Risk & financial management
Managing risk is one of the fundamental principles of running a successful business – and failure to properly identify and manage risks is the reason why many good businesses fail.
As the construction industry moves through cycles of boom and bust, many contractors are caught out by sudden increases in costs and massive skill shortages. These conditions can severely delay the completion of jobs, further compounding losses suffered by a contractor who has taken on the risk.
One of the major contributing causes of these massive losses has been the allocation of the majority of risk to the contractor, via the contract document, despite the contractor having very little control over its management. Contractors take on this risk for various reasons – the main one being the hope that issues won’t eventuate.
As a contractor, if you are going to take on the risk, you need to adequately evaluate the associated costs and properly organise your affairs, or face substantial and unrecoverable expenses. You should be particularly careful not to take on an area of risk that you have no control over.
Some areas to look out for include:
- No provision for extensions of time to contractors for inclement weather
- No provision for extensions of time for industrial disruption
- Contractors held responsible for deficiencies associated with the design and documentation provided by the client
- No variations allowed under the contract
- Contractors responsible for adjoining neighbours and boundary issues
- Contractors taking on insurance conditions that cannot be obtained.
It makes sense for risk to be allocated to the party who is best able to manage it. Simply passing the risk on does nothing to protect or advance the interests of any of the involved parties.
Good contract administration can help to reduce contractual risk. Read more about contract administration.
Financial & credit risk management
Financial and credit risk management are also imperative processes. Before the contract is signed, you should ensure that you are satisfied the owner has the financial capacity to pay the contract price – don’t be afraid to ask them for evidence to support this. If in doubt, you should ask them to deposit the money into Master Builders holding account for security of payment.
Preparation of budgets and financial recording processes and procedures are integral for monitoring the financial performance of a project and all the elements involved.
The payments process must specifically include:
- Payment claims
- Contract claims
- Interest payments
- Bank guarantees
- Back charges/set offs