Risk Mitigation

Managing and Mitigating Subcontractor Default Risks

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“One of the biggest inherent risks general contractors and construction managers face as they build projects is the risk of a subcontractor default. A subcontractor’s failure to perform can add cost, delay a job, and damage the reputation of a contractor and owner. Not all defaults are preventable, but sound prequalification and management practices can reduce the risk of default and mitigate the severity of the defaults that happen.

First and foremost, selecting the right subcontractor for the work gives contractors the best chance for success. Selection involves prescreening subcontractors across a wide variety of criteria.”

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No RX for Risk

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“Today’s risk managers must be as agile and dynamic as the industry and armed with a healthy knowledge of construction practices, the latest technologies, industry trends and the ever-changing, project specific details.

Insurance and bonding are still important, but the profession is expanding beyond those two areas, says Mike Kennedy, general counsel, Associated General Contractors of America. “What’s changing are the metrics for risk management, per se,” he says. “What contractors want to know is, if it’s possible to develop practical risk-mitigation strategies in a world where surety bonds can’t protect them from all the significant risk they face, as well as how to manage the risk they retain.”

Construction has changed dramatically in the past 20 to 25 years. Not only is business more challenging in the current economy, contractors also face unknown risk with new materials (think green construction) and technologies (building information modeling and other, cyber-based innovations).

“The whole point of this is to create tools to elevate the awareness of risk so we can analyze, create specific mitigations and put [ourselves] in a better place to manage that risk or decrease the likelihood and severity of an event if it does occur.”

Click here for more information on how Assurance can assist your company in managing risk.

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Risk Management Tip of the Month: Go with your gut.

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Do you ever get that feeling that something just isn’t right? That feeling when even though there is no definite proof that the feeling is justified, you just know that something is just off. Recently I was faced with a situation where something just didn’t seem right. But, in the world I work in, there are no gray areas. Either something is, or something is not. I know I’m being a little vague. So, before I continue on that tip, let me give you an example.

Some of the services we offer our clients include collecting and verifying the certificates of insurance of our clients’ subcontractors, contractors and vendors. With that, it is very black and white. Does the business have a minimum of $1,000,000 of general liability insurance coverage? Yes. Does the business have general liability insurance coverage per project? No. See what I mean? Black and white, no gray area there.

However, when I got that feeling, I was reminded of the one thing that no black and white result on any of our screening reports will ever be able to do.

Risk Management Tip of the Month: Listen to your gut.

We all have it. That 6^th sense that is inside each of us, our intuition, our “gut” that should be listened to, no matter what statistics or other black and white data tell you. Even though you might be defying logic, sometimes you will get that feeling that something is off. Don’t make the mistake of ignoring it.

How does this mitigate risk? Well, ever thought of working with someone, or hiring someone to be a consultant or a personal trainer when you had that feeling that something wasn’t right and dismissed it. I’ll bet you were right, and if you haven’t by now, you will know soon that the decision you made and the consequences of not listening to yourself could have been avoided. I have had consequences that have cost time and money to undo what could have been avoided altogether.

Now, in certain business scenarios, you might not always be able to justify to your boss, or your employees, or your clients as to why you are or are not doing something. But chances are they have made some decisions based on that feeling as well. Trust me on this, and trust yourself.

Solid Risk Management Must Go ‘Beyond Checklists’

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“One telling section of the report came from in-depth interviews with 15 risk experts at the surveyed companies. When gauging the risk inherent in a construction project, the most commonly recognized measures are the ability to finish on time and within budget, says the report.”
Manage your project risk to the fullest extent possible in order to be successful. There are too many risks today to not have a formal risk management system in place for your company.

Click here for more information on how Assurance can assist your company in managing risk.

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Wyoming wind farm builder wins lawsuit against subcontractor

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“After Tetra Tech paid hundreds of thousands of dollars to some of those vendors and subcontractors, it learned that Herling owed more than it represented, according to court records. On Sept. 13, Jerry Herling Construction removed its equipment from the project sites, and Tetra Tech terminated the subcontract agreements three days later.”

Assurance Screening offers pre-qualification screening services that include: project reference checks, bankruptcy, lien, and judgment checks, and much more. Work with Assurance and Be Sure.

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Do we really have to cut loose?

by Karen · Comments 0

As I am contemplating whether or not the new star of “Footloose” has six degrees of separation to Kevin Bacon, the Kenny Loggins’ title song starts playing in my head. Because of that, I start to think. Do we really have to cut loose? And because I can somehow relate an obscure reference to what we see here at Assurance, I can tell you the answer. When it relates to how our current lines of thinking keep us from implementing needed change, or when we are unhappy about a specific result we are getting in our organization, the answer of course is yes.

Cut loose from the way things have always been.

Especially, if you know it isn’t working. I can’t tell you how many times we meet with prospective clients who tell us they “need to implement something different soon”, and then months and months go by without any changes. There is a prospect we have been talking with that will send us email after email about different subcontractors they have used which end up failing. And we always ask them when they are going to be ready to change? We can never mitigate away all risk, but putting different systems and checkpoints in place can decrease the frequency of which our clients are affected by beginning with a more diligent selection process at the start. Soon never happens soon enough, and sometimes turns into never.

Cut loose from the fear of what might happen.

If you are afraid of repeating the same issues and mistakes, be afraid instead of what will surely happen again if no change is implemented. If there is a giant elephant in the room, are you going to continue to ignore it while it stomps all over your profits or reputation? How many times has your organization worked with a vendor or subcontractor for years and “felt like you knew them”, to only have them suddenly be gone? That sting hurts, however we see a lot of firms who are still completing their qualification process in the same ways they have done in the past. Remember, the partnership you build with your subcontractors and vendors is a synergy. They must trust in you that if they contract to you, you will fulfill your end of the bargain by paying them what is due. All you would be doing is implementing an updated system to make sure they can fulfill their end. How many of you feel like you may be “insulting” them if you ask them to go through a more detailed qualification process? If you know your system has gaps, it is time to do something about it, and delete out the fear of the unknown.

Going back to the beginning, with the degrees of separation from Kevin Bacon question, I will end this post with a fun little fact about myself. I am actually two degrees of separation from Kevin Bacon. If you get through this, and are interested in how it is so, feel free to email me at Karen@proqualverified.com. I’d be happy to share.

Begin with the end in mind.

by Karen · Comments 0

When our team at Assurance Screening and I first decided to begin my blog, we thought of what we wanted it to become. We decided that in the beginning, we would use it as a good way to get out monthly risk management tips, and my weekly thoughts and observations regarding the types of services we provide our clients, the feedback we are getting regarding our client’s use of our services, and thoughts around risk management principles within a multitude of areas. In true Steven Covey form, we are beginning with the end in mind.

Risk Management Tip of the Month: Begin with the end in mind.

When we talk about this, what we are essentially doing is visualizing the end result of your organizational desires. When Jason Terry with the Dallas Mavericks tattooed himself with the NBA Championship trophy, his end, and the end goal of the Dallas Mavericks was to have that trophy. They as a team took the necessary steps every day, with every practice, and during every game to mentally and physically accomplish what they needed to do to achieve their goal. Believe it or not, this same principle can be employed for something as fun and exciting as vendor and subcontractor risk mitigation and compliance.

If your goal is to mitigate the risks you are taking with your current subcontractor and vendor pool to minimize the costs your organization faces with the current ineffectiveness of your current processes, then that is your end. The first step is to assess where you are at. Consider answering the following for your organization:

Do you have a standardized subcontractor or vendor qualification form? If yes, are you requiring each subcontractor or vendor to update their information at least annually?
Who is responsible, and what processes do you have in place to verify this data that is received to be factual?
Are you confident that all your subcontractors and vendors carry the required amount and types of insurance that your organization requires?
Where in your organization does “the buck stop”? If something is missed, who is ultimately held responsible for the added costs, and delayed projects?

Once you know the gaps, you can define what it looks like when your gaps are no longer in your way. Too many organizations focus on sales and additions to the bottom line, and then forget about those issues that can take away from profits, like vendor and subcontractor defaults until something happens. Being reactive versus proactive rarely gets any organization to where they want to be in the end. Focus on what you want, decide how it will happen, and be proactive on defining out the responsibilities regarding who will be responsible for what. If you do that, then you have a pretty good start.