Construction is a multi-step process that can be complicated, lengthy and risky. You hear that all the time. As a construction professional working on a myriad of projects with forensic construction services, owner’s representation, and construction management, you see it all. Whether you are an owner of a complex development or performing a minor facility renovation, having an understanding of overall construction risk when going into a new deal is essential to receive the anticipated return on investment. Obtaining sound advice at a project’s early stages enables you to proceed with eyes wide open, mitigating potential missteps. So what are some of the biggest construction risks? How do you mitigate construction risk?
The three biggest risks in construction involve money, schedules, and contracts. And like everything, the more you know, the less the risk. So where do you begin?
Proper pre-construction planning and due diligence help to lay the groundwork for a successful construction project.
When it comes to construction projects, problems are bound to occur. However, bringing an experienced third-party consultant on-board early in a project is recommended in order to identify, evaluate, and prioritize all risks involved. One of the significant due diligence tools that third-party consultants can provide is a Construction Risk Assessment (CRA). The overall goal of a CRA is to identify areas of risk with finishing the project on-time and within budget while offering recommendations for managing those risks. Generally, the scope of the CRAs includes a review of the contracts, construction documents, and due diligence documents in an effort to reduce financial, schedule, and contractual risks.
Mitigating Financial Risk
As part of the CRA, a thorough review of the construction documents is performed to assess the general completeness of the drawings, schedules, and reports, as well as provide an opinion on the overall comprehensiveness, completion, and coordination between all trades. In doing this, issues and change order risks are identified early in the project, which reduces change order costs resulting from re-work, as the problems will be identified and resolved before errant work is performed. When problems are discovered during the course of work, time constraints often force you to hastily approve change order requests, even when you feel they might be excessive. When these items are discovered early, time is on your side to properly identify, review and negotiate change order pricing from the general contractor and subcontractors.
To analyze the overall cost and fund allocation, a thorough review of project documentation and contractor’s detailed budget analysis is performed by an experienced professional. Problems are often difficult to find and require an experienced set of eyes to identify potential fund shortages, allowing your team to make necessary adjustments without time and resources. If any alterations need to be made to the budget, the pre-construction phase is the ideal time to go over potential changes and make the right decisions.
Mitigating Schedule Risk
Reviewing the project’s schedule is another important role in mitigating construction schedule risk and is very often part of conducting a CRA. Schedules are essential to the successful completion of any project. The implications of schedule overruns may be severe for both the contractor and the owner. The contractor can be faced with liquidated damages and other penalties for finishing late. The owner experiences delays in putting the facility into service and in turn, loss of expected profits on a daily basis. Estimating and adhering to an accurate schedule provides key information for related public commerce, financial institutions, existing operations, and ultimately the end user. By having an experienced professional third-party opine on the reasonableness of contractor’s proposed schedule at the early stage, an owner will receive outside advice on a schedule that is directly tied to the anticipated return on investment.
Mitigating Contractual Risk
Risk is inherent in construction projects of all types and sizes, and there is no way to eliminate all associated risks involved. All that can be done is to regulate the risk allocated to different parties through the use of contracts, and then to properly manage the risk. A third-party review of the construction contracts is often helpful. Also, careful drafting of the construction contract can benefit both sides by clearly defining expectations, eliminating ambiguity, and reducing the risk of delay of performance or payment. By reviewing the draft contracts or contracts in-place, risks can be identified early in the process, helping to avoid costly mistakes by unknown agreements. Not only is it important to be clear in the contract about the parties’ responsibilities, but the parties need to know what those responsibilities are, as too often, construction agreements are long and unread.
Tips to Mitigate Construction Risk
With proper planning and quality due diligence, an owner or developer will receive informed decisions throughout the pre-construction phase that can significantly impact the return on investment. The cost of avoidance of problems during construction generally pays for itself through the minimal fees expended for working with an experienced third-party consultant. Identifying and solving problems early provides ample opportunity for resolution before delays are incurred and many times before additional costs are incurred. These decisions made in the pre-construction phase directly impact time, cost and quality, which all affect the bottom line. The sooner the problems are identified, the greater success a project will have.