.
• Notify appropriate internal/external parties.
• Get authorization from the client before proceeding.
• Document the approval in the project file.

6.5 For all key meetings and presentations, clearly document options considered, recommendations made, and decisions reached.

7. Business Management – Project Delivery

• Assign capable construction team (GC and subcontractors) leaders and members experienced in the project type.
• Understand the Contract Documents and embrace coordination, supervision, safety, and other key duties.
• Develop and apply consistent project delivery standards, guidelines, checklists, procedures, and protocols to support efficiency and quality management throughout project phases.
• Establish an internal peer review process as a quality management strategy.
• Use BIM and other technologies in a coordinated project team approach.
• Anticipate, identify, and proactively manage project risks including unforeseen conditions that may arise, such as cost/budget issues and trade/construction document coordination gaps; engage and develop solutions collaboratively with design team and owner.
• Notify the client (owner) and submit/attain timely approval of change orders and monthly pay requests.
• Track and share financial performance data with construction team members and demand accountability.
• Monitor client satisfaction through consistent communication as established in your communication plan.
• Conduct completed project reviews, identify lessons learned, and adapt your project processes accordingly.

8. Staff Training and Development

• Recruit and foster strong project leaders.
• Mentor team members and make investments for long term retention.
• Develop staff at all levels: executive, project management, field-based resources.
• Include training on leadership, communication, team management skills.
• Offer opportunities for growth.

Your Company’s Culture: Quality, Risk Management, and Client Satisfaction

Once the Risk Management Plan becomes ingrained in the culture of the firm and integrated with project management and business management tools and techniques, the results will be tangible.

Andrew D. Mendelson, FAIA, is Senior Vice President and Chief Risk Management Officer of Berkley Alliance Managers, a member company of W. R. Berkley Corporation, providing professional liability insurance to design and construction professionals. Risk management resources for construction professionals can be found here. Andrew may be contacted at amendelson@berkleyalliance.com.  

Information provided by Berkley Alliance Managers is for general interest and risk management purposes only and should not be construed as legal advice nor confirmation of insurance coverage. As laws regarding the use and enforceability of the information contained herein will vary depending upon jurisdiction, the user of the information should consult with an attorney experienced in the laws and regulations of the appropriate jurisdiction for the full legal implications of the information. 

Products and services are provided by one or more insurance company subsidiaries of W. R. Berkley Corporation. Not all products and services are available in every jurisdiction, and the precise coverage afforded by any insurer is subject to the actual terms and conditions of the policies as issued.