Projects have many different types of risks. In fact, all projects have some risk for contractors. But, understanding the risks could help you avoid, or reduce the amount of risk. Clients may have different risks to the contractor, and each stakeholder in the project faces different risks. Sometimes these risks are the same for a number of stakeholders – so for instance, if the project is slipping against the construction schedule this could negatively impact both the client and the contractor.
Unfortunately, many contractors fail to understand the project risks, or they choose to leap into a project despite the risks. Who would want to start building a bridge across a flood-prone river at the start of the rainy season, or work for a client that’s known to fight lengthy legal battles with their contractors? Indeed, contractors are often a very optimistic lot, always expecting the project to turn out well, even when it’s fraught with risks and probably destined to failure from the start. Then when the proverbial hits the fan, they console themselves by blaming everyone except themselves.
In this article, we will look at the biggest risks that contractors face and how to minimise or avoid them.
The 10 risks contractors should avoid or minimise:
- Clients that don’t pay. Frequently contractors aren’t paid for work that they’ve completed – who wants to work for free? This often causes contractors to become bankrupt. Unfortunately, this also usually leaves shareholders, employees, suppliers, and subcontractors out of pocket. Of course, if the contractor hasn’t finished the project then the client could have an incomplete project. Reasons for non-payment by clients could include:
- The client is dishonest and doesn’t pay for work.
- The client has run out of money or even become bankrupt, so can’t pay.
- The project value has exceeded the client’s budget.
- The client disputes the contractor’s invoices.
- Projects that lose money. This could cause the contractor to become financially stressed, impacting cash flow and resulting in late payments to subcontractors and suppliers. This negatively impacts the project, and in the worst case results in the contractor becoming bankrupt. Projects lose money because:
- They priced the project badly, there were errors and omissions in the contractor’s price, or they failed to understand the full project scope.
- Poor project management which leads to projects wasting money.
- Projects being completed late which results in additional costs.
- The contractor failing to claim for work that they’ve done. This includes not submitting variation claims that they are entitled to.
- Poor quality work which has to be redone at additional cost.
- Negative cash flow. Negative cash flow is the leading cause of contractors becoming bankrupt. Essentially the contractor doesn’t have money to pay their bills. Even profitable projects can be cash negative for large parts of the project. Causes of negative cash flow include:
- Clients paying the contractor late.
- Contractors failing to invoice for completed work.
- The contract payment terms being such that the contractor receives payment several months after they’ve incurred the costs.
- The project is completed late resulting in delays in releasing retainage money.
- Numerous variation claims which take time to settle and agree, or which face lengthy disputes with the client.
- Finishing projects late. Projects that are finished late tie up the contractor’s resources, inevitably negatively impacting other tasks and projects. They cost more in management and supervision time as well as incurring additional costs for project insurance, project offices, security, equipment, etc. Finishing a project late is bad for reputation. It could even lead to the imposition of penalties by the client. Reasons that projects are finished late include:
- The construction schedule was incorrect, or it was badly prepared.
- The project team doesn’t understand or follow the construction schedule.
- The project is under-resourced.
- The client delays the project.
- Adverse weather events.
- Poor project management.
- Poor quality work which has to be redone.
- Adverse weather. Adverse weather can delay the project. Invariably when adverse weather strikes the contractor incurs additional costs which could include; people and equipment standing and they still have to be paid, pumping of flooded areas, etc. Adverse weather can also damage completed work which has to be redone at additional cost and time. Adverse weather could include:
- Extreme heat or cold which slows productivity.
- Strong winds which prevent some work, like lifting with cranes. Wind could also damage completed work.
- The rain which stops work, floods work areas and damages partly completed work.
- Adverse weather could also disrupt the supply of materials to the project site, or impact offsite manufacturing facilities.
- Safety. Poor safety harms reputation, it could lead to the project being shut down by the authorities and even monetary fines. Poor safety can result in poor worker morale. Accidents take management time to sort out and investigate. Accidents could result in key workers being injured, impacting the project progress and productivity of the rest of the team. Accidents lead to increased insurance premiums. Some clients will avoid working with contractors that have a poor safety record.
- Poor quality. Poor quality costs money and time to rectify. It harms reputation. It keeps people back to fix, thus preventing them from moving onto other tasks and projects.
- Insufficient resources, which causes project delays, it could mean opportunities for variation claims are missed, that the team becomes overworked and stressed causing resignations, lower productivity, and poor quality work. Insufficient resources could be caused because:
- Skilled people leave the company.
- The project is under-resourced.
- The wrong skills are used in the project.
- Poor management. This can lead to; poor quality, poor organization on the project resulting in low productivities and mistakes, accidents, low morale of the team causing people to leave or to be less productive, poor financial controls which could result in overpayments, theft and failure to invoice for completed work or to submit variation claims.
- Theft is a major concern on construction projects. Not only is the direct loss of the item, or money, but there are indirect losses which include:
- When equipment, tools, and materials are stolen (even when parts of equipment are stolen like batteries) then work often can’t continue until the item is replaced or repaired. This causes a loss of productivity of workers and delays to the project.
- Sometimes when an item is stolen, the damage is caused to other items creating additional costs to repair the items.
- Disruption to cash flow.
Construction projects are inherently risky. The weather won’t be perfect, changes will occur, everything won’t be exactly as you expected it to be, suppliers and subcontractors will let you down. Obviously, contractors can’t have a risk free project. Risks vary from project to project, both in the type and the quantum of the risk. Some projects can be inordinately risky, especially when the client and the contract document place undue risks on the contractor. Some projects are best avoided. Even the biggest and best contractors have been undone by one bad project.
But, by understanding the risks on projects you can take action to limit and protect against the risk. In my next post, I discuss simple actions that contractors can take to reduce and even eliminate many of these risks.
What do you think are the big risks that contractors face?
Have some of these risks caused your project pain?
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