The construction sector is an inherently risky industry and many contractors face multiple risks over the course of a construction project. Topping the list are health and safety risks that endanger construction employees, followed by potential changes in initial plans that cause contractors to incur more expense and lead to delays. Along with these, the government periodically imposes new rules and regulations for contractors to follow. There are also persistent payment delays and other payment issues that impact the industry.
The trend is for construction projects to grow in scope and complexity, which means the issues and risks grow exponentially alongside them. Most of these risks inevitably affect how your construction business operates. It’s important that you are ready to manage these risks and put systems in place to mitigate them to protect your business operations. That said, this is no easy task. It requires business owners to be proactive in identifying threats and be decisive in the face of business challenges.
Here are some of the ways that you can safeguard your construction business.
1. Use the construction contract as the basis for risk allocation
The construction contract can be thought of as the foundation of every construction project. A single construction project is composed of multiple contracts signed by different parties. Business owners should leverage the power of a construction contract to allocate the risks associated with the construction process. It is important that you, along with other project participants, determine and evaluate potential risks during the initial stages of a project and agree on how to allocate their management. Ideally, the party that is better equipped to handle any given risk should be the one to address it. For example, the project owner should handle design errors while contractors should handle the risks of injuries or property damage.
2. Use construction insurance to mitigate risks
If you are not able to transfer risk to another project participant, you may have to accept it and mitigate it on your own. This is where insurance comes in. Insurance is a way to reduce the financial impact of these risks on your operations. There are different types of construction insurance that you can use to safeguard your business. When choosing what insurance to get, it is important to identify what you actually need for a project, what your role in the project is, and what type of property needs to be covered.
You may want to consider one or a combination of the following types of insurance:
All risks insurance
All risks insurance covers any physical damage to the construction works and site materials. Either the contractor or the employer may take out All Risk insurance. Each party should specify their responsibilities in the construction or engineering contract. The contract should provide details of the specific insurance requirements, such as which risks need insuring and the amount of cover required. Regardless of which party obtains the insurance, it’s often a prerequisite of the contract that it is maintained jointly by the employer and the contractor.
Public and Employer’s liability insurance
Public liability insurance covers liability arising from injury or death to third parties other than the insured’s own employees. It also covers any damage to property belonging to third parties.
Employer’s liability insurance provides protection for employees in case they are injured during the course of their work. If you employ people you must have Employer’s liability insurance in place. It’s the law.
Professional indemnity insurance
Professional indemnity insurance provides financial protection against liability arising from professional negligence. This usually includes a contractual liability equivalent to professional negligence. An example of this would be a breach of a contractual obligation to exercise reasonable skill, care and diligence when preparing and following a design.
Architects, engineers and surveyors are legally required to hold PI insurance. Other professional consultants involved in a construction project and building contractors with a design responsibility to their employer are also usually required to have Professional Indemnity insurance in place.
Product liability insurance
Product liability insurance protects against liability for injury to people or damage to property, arising out of products supplied by a business. Suppliers of equipment to a construction or engineering project, such as lifts or escalators, may be required to have Product liability insurance in place, sometimes instead of professional indemnity insurance.
Latent defects insurance
Latent defects insurance (also known as decennial insurance) typically lasts for ten years from the original construction of a building. A building owner must usually arrange the cover in advance and it typically protects the owner against the cost of remedying the structure of a building, due to a defect.
3. Take measures to protect payments
As previously mentioned, late payments are somewhat a norm in the construction industry. Small construction firms, especially those with low profit margins and tight cash flow, are usually the most vulnerable when it comes to payment delays. These issues can hinder a company’s ability to continue operations and take advantage of growth opportunities. This is why it is important to take measures to protect payments, such as:
- Using the construction contract to set clear payment guidelines
- Sending preliminary notices during the initial stage of a project to protect lien rights
- Following up with clients about their unpaid invoices.
The construction industry has some of the most challenging issues that threaten a firm’s survival. Before these risk factors affect your business, it is crucial that you stay proactive in taking all the necessary steps to safeguard your operations.
About the Author:
Kevin Rabida is a content marketing specialist writing in-depth articles and guides about new technology, small business challenges, and blue-collar industry issues and has been featured in several US, UK, and Australian trade publications. He’s worked with companies like UPrinting, PrintPlace, and Handle.com