Negotiating Risk

We are always surprised when we take on a new client who is an experienced contractor but does not realize that risk is negotiable. Too often we see construction companies enter into agreements for jobs that assign risk to the wrong parties. If you are not checking your job contracts to make sure that risk is being properly assigned, then you could be setting yourself up for potential problems down the road.

One of the most common pieces of advice we give our clients is to allow us to negotiate risk for their projects and make sure that risk is properly assigned. It is always a smart to have experts negotiate risk for you, especially for larger projects with several unique areas of risk.

Design Flaws

It is understood in construction projects that design flaws are assigned to the project owner, but who will bear the costs of changes made due to design errors? Many of our customers are surprised to find out that job owners will often try to put limits on how much risk the owner assumes in design flaws, and that can cost a contractor a lot of money. We always recommend clarifying responsibility for design flaws in the job contract to make sure that risk is assigned to the proper parties.

Worker Injuries

An assumption made by contractors and project owners is that any worker injuries are the responsibility of the contractor. While this is true in most cases, it is not always the case. For example, if the owner fails to reveal site issues that are hidden and not discovered by the contractor during the initial site survey, then responsibility for worker injuries could rest, in part, with the project owner.

The idea that it is the contractor’s insurance that should absorb the costs of worker injuries can be damaging to a contractor. In every instance, a contractor has to be proactive and negotiate how risk is distributed in the event of a worker injury.

Design Changes

Once a job owner signs a contract, the owner expects the contractor to complete the project as it is outlined in the project agreement. But what if a change in the contract creates a series of serious problems for the contractor? Changes to a contract when a project gets underway are common, and job owners understand the need for change orders when designs are altered. But what if those changes require an area of expertise or equipment the contractor does not have ready access to?

Assigning risk during project design changes can be complicated, and they should not be taken for granted. Prior to signing a job contract, a contractor should have a risk expert review the contract and determine if there needs to be considerations made for potential design changes and the risks associated with those changes.

As risk management experts, we understand the importance of not taking on risk that does not belong to our clients. The negotiation process of any job contract should include negotiating potential areas of risk that could arise during the project. There is no reason for a contractor to spend extra money on insurance that, in the proper allocation of construction risk, is not even necessary.