Construction and risk are like Forrest and Jenny—they go together like peas and carrots. So there’s no way you can be a contractor without some risk exposure.
But not every construction risk is worth taking.
Some construction risks, if ignored or underestimated, can cause major delays, eat into profits and even cost you your business.
In fact, thanks to mismanaged construction risks, 63.6% of contractors go out of business before their fifth year.
If you aren’t willing to let that happen, here are the top construction risks you need to monitor, manage or avoid to keep your projects profitable and safe.
Let’s start with the most obvious risks in the construction industry—the ones that affect your jobsites:
1. Site Safety Hazards
Most construction site work entails a bit of necessary risk. But there’s a difference between taking an inherent risk and working in hazardous conditions.
To keep sites safe, you have to ensure that necessary risks, like working at heights of 10-100 feet or more, aren’t compounded by unnecessary construction hazards like these:
- Poorly constructed scaffolding - such as using barrels, bricks or blocks to support scaffolding planks
- Lack of fall protection - such as failure to install guardrails, use safety harnesses or cover floor holes
- Unsafe stairways and ladders - such as ladders with bent rails or missing rungs and stairs that are wet or without treads
Each of these scenarios make working at a height more dangerous than it should be. And if they lead to injuries or death, contractors are held responsible.
For example, after a worker fell to his death, OSHA fined a contractor in Georgia $170,000 for exposing workers to fall hazards. The contractor didn’t provide fall protection, safety training or conduct regular site inspections.
Don’t make these mistakes. Do whatever it takes to create a culture of safety within your company. Create daily safety checklists, organize weekly safety meetings and ensure everyone has appropriate PPE.
2. Environmental Hazards
The weather is another jobsite risk that can’t be totally avoided. Mother Nature is often testy and unpredictable, and she’s been known to wreak havoc on construction sites from time to time.
And while you can’t control earthquakes, tornadoes and other forces majeure, you can transfer some of the environmental risk away from yourself. Be sure to include a force majeure clause in your contracts and invest in good insurance.
Insurance goes a long way toward protecting your business financially, which brings us to the next risks you need to mitigate to keep your company running:
Not all financial risks are bad. After all, you can’t make money unless you spend money. But there are plenty of financial risks that contractors should guard against.
Here are some prime examples:
3. Unsustainable Growth
When you’re good at what you do, it can be easy to overestimate how many projects you can handle at once. And, let’s face it, if you’re hungry to grow, some jobs are hard to pass up.
For example, if you have an opportunity to bid a project that would expand your business into a higher paying market, it would be tempting to take it—even if your crew is maxed out on other projects.
But in this case, the risk outweighs the reward.
A study by The Surety & Fidelity Association of America cited “unrealistic growth” as the number one reason contractors’ businesses fail.
Another leading cause of construction business failure is this:
4. Negative Cash Flow
If you don’t have more capital coming in than going out, then your business is in real trouble.
Here are a few tips to keep your cash flow healthy:
- Check out clients beforehand. It literally pays to be nosey. Not all clients pay promptly. And some may not have the ability to pay you in the first place. So before taking on new clients, dig up their credit reports, or at the very least, ask other contractors about them.
- Charge for change orders when appropriate. Some changes are small, others, not so much. So be sure to outline, in person and in writing, at what point a change order will incur additional charges. Then stick to your guns.
- Keep a Buffer. Don’t tie up all your working capital in ongoing jobs and fixed assets. Save some money for a rainy day.
- Make cash flow projections for every project. How much work will be done each week? Who will be doing it? When will you have to pay them? And when can you charge the owner for the work completed? If you don’t carefully plan for what goes out and what comes in, then you won’t be able to manage your cash flow.
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Poor cash flow is often a symptom of the next big financial risk for contractors:
5. Poor Job Costing Practices
Poor job costing practices can cause you to bid and accept projects that have thin profit margins, or worse, aren’t profitable at all. So don’t be lax in keeping tight tabs on job costs.
Here are a few ways to make your job costing practices more accurate:
- Track change orders. If you aren’t tracking expenses from change orders, then you aren’t getting an accurate picture of your job costs.
- Review reports often. Check cost reports regularly so you don’t go over budget without realizing it.
- Use a mobile time tracking system. Time tracking software automates clock-ins and keeps labor costs from getting skewed.
- Double check your subs. Don’t be caught off guard by a job costing error that you didn’t make.
Project Management Risks
Construction management is multifaceted. And if one facet is mismanaged, then your entire project is at risk of being completed late and going over budget.
So pay close attention to these construction management risks:
6. Poor Communication with Stakeholders
Clear communication with stakeholders is crucial from pre construction until completion. A project won’t be profitable without it.
So beware a project owner who wants you to bid a job with incomplete drawings and a poorly defined scope. Bidding without all the information you need will ensure that design flaws, scope creep and head-butting will follow.
To fend off these nightmares, ask for all the information you need upfront. Then you can determine the construction methods and materials you’ll need for the job before you submit a bid.
And once you’ve won a project, be sure to continue to communicate clearly and get the most important things in writing.
If you do, you’ll avoid the next project management risk:
7. Poor documentation
You can’t have great communication without clear documentation.
And two of the most important types of construction documents are contracts and change orders.
Contracts should use plain language, detail how risks are shared, outline the terms of the project and include how to handle changes that are outside the original scope of work.
They should also outline how and when change orders should be requested, as well as which kinds of changes will require additional fees.
Good contracts work like a referee when any problems arise and keep squabbles to a minimum, so work doesn’t have to be halted.
Because if work is halted, then you will be facing another risk that is often detrimental to construction businesses:
8. Project Delays
Any of the construction risks above can snowball into significant project delays if mismanaged.
And when your projects are set back by days, weeks or months, your entire business is negatively affected. Your profit margins shrink. Your cash flow slows. Your clients get frustrated, and your reputation suffers.
So pay attention to these construction risks, and do your best to mitigate or avoid them.
For more information on avoiding project delays, read this article.