Risk Management: Count All The Costs
Commentary on the International Risk Management Institute construction conference
Michelle Luster, risk management director of Swinerton Inc., spoke at the International Risk Management construction conference in Las Vegas in November. Photo: Richard Korman for ENR
When I go to conferences, I always end up finding new reasons to admire the construction industry.
Sometimes it is for good architectural and engineering design, other times it’s a contractor’s logistical genius or a good business plan. But I never lose my fascination for how companies navigate the various risks of what can go wrong with a project or a company—the ability to make more right decisions and fewer bad ones to keep going.
The recent construction conference in Las Vegas held by the International Risk Management Institute added to my appreciation. Insurance is vital and complex, but what grabbed me was a session on assessing the true cost of construction risks, with its basic message that insurance by itself rarely covers all the costs.
That was made clear by David B. Dolnick, a risk management consultant, who asked the audience to make the broadest possible assessment of all the time, money and energy associated with a risk or insurance claim. He urged managers to take everything into account, including retention and deductibles, the costs of being self-insured or uninsured and the staff time it takes to deal with a claim.
How many times have you looked at the risk management challenge as one involving only risk finance or risk transfer to another party? Dolnick suggested managers work with an actuary to decide which uninsured risks their companies should cover in a reserve fund.
My past impression had been that this kind of “go the extra mile” planning and management was only done at large organizations, but considering the tumultuous times we live in—with inflation here and a possible recession on the way—I had to agree with Dolnick when he said that “risk management is good management.”
The idea that insurance is not the beginning nor the end of risk management isn’t always an easy sell. Michelle Luster, risk management director of contractor Swinerton Inc., agreed.
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“I get into conversations with the project team about whether something is insurable, and I say, ‘let’s just say I could buy insurance for everything’ required under a contract,” she said. “Then I answer, ‘do you really want that? Is that the best way to use our funds and our potential profit on the project? Doesn’t it make more sense to have some strategies in place, and relationships, and good subcontractor partners, to manage those risks?’”
Contractual risks will outstrip your coverage every single time, but many companies are unprepared to manage it, Luster said.
“I wish I had a dollar every time one of our A-E partners tells us that their indemnity in the contract is more than their professional liability will cover. I say, ‘you are absolutely right and I appreciate you reading our contract so closely. But here it is.’”
Tough Contract Terms
A final breath of fresh conference air came from Michael B. Murphy, chairman of Donald B. Murphy Contractors Inc., a Federal Way, Wash.-based general, civil and specialty geotechnical contractor that often works as a subcontractor.
Murphy said prime contractors sometimes boldly seek to shift risk to his company (sometimes it is flowed down from an owner's risk-shifting tactics). He held up a thick contract as an example. “It says, ‘you have to do the work, we don’t have to pay you, and if anything goes wrong, I can charge you for it.’” If a contract is that abusive, Murphy said, his firm will be a tough negotiator.
As for insurance coverage, one of Murphy’s practices is to send out proposals with a letter attached that contains a 65-item list that he compared to insurance policy exclusions and which are based on unpriced risks from the company's past work that each cost $100,000 or more. That way, the prime contractor knows what it is getting and the companies can use the letter as a point of departure. Said Murphy: “If you want to remove that, okay, then we can say, here’s what it’s going to cost you.”
That approach may not work with a state or city agency, Murphy said, but “at least it gives you a position to negotiate and price what you didn’t put in the bid.”
As the economy progresses toward 2023, I suggest taking to heart wisdom about costs, contracts, the limits of insurance and the forbearance to recognize and resist risk that you can’t control or don’t want to finance.
After listening to this session at the risk conference, I was more convinced than ever that risk management was not only good management but also close to the heart of construction—requiring talent, creativity and spine if you intend to prosper year after year.
