Avoiding Litigation by Effective Risk Management
Ed Kinberg
Attorney
Introduction
Most contractors think risk management is something you do to minimize the risk of injury while your company is performing a job. In fact, effective risk management must begin the moment you think about bidding a job.
A contract is simply a tool for allocating risk between the owner and the builder. The more risk you take on, the more you must charge for the work. By applying good risk management skills before you enter into a contract and throughout performance, you can substantially reduce the risk that you will lose money on the job.
What Is It?
Risk management is the practice of looking for potential trouble spots before they arise and taking steps to prevent those "spots' from interfering with your job. This is done by carefully examining each step of the process you will be using, identifying potentially difficult or dangerous areas, and implementing procedures to ensure they don't affect your performance.
The most effective risk management tool available to you is your experience and that of your staff. By forcing yourself to keep an 'eye open' before you even submit your bid, you will develop the ability to identify problems long before they impact performance. If you are unable to avoid an impact, your risk management program will ensure you have developed a solid record for recovering your costs.
How Do I Do It?
Effective risk management simply involves questioning all aspects of the work f rom the time you begin working on your proposal until final payment.
Who Will I be Working With?
The first step is identifying who will be involved in the project and their reputation. Does the owner have a reputation for slow pay? How has this owner handled change orders in the past.
Does the architect have a reputation f or designing "difficult" projects? Is the architect difficult to work with? Who will be inspecting the work for contract compliance? By discussing these kinds of issues with your staff, you will develop a much better understanding of the extent of the risk you will be assuming if you bid on the job.
Are the Contract Terms Fair?
The next step involves a careful examination of the terms and conditions of the contract. owners try to place as much risk as possible on the contractor. While every word of the contract is important, you must pay particular attention to clauses that require you to give up any of your rights or impose additional obligations. In most cases, you do not have to accept each clause as it is offered by the owner. Be prepared to offer reasonable alternatives to equalize the risk.
Are There Problems with the Drawings and Specifications?
Once you have completed your examination of the contract, you must carefully examine the drawings and specifications. In almost every case, you will find defects, conflicts or ambiguities. If you do, request clarification. Failure to seek clarification of a problem you know of, or should have known, when preparing your bid, may make you responsible for the cost of fixing that problem.
It's always tempting to ignore problems and "gamble" on getting a change order to correct the problem when you "discover" it during the course of performance. In so doing, you may feel you are gaining a competitive advantage over other bidders who may base their price on the cost of doing the work correctly or simply failed to see the problem.
Don't do it. I have defeated several such claims by demonstrating the contractor knew, or should have known of the problem, when they prepared their bid. If you know of a problem when you prepare your bid, you have a legal duty to seek clarification. If you do not, you are responsible for the consequences of your decision.
Who's in Charge?
It is absolutely essential to clearly identify the decision makers on both sides of the contract. As a general rule, inspectors do not have the authority to direct your performance. They are there to simply make sure your work conf orms to the drawings, they do not interpret the drawings.
By ensuring your staff knows the extent of their own authority and who is authorized to make decisions f or the owner, you can substantially reduce the risk of unnecessary delay and disruption.
Is a Performance Problem Coming Up?
Once you begin performance, you must remain alert for potential problems. No matter how careful you were in preparing your bid, once the work begins you will run into problems you never suspected. Early identification of such problems will minimize the time and dollar impact of the problem. I have seen several cases in which contractors were unable to recover such costs because they failed to take prompt action to "mitigate" the problem.
If I Have to Make a Claim, How Can I Win?
If a problem is unavoidable, you must carefully document the exact nature of the problem and its impact on your perf ormance. All too often contractors fail to create an adequate record while a problem is developing. The most effective tool in successfully asserting claims is a good "real time" record.
You must be able to demonstrate you did what you could to avoid an impact and the exact nature of the impact. Trying to recreate events after the fact is expensive and time consuming. Train your staff to make thorough records during the course of each project.
Most importantly, by accurately documenting problems as they develop and working with the owner to minimize the impact, the owner will be more inclined to honor your claim. If you are unable to settle the claim, good records will substantially increase your chances of winning in court or arbitration.
Read the Contract!
Before you approach the owner with your request for a change order or claim, review the terms and conditions of the contract. It has been my experience that most people tend to ignore the terms and conditions of the contract until they are ready to start putting together a formal claim and seek legal advice. By then, it's too late. In many cases, simple reference to the actual contract terms can resolve a claim.
Do I Need Help?
You should also seek advice from a neutral person (helper) as soon as you realize you may have a problem. In selecting a "helper" you need to find someone you can comfortably talk to about your problem. This person does not need to be an expert or have any specific training. You are simply looking for someone who can critically review what you have done. Of course if you have specific technical questions, you need to talk to an professional in that area.
Most of us are too close to our own problems to really understand the issues involved. By talking to someone who is not involved with the problem, you may gain significant insights that will help you reach a quick and effective resolution. When you meet with your "helper", be prepared to explain why, based on the terms and conditions of the contract and the facts involved, you are entitled to a price or time adjustment.
If the problem cannot be resolved, your "helper" may be able to give you some good ideas on building a record for your claim. In picking a "helper," you simply need to find someone who understands your business, but is not involved in the specific project. Your best source of help is other contractors that do the same sort of work. In this regard, it may be helpful to "build" a local network you can call upon when you need assistance.
Conclusion
While you cannot eliminate all of the risk involved in a project, you can substantially reduce it by applying good risk management practices in all aspects of your work. While you can't make a profit without taking some risk, you can't make living if you don't properly manage your risk.