Top 5 Risks That Contractors Face

Construction firms face many risks: worksite injuries, skilled labour shortages, cash flow problems, contract disputes, job site theft, defects in workmanship and material, weather delays and supply interruptions, to name just a few.

One study found that construction companies have the lowest survival rate of any type of startup. Only 36.4% were still in business after five years.

Understanding the most serious risks contractors face can help you better appreciate the perils and pitfalls in this field and develop smart risk mitigation strategies. Here are five top risks to be aware of:

• Skilled labour shortages and injuries — The Canadian Construction Association predicts that Canada may lose up to a quarter-million construction workers in the next decade, while job vacancy rates for the industry are already higher than the national average. A skilled labour shortage, an aging workforce and an influx of inexperienced workers are driving up costs and increasing injuries on worksites. Construction continues to lead all industries in the total number of worker deaths each year.
• Construction defect claims — Construction defects are on the rise. Deficiencies run the gamut, from poor workmanship to serious design flaws that can cause property damage, injury and even death. Most contracts have a one-year warranty period, making it hard to reach settlements on latent defects that aren’t evident until years after the work has been completed. In addition, commercial general liability (CGL) policies exclude many types of defects, and some courts have ruled that CGL policies don’t cover construction defects.
• Unrealistic growth. Increasing demand and competition are driving contractors to take on more jobs and bigger projects that are beyond their capacity. Overextension is a major reason why construction firms fail. This can take the form of inexperience with new types of work, expansion into new geographic areas or significant increases in the size of projects.
• Cash flow and accounting problems. Construction is a capital-intensive business, and contractors often find themselves strapped for cash. Construction firms run the risk of becoming overleveraged, tying up working capital in multiple projects and investing in expensive assets like heavy equipment, vehicles and tools. Contractors may underbid a project or fall behind in billing. Or they might not accurately estimate their costs or efficiently procure supplies. As a result, they often encounter financial difficulties.
• Job site risks. Contractors don’t always adequately protect their job sites, exposing workers to injury and leaving property vulnerable to damage or theft. If the site isn’t properly secured, equipment, tools and material may be stolen or damaged. Workers and visitors to the site may be at risk if proper safety standards aren’t followed. In addition, the danger of a fire is quite high on a construction site. All of these risks can result in costly losses and expensive liability exposure.

Warning signs

These are the more consequential risks you’re faced with today, but there are other risks as well. Here are some warning signs that your construction firm may be experiencing:

• Ineffective financial management systems
• Bank lines of credit constantly borrowed to the limit
• Poor estimating or job cost reporting
• Poor project management
• Lack of a comprehensive business plan
• Communication problems

Managing subcontractors

Construction may be risky, but there are measures you can take to protect your company. High among those is managing the risks your subcontractors bring to a project. These exposures can cause immediate, long-term and sometimes irreparable harm to your projects. The following precautions will go a long way toward ensuring your project is satisfactorily completed and your firm is financially strong at the end:

• Vet subcontractors thoroughly before hiring them
• Make sure they are licensed, bonded and insured
• Hold subcontractors to contracts that clearly state job requirements and establish who is liable for what
• Communicate with subcontractors regularly
• Establish a detailed work schedule
• Document job progress

Contact your insurance broker and make sure you have a full array of protection in case things go wrong.

This content is for informational purposes only and not for the purpose of providing, financial, medical or legal advice. You should contact your attorney, doctor, broker or advisor to obtain advice with respect to any particular issue or problem. Read more about our limitation of liability here.