Construction companies are three times more likely to fail in an economic recovery than in a downturn, according to Ryan Howsam, a principal at FMI Corp., so managing risk is one of the most important aspects of running an AEC business.
“Contractors die of gluttony, not starvation,” he said during a September webinar.
With the U.S. experiencing one of the longest recoveries in history, contractors must be especially vigilant not to run out of cash. “This is a time managing risk is more important than ever,” said the certified risk and insurance specialist.
For contractors, risk falls into several buckets, each with its own set of considerations for how to manage it. Most organizations, said Holsam, view risk in various silos, including finance, operations, business development, estimating, self-perform and project management.
PCL Construction’s vice president of risk management, Hugh McLellan, told Construction Dive the company puts risk into three buckets:
- Enterprise — things that impact any company, including the economy, interest rates, a change in political parties, local governments, regulatory changes and even reputational risk.
- Organizational — things that affect cash flow, such as recruiting and retaining talent, cyber liability, the cost of financing and working capital.
- Operational — things that impact a project, including health and safety issues, quality assurance, design risks, constructibility, subcontractor defaults, faulty workmanship or products and the supply chain.
Ways to mitigate risk
Perhaps one of the most important tools for managing project risk is to communicate early and often. Project kickoff meetings are commonplace, said Mike Kennedy, general counsel for the Associated General Contractors of America, where risk managers and in-house lawyers converse about a project’s characteristics and potential risks.
“The best claim you had is the one you never got,” Kennedy told Construction Dive.
Most contractors expect to see more change in the industry during the next five years than in the past 50 years, according to a FMI and AGC survey, and Kennedy believes collaboration from all project team members “seems destined to become one of the fundamental strategies for managing the increased risk” that comes with change.
Having appropriate insurance coverage also is vitally important, as well as the placement of risk in contracts. “An awful lot of risk is allocated by those contracts and how they’re written,” he said.
In addition, construction firms must anticipate risk, develop plans on how to mitigate it and figure out how to minimize claims that result when risk is not managed well, Kennedy said. For example, every general contractor bears the risk of a subcontractor defaulting, so many large construction companies now purchase subcontractor default insurance, he said.
“[Contractors] often put risk mitigation plans into effect where they think there could be a problem,” said Kennedy. “They’re more proactive.”
How PCL reduces risk
McLellan said PCL Construction actively mitigates the risks in each of the buckets he defined. Regarding enterprise risk, the company maintains an abundance of working capital and stays liquid so that if interest rates rise, the firm can generate investment income.
Cyber-liability, which falls under organizational risk, is managed by the PCL’s chief information officer and what McLellan calls a “very robust cyber crew and business technology group” that not only looks at potential threats, but also examines opportunities to leverage technology and innovation to make the company more competitive.