Best Practices

While the past decade has seen a significant shift in the way that many in the construction industry view risk management, implementing a successful corporate-wide risk management program still poses a challenge. According to KPMG’s 2013 Global Construction Survey, 77 percent of respondents reported underperforming projects due to delays, poor estimating processes and failed risk management processes. A separate survey from risk management society RIMS found that only 21 percent of companies across all industries and sectors even have a fully-integrated risk management program. 

These challenges are especially apparent for growing project developers and construction companies, many of which are just beginning to increase their risk exposure across multiple and increasingly large-scale projects.  For these types of firms, formal risk programs may not yet exist and discussions of managing risk may be focused solely on the purchasing of insurance.  

Unfortunately, this approach creates a disconnect between insurance purchasing decisions and the actual risks to which these developers and construction companies are exposed.  Having a more integrated view not only allows them to make smarter decisions about their insurance, but it has the potential to drive down insurance premiums and lower their overall cost of risk in the long run.  So how can these firms avoid this disconnect? Consider the following three-step process: evaluate, educate and engage. 

Evaluate Risk Regularly

Aligning risk profiles with insurance decisions shouldn’t be done only at the beginning of a project or development. In order to be most effective on an ongoing basis, developers and construction companies must have a formal process in place to continually evaluate emerging project risks. Depending on the particulars of a project and the challenges that are encountered, the risks may change drastically over time. 

One strategy to address this is to set fixed times within the project schedule for risk assessments. However, even a set schedule may not be flexible enough to respond to rapid changes within a project lifecycle. Firms should consider implementing an ongoing monitoring system and be cognizant of how they can mobilize their teams to quickly re-assess risk as the project progresses. 

Risk managers should communicate frequently with key project leaders as well as their insurance broker to discuss how specifically to address new risks and how they could impact insurance coverage. Having these clear and regular processes in place before a project begins ensures that the developer and builder are and remain in the most protected position they can be.

Educate Your People

A firm’s risk management message and corporate goals may be top-down functions, but for builders and developers to truly mitigate their risks, they must build a culture that recognizes and addresses risks at every level within the organization.  This includes project-specific personnel as well as corporate and administrative staff.  All corporate departments, from operations and finance to human resources and legal, need to be aware of the risks associated with project delivery.  

In construction, one of the biggest and most controllable risks is the safety of employees. Builders can drive down insurance costs significantly if they have a strong safety culture within their organization that’s backed up by specific programs and processes. At a base level, this can be achieved by developing formal and ongoing safety training programs. These programs educate employees, workers and supervisors on how to make smarter decisions in the field that lead to safer outcomes and fewer injury claims.  At a higher level, executives need to educate themselves and each other on the overall benefits of a more robust risk management function and understand the value that it can bring to an organization. 

Engage in Contract Process

A fundamental tenet of risk management is risk transfer. Understanding and evaluating risk provides a particular advantage in the insurance arena when looking at how contracts are structured and which parties assume liability. While a contract may seem like a formality that must be signed before work can commence, builders and developers need to be engaged in the process of structuring contracts to reduce their exposures to risk.  

By working closely with their own insurance broker as well as property owners and all subcontractors, builders can ensure that the risk of loss is properly distributed among the parties and should be able to shift some of that risk away from themselves.  When parties bear a disproportionate amount of the risk for a project, they face costly disputes if the project faces delays, claims or interruptions. 

Insurance is one of the most critical aspects, if not the most important aspect, of risk management. However, insurance cannot be viewed as the only solution in mitigating risks. There are a large number of other strategies, both traditional and alternative, that should be considered and executed. When construction companies on the verge of growth take a look at insurance in the context of risk, they not only drive down insurance premiums and lower their overall cost of risk, they experience better overall business outcomes. 

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