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RISK ARTICLERisk can work for and against you.   

By Heidi Pozzo

Risk. Just hearing it can send chills down your spine. After all, most people see it as a downside. But risk can be a competitive advantage. When you understand what can go wrong in your business, you also will find what you do well. That knowledge will allow you to minimize the impact of downside risks. By finding a point of distinction in managing risk better than your competitors, you have a decisive advantage.

If you haven’t already done so, look at projects that went well and those that didn’t over the last decade. A decade will give you a good sense of what happens during cycles. You may find that when the market is up, you take on different risks than when the market is down. This process cannot be bogged down by politics. It is not about assigning blame to any one person or area of the business. It is to learn and either replicate success or avoid mistakes. 

I’ve reviewed hundreds of projects and found that many of the risks repeat from project to project either positively or negatively. The following are top risks:

Losing your history – In many companies, people move up, move to other companies, retire, etc. In construction, the cycles can be extreme. Many companies take action to reduce the impact of cycles and address risk in the business. Unfortunately, as management changes, those lessons are lost and history repeats itself. It is important to build those lessons into the culture and processes of your company so people not only know what they need to do, but why.

Cash – Understanding how to structure payments so you are always ahead has a significant impact on the overall profitability of your company. Companies that do this well have significantly lower needs for debt and also have learned to weather industry cycles better than competitors.  Many bankers won’t do business with companies in the industry due to the high risk of getting offside with cash. Those who manage cash well have access to capital.

Lump sum projects – The ability to take on a lump sum project should be conditioned on a clear scope and engineering complete or nearly complete. It is critical to have an experienced project manager in that type of project, and a project execution plan that is aligned with the bid/contract. If you have deep experience in these types of projects, it may be a competitive advantage, allowing you to achieve high margins. To incentivize the crew, there should be a bonus shared with the people to align interests. If these conditions are not in place, a lump sum project structure can lead to losses.

Project manager – People make the same mistakes in managing projects as they learn and move up in the ranks. The trick is to start project managers on small, low-risk projects then move them up to increasingly more challenging and larger scopes. You want a PM who has had something go sideways and had to regroup to get the project back on track. One of the single largest factors in projects not going well is a mismatch between the PM and the project scope. 

Soil conditions – Many times contractors take on the risk of soil conditions. You can’t control what is down there and surveys don’t get you all the information you need. Any time a risk is completely outside your control, you should avoid it. That means if the contract puts the responsibility on you, you should take exception to that clause and return the responsibility to the owner.

New technology – There are always hiccups with new technology. Think about your computer or phone. If you get the first release, there are always bugs that get fixed over the course of weeks or months. The same is true for new technology in facilities. You don’t know where the issues will arise, so it is important to contractually avoid responsibility for the hiccups that will occur when dealing with new technology that will surely cause you losses if you have responsibility. Whether it is installation or startup, there are almost always delays. Make sure to protect yourself.

Constrained site – Many times when bids are being put together and negotiated into a contract, the project execution plan is not considered. In the case of a constrained site, many challenges may arise such as accessibility to materials when and where needed, and work flows that create a challenge for efficiently building your project. A keen eye on the construction execution plan should be included as part of the estimating process before getting to a price and contract.

Labor Availability – Depending upon where you are located, this one may seem obvious right now. You’ve likely built increased turnover and higher labor rates into your contracts. This may be an issue when you are at the front end of a cycle and you have a delay in the start date. That delay can put you into a seasonal or cyclical period where labor availability declines and cost increases. Your contract should be clear that delays beyond a certain time frame allows you to adjust your rates and your completion date.

These are the most impactful of the many risks that are regularly experienced in the construction industry. In many of the cases highlighted, top contractors have turned them to competitive advantages. How are you identifying and addressing risks in your business? 

Heidi Pozzo helps leaders grow their businesses in good times and bad. She has a deep background in the construction industry, both as a senior executive and as a consultant. She was recognized by the Portland Business Journal for her work at Longview as CFO of the Year - Large Company. To contact her, visit www.PozzoConsulting.com.

 

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