Four Major Risks Construction Owners Face
By Mark McCarthy
In a world of constant expansion and development, it is more important than ever to fully understand the risks associated with a construction project. Construction is booming. Values recorded by the Census Bureau indicate cumulative U.S. construction project spends in 2015 reached $1 trillion, the highest recorded amount since 2008. But when considering a project, there are four particularly important risk areas to keep in mind as a construction owner that can help you manage upcoming projects and prevent overpaying.
- Contract language: The biggest risk to a construction owner lies in the contract itself. Too often contracts are muddied with unclear language that makes it difficult to determine reimbursable project costs. In the case of one recent academic institution, a lack of contract clarity resulted in a $2 million discrepancy in addition to costly legal expenses. Before running into a similar problem, draft your contracts using clear, transparent language so that every party involved knows exactly which costs will be reimbursed. One way to avoid confusion is to write clauses and provisions so that even someone unfamiliar with the project can easily understand the reimbursable costs.
- Labor rates: Reimbursable labor rate costs associated with your contractor and subcontractors should be detailed. Before you break ground, it is important to review each of these labor rates to make sure they align with the provisions included in your initial contract. When labor rates are reviewed and approved up front, all parties are aware of the rates which will be billed on the project. This significantly reduces the likelihood of future disagreements. This strategy saved one company more than $500,000 after it discovered upfront that its subcontractor labor rates were much higher than industry averages and local union agreements.
- Change orders: With any major construction project come last minute changes or unpreventable surprises that can increase the scope of work. If additional work requires you to deviate from your original plan, a change order will be needed. It is important to carefully review every new change and confirm that the pricing is fair to both the contractor and project owner and complies with the contract. This will avoid potential overcharges related to change order work.
- Insurance and bond costs: Today, many large contractors use complex self-insured insurance and bonding programs. A project owner should fully understand the costs and potential risks related to these programs. For example, if a performance and payment bond rate is inflated by even 0.1 percent on a $100 million project, the result is an overbilling of $100,000. Ensure you are only paying for insurance coverage and limits you have specified in your contract. Carefully review your insurance policies and costs to guarantee adequate coverage while also mitigating the risk of over-billings.
Understanding the major risk areas you face prior to beginning your next construction project will help you manage risk from inception to completion. At a minimum, you need to execute clear contracts considering pricing of labor rates, change orders and insurance costs to help you stay within budget.
Mark McCarthy (pictured to the left) is a senior manager for CBIZ Risk & Advisory Services. He can be reached at MMcCarthy@cbiz.com.