As we prepare for Pivot to Profit (P2P) in Atlanta this year, our attention turns to a very important session on contract administration and project risk management. This workshop will focus on risk, along with the variable and controllable steps you can take.
Do you understand all your project provisions? Are you using “good paper” for your service agreements and project engagements? Does your company conduct large project reviews prior to quoting and signing contracts? Have you seen increased ownership guarantee demands?
“De-risking” a project starts with a thorough understanding of its general and supplementary conditions. The four Ps—project, product, people, and payment—are now major risk factors that you can somewhat control through proper contractual language and negotiation of a project’s terms and conditions.
Project Risk Management Factors: The Four Ps
Schedule compression, postponement, or cancellation can all cost you money. To mitigate this risk:
- Have an open discussion with the owner, construction manager, or general contractor to let them know you simply cannot be held responsible for liquidated damages with uncertainty about schedule and accessibility to the project or constraints created by other trades.
- If the schedule is compressed, then you cannot agree to no change orders or additional billing for overtime.
- If the project is terminated, then you need to receive compensation for work performed plus the non-labor expenses associated with the project (material restocking, freight, etc.).
Supply chain issues are creating delays beyond your control. To mitigate this risk:
- Try your hardest to communicate concerns, get written approval for down payments, and store materials early in anticipation. Don’t order anything for a job without an executed contract.
- Expand your contract language beyond “work completed” to include all expenditures related to the project if it’s cancelled or delayed.
- Be open and transparent about the fact that the products specified and approved on submittals may have to be substituted temporarily or, in some cases, that a surcharge or additional expedited charge may be required. You can’t eat these costs!
- Procurement is a daily priority. We don’t suggest hoarding, but you may want to take a three-month investigative look at your pipeline, your backlog, and the work in progress (WIP) to see what the most common and known materials look like in terms of delivery. As Dr. Chris Kuehl, chief economist, put it: “Just-in-time” ordering is a thing of the past (for now, anyway).
The project is ready, and the materials finally arrived—but now your labor resources are committed to other projects. What hasn’t changed (surprise) is the completion deadline. To mitigate this risk:
- If you think you’ll need to sub out any portion of the work, attempt to strike out contract language that requires your employees to perform it.
- Get in writing the prevailing wage determination on the project and know your SOC before putting in your final price. Don’t allow a crossed-out certified payroll provision.
- If the schedule moves, then you make your move. Your move is to not allow schedule compression to force unbilled overtime. Strike any language that triggers a default until things stabilize if the project is not properly staffed.
- With skilled workforce shortages, we often see 20%+ turnover in field staff. You can’t let lengthy approval and signoff delays prevent you from starting on time. Likewise, know the exact safety provisions of the site well in advance in case additional OSHA training is required before starting.
Cash is king, and payment cycles aren’t improving. To mitigate this risk:
- The profitability of your projects is largely measured by maintaining margin, labor accuracy, and efficiency, along with a predictable cash conversion cycle. You have a responsibility to do everything in your power to eliminate the reasons why you shouldn’t be paid. That includes just about everyone in the company.
- Deposits, progress billings, and stored materials are indeed something you can accomplish.
- Never waive your right to file a lien on big projects.
- Watch for retainage delays beyond the normal closeout period.
- When licensing, software, tests, and inspections are within your scope, but the project is contracted with a general contractor or electrical contractor and not the owner, you need to address how this is communicated. The expenses will be ongoing through a post-warranty-period managed services agreement.
A Few Final Project Risk Management Considerations
There are a few other project risk management factors to consider as well that don’t fall within the four Ps:
- On renovation projects, regardless of what your proposal states, the removal, tagging, or connectorization of abandoned cable is your responsibility and is a code requirement. This responsibility must be made clear before you price the project.
- You must have absolute certainty about prevailing wage requirements.
- You should never sign a waiver of subrogation.
- You can’t indemnify the owner, other contractors, or anyone else from liability in case of an accident or workplace situation.
- You should know before pricing if a performance bond or insurance rider are required.
- Until site accessibility, supply chain, and workforce issues return to normal, you simply can’t agree to liquidated damages.
- As always start with a clear scope of work document.
If you want to learn more about these things, be sure to register for NSCA’s Pivot to Profit event. Get details here. –Chuck Wilson, NSCA CEO