June 2011

In any industry, there will always be certain costs associated with doing business. However, construction firms should never consider construction deficits as part of these unavoidable costs. Construction deficits are an ever-growing problem in the construction industry, but are definitely not unsolvable. No problem can be solved without understanding why it’s occurring in the first place. Here are three of the main contributing factors:

1. Poor Site Selection. Many contractors, especially those in urban areas, have witnessed rapid growth spurts claim the majority of the highly-desirable sites. This leaves contractors choosing from what’s left and possibly choosing sites that aren’t exactly optimal for the construction.

2. Poor Soil Analysis. An adequate soil analysis should include collecting and testing soil samples for the presence of sinkholes, the presence of sand, and the degree of compaction. The overall purpose of soil analysis of a site is to make sure that the soil present will be able to support and bear the load of the expected construction project. Construction firms not doing such verifications are leaving themselves wide open for a number of legal issues.

3. Defects. Structural and material defects are also major contributors to deficits. For example, an improperly set foundation can result in the weight of the building not being supported correctly and can make the walls more likely to crack. A firm might also find trouble when they cut corners on materials, as this can lead to faulty construction.

The above three factors are the basis for construction lawsuits alleging negligence. The legal definition of negligence is a failure to use reasonable care or meet the recognized standard of care. To a construction firm, the reasonable care is in building a structure at the performance level expected of this type of work by the community and doing so in a professional manner. This doesn’t mean that a construction firm must warranty or guarantee that a construction project will be exactly perfect, but it does mean that a contractor must take the appropriate steps to ensure the absence of defects.

Taking reasonable care to ensure against defects sounds straightforward. However, contractors often find that the pressure to get a job done faster and cheaper leaves them in a vulnerable position as they might try to meet these goals by cutting corners, skipping vital checks, using cheaper and inferior materials, or using cheaper contractors with a questionable work ethic or history of inferior work.

Even if a General Contractors Liability policy is in place, contractors shouldn’t dismiss the seriousness of negligent claims. Depending on the particular project, a contractor proven negligent could face serious financial repercussions. Yes, the liability policy will cover physical damage to the property and any resulting loss of function, but insurers are minimizing their risk by adding exclusions for areas like mold damage, multi-layered wall systems, earth movement, and so on. Another problem is the delay between when the defect occurs and the resulting injury/damage, which leads insurers to question coverage. A liability policy written on a claims made basis will not provide coverage unless the claim is reported or made during the set policy period.

To counteract the above risks, contractors should set their standards and make sure that everyone involved with the project understands and agrees to the standards before ever starting a job. A quality control system should be used throughout the project to continuously monitor and inspect every aspect of the project – from whether or not standards are being met and fines for such deliberate failures -to- finding and correcting defects in a timely manner. Remember, defects should be handled as soon as possible and not be put off until they become a lawsuit. Contractors without a quality control system in place don’t have any reliable way to regulate exactly how workers are performing on the site. From a legal standpoint, showing that a formal quality control system was in place is also very beneficial if a lawsuit should happen to occur.

Weather forecasters say a hurricane is coming that will threaten the half-completed multi-million dollar industrial building a contractor is erecting. After completion of a new 20-story hotel, the media reports that executives for the general contractor rigged bids so that subcontractors in which they had financial interests got the jobs. A scaffold collapses with five men on it, killing one and severely injuring the others. These are all examples of crises that could strike a construction business. If not managed properly, a crisis can cause a firm great damage and even put it out of business.

Good crisis management involves six stages:

1. Defining what a crisis is for the contractor. It could be a catastrophic injury, a loss of financing for a project, a major fire, the loss of a key employee, the failure of a vendor in the supply chain, or a strike. Whatever form it takes, it is an event that can cause significant harm for the contractor.
2. Assuming that a crisis will occur and anticipating it. Managers look at worst-case scenarios and predict how likely they are to occur. They can then take steps to prevent them from happening. These steps might include safety measures, arranging for backup suppliers, protecting the structure against the elements, and financial controls.
3. Recognizing a crisis as it is occurring. If managers have planned for the possibility of crises during the previous phase, they will be more apt to spot them when they happen. Since a number of people with different roles in the project might be able to identify things that are going wrong, managers should seek updates from a variety of participants.
4. Managing the crisis. The key to crisis management is advance planning. A sound plan will include: Who will participate in managing the crisis and what their responsibilities will be? How individuals will communicate with each other and how the contractor will communicate with others, such as customers, vendors, regulators and the media. The resources that will be available to confront the crisis. What the organization will do to get back to its normal operating state.
5. Resolving the crisis. This involves implementing the plan, gathering information about the situation, analyzing it, weighing options, choosing one or more options and putting them into effect. Managers and other leaders must effectively deal with the emotions involved, including confusion, fear, anxiety and frustration. Because crisis situations evolve rapidly, leaders will have to make quick decisions and be ready to change course if need be.
6. Learning from the crisis. After the situation has reached a resolution, the participants reflect on what they learned during the crisis, what worked and what the firm should do differently the next time it faces an emergency. Questions they should ask include:

How effective was the pre-crisis planning? Did it anticipate the problems actually faced or was the firm left unprepared? Were there sufficient financial, material and human resources to handle the crisis? How effective was the communications process? Did team members get the information they needed when they needed it? Did the firm keep other organizations and entities fully informed? How can the process be improved? Were the decisions made the right ones? If not, why not? What can the contractor do next time to improve decision-making?

Check with one of our insurance agents to see if your insurance companies have consultants available to help put together a crisis plan. Because a solid plan will help limit the size of an insured loss, companies are usually eager to help. With preparation, you can survive and even thrive after a crisis.

Pollution and environmental exposure risks on site and during transfer and disposal, such as toxic mold, the disposal of contaminated soil, and broken pipelines releasing toxic materials, are major construction concerns. When such incidents happen, a contractor’s reputation and livelihood can be irreversibly impacted.

Contractors Pollution Liability (CPL) is a type of insurance designed to protect contractors against the liability issues and financial losses that result from such environmental incidents. This insurance covers an array of environmental and pollution risks that are common to construction projects and is considered an appropriate coverage whether a firm is a trade contractor, such as those specializing in paving or HVAC; a general contractor; remediation contractor; or a contractor doing specialized work, such as tank installation or drilling. Contractors Pollution Liability insurance is available to cover areas like pollution incidences that result in bodily injury, third-party property damage, or remediation costs. Comprehensive policies can even be customized to provide pollution risk coverage to an entire project, which would include off-site transportation and all contractors involved in the project. Most Contractors Pollution Liability policies are written on a claims-made basis. This basis limits the insurer’s risk for unknown future liabilities since it means the policy only pays claims occurring and being filed during the period covered by the policy.

Clearly, Contractors Pollution Liability insurance can provide invaluable protection against environmental-related financial losses. That said, such a policy doesn’t prevent environmental incidents from occurring in the first place. To help prevent environmental incidences and protect hard-earned reputations, contractors should additionally adopt effective environmental risk management practices.

Creating an environmental risk profile will be one of the most important factors when taking steps toward risk management. This allows the firm to identify possible loss exposures and risk areas by thoroughly reviewing their administrative control documents. While some firms opt to conduct the profile in-house, many prefer the expertise and outsider’s perspective offered by a professional environmental consultant. In any event, documents related to the following areas should be reviewed during the development of an environmental risk profile:

• Contractors Pollution Liability policies
• Standard client agreements
• All mold prevention programs
• All environmental management programs
• Subcontractor’s environmental/mold management/prevention systems
• Language of subcontractor agreements
• Environmental data searches of job sites
• Hazard communication programs
• Quality assurance programs
• Internal health and safety programs, incident response protocols, and training protocols
• Trends, history, corrective measures, and employee communications related to environmental losses
• Environmental assessments for all leased and owned properties

Once the above documentation is assessed, the firm can identify strategies to reduce, if not eliminate, their exposures to environmental risks. Combining risk management with a Contractors Pollution Liability policy can help contractors reduce their risk, but still be covered in case the unexpected happens.