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Mitigating Risk in Construction

We’ve been taking in a lot of information from our spec book on the Portland library project, and it's understandable if you’re feeling a little bit overwhelmed. Construction is hard. And, today, we are going to learn about liquidated damages, which might make it seem even harder.

Now, liquidated damages is an amount of money that contracting parties agree the project owner can recover if the contractor breaches the contract by not finishing the work on time. So, not only is construction hard, we have a large financial obligation hanging over our heads if we don’t finish our projects on time.  Now, liquidated damages can vary in amount; it really just depends on the contract. Amounts can range from $500 to $2,000 per day, and can sometimes be as high as thousands of dollars per hour. Now, this last case would only be for a very time sensitive project, like an airport. If a contractor is shutting down a runway to do a project, you can imagine that it’s very time-sensitive, so there will be some steep liquidated damages assessed here if the project isn’t finished on time.

You may be feeling very overwhelmed with these high stakes, but thankfully we are now going to learn about the three main ways  that contractors mitigate risk on their construction projects.  

The first method we are going to talk about is called compliance where contractors track, verify, and report on a few key items to reduce liability on their projects. One of those items is subcontractor compliance. Did their subcontractors submit their certificates of insurance? If they didn't, then the contractor is on the hook for that liability. How are they tracking that their subcontractors returned signed subcontract agreements? If there happens to be some sort of dispute, and they don't have signed subcontract agreements, they are going to have a very difficult time resolving that dispute successfully.

Compliance can also revolve around OSHA training. OSHA fines for serious violations begin at almost $13,000. That is a pretty expensive lesson to learn. So tracking what sort of training their employees are getting on OSHA requirements is an important thing for contractors to do. 

Compliance can also apply to things like equipment. Is the contractor’s equipment being serviced per manufacturer recommendations? Reactively fixing a piece of equipment is expensive and it takes time, time they may not have when working up against liquidated damages. 

The next method contractors use is collaboration between parties. Forming strong relationships between the project participants improves the rate of success or, at the very least, allows for early dispute resolution. For example, let’s imagine if a contractor were able to get their field to enter time successfully. Not only would this help accounting with successfully entering payroll, it would also feed into daily logs which tell the story of what happened on any given day at the construction site, and can answer questions like Who was there? What were they doing? What issues arose? Collaboration is also not just limited to being between employees. Things like documents, RFIs, submittals, drawings, and photos can be shared with all parties involved in a contract, such as architects, suppliers, and subcontractors. An ERP solution that helps contractors manage a large amount of work in a small amount of time will drastically reduce their risk of getting hit with liquidated damages.

The third method that contractors use to mitigate risk is quality assurance control. In the construction industry it is a well-known fact that defects in materials and workmanship are the number one reason for reworks, delays, and warranty claims, all of which impact profitability and, of course, reputation. ERP solutions that provide employees with tools to document workmanship issues as the project progresses makes these issues easier to resolve, and can be crucial for meeting project timelines. Contractors can use technology to prevent some of these elusive and recurrent problems. And, if a dispute occurs, contractors will be prepared to resolve them in a timely manner. 

Risk mitigation, along with other accounting workflows, can be difficult to manage in a way that maximizes your organization's efficiencies.

Trimble Construction One is a connected suite which connects your office to the field to streamline these workflows with the industries’ leading solutions to give you the right data for your projects. Check out what Trimble Construction One can do for you.