If you take a drive through southern California, it’s exciting to see the number of tower cranes visible from the freeways. According to McGraw Hill’s Construction Market Forecast for 2014, they are predicting double digit increases in residential and commercial construction starts for 2014 over 2013. This is great news for developers and contractors alike as the job creation and revenue generation aspects of these projects will help continue the overall rebound of our southern California economy. However, as more projects become available for contractors to compete, it is easy to forget some fundamentals of construction risk management as you begin to think about which construction partners will help get your asset built and into revenue-generating mode.
Even now more than ever, real estate developers/owners should include construction risk management as an important part of their overall development protocols. Developer/owners are encouraged to work closer or even partner with their construction manager, general contractor, lender and risk advisory team to ensure a coordinated approach to risk management. Taking this proactive approach to managing the construction phase of your development could help identify red flags and potentially help mitigate any derailments of the project. Red flags can come in many shapes and forms, but they all have the same result; they could adversely impact the success of a project.
Let’s take a look at some practical construction risk management techniques that can reduce the likelihood of a project getting off track.
Have a well-defined plan and budget. It is imperative to have more than just a vision of what your development plan will encompass. At the onset, it will be important to be thoughtful about scope of work, budget and overall design for the project. This will help set the stage for contractors to adequately and effectively bid on your project. Incorporate these expectations into a well-defined contract for execution.
Qualify the contractor. There are a lot of contractors that could potentially build your asset. The decision on which construction partner you choose should be more than the lowest bid received from the contracting community. The contractor’s management team, their approach to quality and workmanship, and their experience and performance on other projects should be additional considerations.
Implement an effective and efficient insurance/risk transfer program. Insurance is just one part of an overall risk management program. By sitting down with your contracting partners, lenders and risk advisory team, a plan for who will manage certain risks of the project can be determined and appropriate levels of risk transfer can be procured in the marketplace. Clear communication of these goals is imperative for an effective risk transfer program to work for all parties. This is one area that often gets left to the last minute and done without thoughtful consideration of all stakeholders. A risk transfer program can be structured in several different ways to achieve the same goal– build the project on time and on budget. Discussions should include third party liability, environmental liability, builder’s risk/course of construction, workers’ compensation, automobile liability and professional liability. Other concerns may include transit risk and political risk.
Make Quality your middle name. Quality Control/Quality Assurance programs should be part of the standard operating model for the project. An effective QC/QA plan should be the responsibility of all workers on the project and should not rest solely on the shoulders of one individual. The objectives for each project are achieved through the documented planning review. Implementation and control of all activities that could affect the overall quality of the project. This will include photographic as well as written documentation of certain milestones from a third-party provider.
Stay involved. It is important for the developer owner to stay involved once the construction contracts have been signed. Regular status meetings on project delivery along with any outstanding design issues, claims or potential future change orders will help keep communication lines open. Mitigating tactics can be employed if everyone on the project team is aware of a potential issue. By keeping in constant contact, unanticipated project delays may be avoided.
A project derailment can cost time and money. The techniques outlined above are just a few of the many ways owners/developers can approach construction risk management to increase the likelihood their project will be built with quality workmanship and on time and on budget. Marsh’s Real Estate, Construction and Consulting practices are structured to work together with you and your project team in identifying project risks and developing a plan around how to manage them effectively with efficient use of capital.