Protect Against Risk Shifting with the Three Rs
April 2, 2017
Source: “Managing Risk in the Construction Industry” from Dodge Data & Analytics
Contract glaziers can best manage the risks inherent in any project and plan accordingly by following the Three Rs—Review, Revisit and Reserve. The Three Rs become even more critical as owners and builders continue to transfer more and more of their project risk downstream.
According to a recent report on construction industry claims management, risk shifting is one of the top concerns of building industry firms. The study, “Managing Risk in the Construction Industry” from Dodge Data & Analytics, is a broad-based survey of how owners, general contractors and trades manage risk in the construction industry. Survey respondents pointed to risk transfer as a primary area of concern. There was a general view that owners and builders continue to transfer more and more of their project risk downstream.
This risk shifting is particularly problematic in two areas, according to respondents. First, contract terms that address indemnity and liability risk transfer were identified as becoming more overly favorable to both owners and builders. Second, respondents reported that more trades are receiving incomplete plans, which then force trades into fill-in information and project details that previously came from the owner or architect. The fact that trades are being required to offer more critical input into project performance through contract or plan limitations is especially notable given that the largest claim expense cited by the survey was warranty-related expenses and the pre-project uncertainty surrounding the same.
Both of these concerns can operate to expand a trade’s legal obligations and responsibility for critical building systems. Many builder contracts are not helping. More project trades are facing flow-through clauses and enhanced warranty response demands. (Flow-through clauses mandate that the trade acknowledge and agree that the builder’s direct responsibility to the owner for the trade’s work will be borne by the trade itself.) Ultimately such clauses can prove disastrous for trades where there is an uncertainty as to the obligations owed or vagueness on performance expectations. Equally, growing warranty obligations are increasing the overall cost of projects because future costs must be built into the bid. Also, any uncertainty in the contract can force trades to respond to warranty items outside their scope.
These risks and concerns are real, and costing real money. Within the past five years, upwards of 80 percent of general contractors/builders reported being involved in claims on at least one project. Well over half of the responding trades had a similar experience. Most of these claims resulted from the owner, general contractor and trades simply not being on the same page contractually speaking.
To avoid claims and to limit risk exposure in this challenging contract environment, glazing contractors can look to the Three Rs.
The first step in trying to get a handle on these issues is to review the contract critically. Identifying provisions that shift liability onto a trade, as well as those terms that have the potential to increase future exposure on the project, must be identified and considered. This applies to small projects, for example where storefront installations might have unique code-required hardware or security requirements. It also applies to large projects, where overall performance is measured by contractually driven energy performance targets.
Understanding what you are being asked to deliver, and then clarifying such through the negotiation process, can help avoid a host of issues during the project and post-completion.
Having invested the time at the beginning of a contractual relationship to ensure that an ultimate investment is profitable, do not then let the contract terms slip. The second “R”, revisit, stresses the importance of ensuring performance and project specifications are within the contract throughout construction.
Revisiting the essential terms to ensure that the scope of performance matches those contractual requirements can help avoid later issues. Revisiting the contract requirements when faced with schedule changes, change orders or claims processing requirements can help avoid an unanticipated expansion in the scope of the contract. It can also help identify necessary points for additional collaboration as a project moves forward.
Finally, reserve appropriately. While most think of reserves in terms of the necessary financial commitment, there is a manpower reserve that needs to occur as well to help manage current workloads while responding to needy projects. Taking a critical assessment of potential financial and manpower reserves at the time of contracting can help manage that prospective risk, and the expense accompanying those items.
Reading and writing contracts, and being sure the arithmetic works, may make a workable contract. But taking a little time to Review, Revisit and Reserve may help manage legal risk issues inherent in any contract.