Insights

Avoiding Unnecessary Contractor Risk and other Insights from the 2020 Construction Forecast

The construction industry is full of uncertainties and risk that are out of a contractor's control: rising insurance costs, inherent safety risks, and new digital threats, to name a few. Finding ways to mitigate these risks was the main topic of discussion at the 2020 Construction Forecast, presented by Grassi and Connell Foley this month.

Michael Hochman and William Hughes, two of Grassi's Construction Partners, tackled the industry's biggest areas of risk and exposed the ways contractors are taking on more of it than necessary:

Growing too rapidly – While the growth of your business is an admirable goal, taking on more work than you can handle could have unintended consequences. Know before you bid on a job if you have the systems, employees and finances in place to handle the additional work. Take the time to estimate what the job will cost in both monetary and human capital and assess your lines of credit and cash flow. And while it may be tempting to bring on the latest machinery, equipment or technology to increase your ability to win and complete a job, remember that the bottom line is always more important than the top line. Be realistic – you may find your company is actually more profitable at a lower revenue range without all of the extra expenses and risk.

Not managing change orders – There needs to be adequate levels of oversight over your change orders to ensure they are paid in a timely manner. The longer a change order goes unpaid, the higher the under-billings on the WIP schedule and the greater the likelihood that it will never be paid in full, negatively impacting your bottom line.

Selecting subcontractors on price alone – General contractors should not only be monitoring their own qualifications for a job, but also how their subcontractors are prioritizing safety, complying with employment law and securing adequate insurance coverage. Your subcontractor's liability could become your liability, so do not make this important decision without doing your due diligence first.

Lack of a succession plan – While not unique to the construction industry, succession planning should be a top concern for every privately held company. It is estimated that only 33% of private companies survive in the second generation, and only 13% of those make it through the third. It's never too early to put a succession plan in place, and it can be modified as your company grows and as family or professional situations change.

Assuming your original cybersecurity measures are still adequate – New cyber threats emerge daily, and no company will ever be 100% protected against unknown digital risks. But making cybersecurity an ongoing process with regular monitoring of your company's vulnerabilities, employee awareness and data backup testing will help you prevent as much risk as possible.

Not keeping up with safety best practices – While the nature of the construction industry brings more safety hazards than most, implementing the latest safety trends can increasingly reduce this area of risk. Enhanced employee training, drug screening, and new technologies that track risky behavior or shoulder some of the more physically challenging work are just a few examples.

Thinking there's nothing you can do about rising insurance costs – Some factors that go into calculating the cost of a contractor's insurance policies, such as the location and type of work performed, cannot be altered. But instilling a more safety-conscious culture is attainable and directly linked to reduced accidents, claims and insurance costs. Employee training and safety awareness need to be conducted regularly and with buy-in and endorsement from the highest levels of your organization.

For more information on mitigating contractor risks and other Construction industry trends, please contact Michael Hochman at mhochman@grassicpas.com or William Hughes at whughes@grassicpas.com.
 
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