As a General Contractor, what risks should I be thinking about?

When we think of industries with dynamic and evolving risk, our mind often turns to the world of general contractors (GCs). Companies are diverse in size and area of specialty. Projects vary from new builds to renovations in urban, suburban, and rural locales. Estimates put the number of businesses in the industry at just over 3 million, and it creates around 9.5 million jobs. The industry also shifts with the economy, growing or shrinking based on the investment confidence in any given year. Technology is constantly evolving, and labor trends are presenting GCs with difficulty filling the demand during economic upswings. Taking all of this into account, and simply considering the nature of the work GCs do, it quickly becomes clear that each company in the space faces a unique risk portfolio. Through research and work with GC clients, however, we have discovered that most companies share several key categories of exposure that they should have a strategy in place for. Let’s break down the primary risks you will face as a general contractor, and why to be proactive in addressing them.

Primary Exposure Categories

Your company is unique, and so are the challenges and risks you face. That being said, by establishing major categories that exist across all GCs a foundation is created that can help a company begin to assess what risks they have failed to adequately mitigate. Think of these categories as the starting points for a more custom strategy to mitigate your risk portfolio. For general contractors, the primary exposures are

• Operational Exposure
• Equipment/Site Exposure
• Talent Exposure
• Work Comp/Safety Exposure

Let’s dive into each of these in some more detail.

Operational Exposure

We firmly believe that a healthy organization is a successful one. The way a GC runs their operations on a daily basis is a significant component of overall organizational health. Consequently, faulty operational practices present a significant risk to the short-term and long-term goals of any general contractor. Unfortunately, a trend in the industry is that the success of contractors often becomes their downfall. In a study conducted by the Surety Information office, it was found that unrealistic growth was the number one cause of failure for contracting businesses [1]. As a company grows, a proper operational foundation will be crucial to prevent becoming a victim of their own success.

Financial Risks

Businesses need to make money, but growth can quickly become unsustainable as a company takes on more than they can handle. As the finances of a company become more complex, an owner may suddenly find themselves feeling more like an accountant than a contractor. Another issue that GCs often face is negative cash flow. If you have more capital going out than coming in, your business could be in trouble. There are several factors that play into cash flow, from late payments to job costing practices. Here are some strategies you may want to consider combatting cash flow issues:

Evaluate Potential Clients

Some clients are simply better than others. Some pay promptly and others might not be able to pay at all. You can decrease your risk by evaluating client credit reports and making a habit of asking other contractors about their experiences with potential clients.

Job Costing Practices

Having an accurate number for how much projects cost is the bread and butter of a successful GC. If you have poor job costing practices, you could end up bidding on projects that won’t end up being profitable at all. In today’s industry, there are plenty of tools for tracking time and managing your projects that can give you a data-driven understanding of how much it will cost to complete a future project. The key here is to be intentional and consistent. If a job’s cost is assessed incorrectly, it will have a serious impact on your bottom line.

Project Management Risk

How you manage your projects is just as important as the financials associated with those projects. A profitable project for a great client could quickly become a problem if it is mismanaged. There are several key components of a project management strategy you need to have locked down:

Change Order Management

Change orders can be the bane of completing a project on budget. While some changes are small, some can have a huge impact. Make sure to have contractual safety nets built in for big changes to a project, so you can ensure that you can charge where necessary. Communication will be a key component of change order management. Make sure you have open and clear lines of communication with stakeholders and document EVERYTHING. That way when you and any stakeholder (internal or external) have your wires crossed, you can go back to the documents to get everyone back on the same page.

Dealing with Subcontractors

Depending on the size of the job, you may end up working with subcontractors. If a subcontractor fails to perform on a project, the primary GC is facing serious exposure. While no subcontractor walks into a job wanting to default on the work, it happens more often than it should. GCs need to be proactive when it comes to their subcontractors. It won’t be good enough to react when a subcontractor backs out or forces you to terminate them. A good starting point will be prequalifying your subcontractors, doing your best to determine which of them will be able to handle the project you are working on before taking their bids. You should also consistently monitor subcontractors on active projects: you won’t see warning signs of things getting off track if you aren’t looking for them.

Contractual Risk

As time goes on, owners are starting to shift more and more liability to contractors with subtle changes to contract language. Most common is the waiver of the exclusive remedy provision of the Workers’ Compensation Act, opening you up to a personal injury liability lawsuit [2]. If you aren’t carefully examining your contracts, now is the time to start. The wrong language could come back to bite you.

Equipment and Jobsite Exposure

Like most contractors, GCs have a significant exposure when it comes to the specialized equipment required to complete their work and the security of the jobsite. Estimates show that there are approximately $1 billion a year of losses due to theft and vandalism on jobsites [3]. Ensuring the security of a site is a crucial component of any risk mitigation strategy for GCs. Here are some basic components of site security — the bare minimum you should have in place to protect your work and assets:

• Lighting in place during off hours
• Secure perimeters with temporary fencing
• Utilize theft deterrents and cameras where necessary
• Document and track site inventory daily

Additionally, specialized tools and heavy equipment come with a price tag and are necessary to the proper completion of a job. Just a few examples of these tools and equipment would be jackhammers, concrete mixers, excavators, skid steers and more. While many GCs have insurance to protect against loss or theft, they often fail to realize that exposure isn’t limited to the cost of replacing tools.

Lost Productivity

Some specialized equipment, on top of being expensive, may have a long lead time for replacement or maintenance. This is especially true if you do any work that requires custom machinery or equipment. If your business relies on your equipment but does not have a replacement/backup plan in place, you could face long periods of downtime and be unable to complete jobs. If you are reliant on any individual piece of equipment, carefully consider what could happen if it stopped working.

Malfunction

Equipment that is improperly maintained can pose a liability that could cost your company more than replacement costs. Imagine your worker goes into the field and uses a skid steer with brakes that are old and in a bit of disrepair. Not only is that employee at risk of injury but he is endangering everyone on the jobsite. Add to that the liability of faulty equipment resulting in your crews completing a job improperly and creating future hazards that could cause property damage, injury, and more. It is important to have a strategy in place to ensure that inventory is not only safe from loss but maintained properly as well.

Talent Exposure

Let’s talk about talent. In skill-based trades across the board, talent acquisition and retention has become a major point of concern. Electricians, plumbers, and contractors alike are faced with a shrinking talent pool and an aging workforce. The Associated General Contractors of America conducted a study in 2018 that brought several critical concerns to light in the industry [4]. Here are some highlights:

• 78% of GCs reported having issues finding qualified workers for open roles
• 21% of the workforce is 55 and older
• Just 9% of the workforce is younger than 24
• Industry has over 200k job openings to fill
• GCs have resorted to hiring unqualified candidates and have less experience in the field

Almost 4 out of 5 GCs are struggling to find good employees. We see this with our clients as well. We conducted a survey of skilled trade clients and when asked what the biggest challenge facing their business was, attracting and keeping talent was almost every company’s primary concern. This issue is somewhat of a pandemic for trade jobs right now. And the risks are very real. Operationally, having limited crew sizes can impact the ability of an organization to take on additional work, and could even slow down the work on current projects. This is compounded by the fact that GCs are putting employees in the field with inadequate experience to try and meet work demands. This opens them up to the risk of work defects, injuries due to improper jobsite behavior, and more. This situation begs the question: what can a GC do to attract and retain high quality talent?

Meet the Competition

Let’s face the facts: GCs are going to have to compete for talent in the marketplace. There are a lot of companies vying for a smaller pool of high-quality employees. Examine your pay and benefits and compare it to your local competition. If there is a significant disparity, you will be at a disadvantage both in attracting new talent and retaining your current team. If you realize you might need to raise your payroll costs and the thought seems daunting, consider this: the cost of losing key project managers or workers could be far more than the increase in your payroll. If key talent leaves there is a possibility of work stalling, lost productivity, training and hiring costs for replacements and more.

It’s Not All About the Money

Salary and benefits matter. However, they are only one piece of the solution to a talent problem. Research by the Society of Human Resource Management has shown that one of the major components in employee attraction and retention is a cultural one. Employees who feel appreciated, engaged, and aligned with their leaders and organization are less likely to move on [5]. Author and business consultant Marcus Buckingham put it like this: “People leave managers, not companies.” While changing the culture of your company may seem like a taller task than simply raising a salary there are several compelling reasons to invest in your culture. Healthy organizations are the most successful organizations. McKinsey and Co., the world’s leading voice on Organizational Health, has tracked the metrics of the top performing organizations in the world for years. The one thing they had in common? They scored at the top of an index that included employee engagement, organizational alignment, and strong leadership practices. If you need a bit more convincing, check out this piece we wrote on why it is vital for companies to be healthy.

Safety Exposure

Across all skill-based trades, companies face a significant exposure caused by a lack of safety. GCs are no exception. The average jobsite provides ample risk of injury — from a slipping hammer hitting a hand to a tool falling off of scaffolding and hitting a passer-by. It is important to note that while many GCs carry workers comp to cover injuries to employees, that may not be mitigating all the risks they face. An example of additional liability could come from OSHA sanctions. An example of this was a contractor who tragically had an employee fall to his death on the job. An OSHA investigation concluded that the employer had exposed their employees to unsafe conditions, and that came with over $170,000 in fines [6]. The point is this: the way to mitigating the risk of injury isn’t getting coverage, it is getting safer. To create lasting improvement across your organization will take more than a poster or a training session here or there. It will require a shift in your culture that embeds safety into your organizational identity. If you are interested in learning more about how safety can change your organization check out our post on how safety and insurance work together.

Where should you start?

If you are a GC and you want to get serious about managing risk, you may find yourself asking where you should start. Maybe one of the risk categories stands out as something you haven’t considered before. Or perhaps, you need improvements to your risk management strategy across the board. Risk management is a process, and it will take time to assess your risk, develop strategies, and then begin taking steps to change.

Regardless of where you are in the process, we would love to learn more about you and your organization. Let’s have a conversation about how your organization can transform its culture and risk portfolio. Click here to learn more.

References:

1. ModernContractorSolutions. Why Contractors Fail. Washington D.C.; Surety Information Office. 2007. https://suretyinfo.org/pdf/WhyContractorsFailMCS.pdf
2. Demberger, A. 11 Critical Risks Facing the Construction Industry. Risk & Insurance. 2020. https://riskandinsurance.com/11-critical-risks-facing-the-construction-industry
3. Chinn, S. 8 Construction Risks Facing the Construction Industry and How to Reduce. eSUB Construction Software. 2020. https://esub.com/blog/8-construction-risks-facing-the-construction-industry-and-how-to-reduce/
4. AGC. SEVENTY-FIVE PERCENT OF CONSTRUCTION FIRMS PLAN TO EXPAND HEADCOUNT IN 2018. Associated General Contractors of America. 2018. https://www.agc.org/news/2018/01/03/seventy-five-percent-construction-firms-plan-expand-headcount-2018-contractors-are-0.
5. SHRM. Managing for Employee Retention. SHRM. 2021, July 21. https://www.shrm.org/resourcesandtools/tools-and-samples/toolkits/pages/managingforemployeeretention.aspx.
6. Hughes-Barnes, H. 8 Construction Risks and How Contractors Can Avoid Them. ClockShark. 2021, March 4. https://www.clockshark.com/Blog/the-10-biggest-risks-facing-construction-contractors.