Schleifer’s Weekly Construction Message
Equitable Assessment of Risk
Last week’s whimsical “letter to the contract” was designed to illuminate the central position that the contract occupies in construction. The “contract” replies to the contractor with this humorous illustration (penned by the same Simplar researcher’s sense of humor).
Dear Client of Choice,
Thank you for your letter and I appreciate you mentioning that you will always need me.
In my defense, you should know that I am doing the best I can, I was written by lawyers.
One Simple Truth
-Everything begins and ends with the contract-
…with the inevitable lawyer in the middle…
Although this humorous illustration brings a wry smile to the face of everyone involved in construction contracting, it is not our intention to lampoon lawyers, but rather to illustrate how the construction contract has become a litigation tool between contentious parties.
The question for contractors is how they allowed a positive contract for construction services to become a litigation over – who did what to whom. Litigation in construction contracting has become so commonplace that we now engage outside counsel even before the contract is signed because we know we will end up in court by the end of the project. This is a sorry state of affairs and is at the very core of why so many projects fail to deliver intended outcomes for all stakeholders.
How Did We Get Here?
Construction is a highly complex technical activity that is executed by a diverse team of independent specialists over an extended period of time. In other words, by its very nature, it is fraught with risk. Many things can go wrong, and often do. The question is, who is responsible? If this question is not asked and answered in a fair and equitable manner, at the very outset of a construction contract, failure is almost assured.
The main reason why construction contracting suffers the highest rate of failure in the industry after restaurants is that contractors, in their zeal to submit the low bid and get new work, have allowed owners to assign them almost all of the project risk. Contractors have been doing this for so long that it is now considered standard operating procedure. And owners now hire lawyers to be sure that they can hold the contractor’s feet to the fire if things go sideways, as they often do.
The Owner’s Long-Held Belief
Too many owners think “it isn’t the owner’s place to absorb any project risk. That’s the contractor’s problem. In fact, that’s why some owners insist that the contract ensure that the contractor absorbs all the project risk. Owners claim they absorb all the business risk by building the project in the first place, so they shouldn’t be expected to absorb any project risk because that’s the contractor’s problem. This needs to change.
Time To Change This Belief
The equitable assessment of project risk to all parties to the contract is the key to construction project success. Equitable assessment of risk begins with the Request for Proposal. Proposals submitted after a careful assessment of the unique risks inherent in each project assure success for all stakeholders. Below find a step-by-step process for assessing equitable risk prior to signing a contract. If you don’t approach proposals with this amount of prior preparation, you are leaving yourself and your company at risk every time you sign a contract.
- Recognize at the outset that project risks should rightfully be borne by the party that has the most control over the particular risk.
- Include risk-analysis in the proposal preparation team’s checklist.
- Attempt to identify in advance every inherent risk, market risk, environmental risk, and existential (unexpected-out of the blue) risk in each project.
- Design a detailed “risk abatement” plan.
- Recognize that “risk abatement” is not “risk elimination.”
- Quantify and monetize each risk as accurately as possible in all proposals, particularly those you have no control over, even if you decide not to include these costs in your bid.
- Recognize each risk event as it materializes throughout the life of the project and reconcile monetary responsibility at the point of actualization. (In this manner you can learn about unexpected costs along the way that should have rightfully been shared by other parties to the contract for future reference)
- Always negotiate rather than litigate to the extent possible.
We recommend you consider the following: In 2021, we resolve to adopt professional risk assessment skills and utilize them in all proposals. We recognize that the failure to assign risk equitably before entering into contracts has caused much of the litigation and losses our industry has suffered in the past.