CONSTRUCTION Accounting ARTICLE - Strategic risk management for contractorsTarget Audience: Construction Industry Professionals, Business Owners, Contractors, Construction Accountants, Project Managers, Human Resources In a perfect world, accidents never happen. Unfortunately, hazards abound on construction sites and, therefore, someone is bound to get hurt . . . eventually. And the risks don’t end there. Bumps in the supply chain can stall deliveries, weather can wreak havoc on project schedules and owners can go bankrupt, among many other potential snags. These realities, compounded by recent natural disasters, heavier pressure to finish projects faster and more efficiently, and a steep rise in global competition, have prompted contractors to turn to strategic risk management (SRM). Think of it as preparing for battle, as your management team evaluates potential risks and devises a plan of action to curtail them. Your SRM plan of attackDeveloping and implementing an SRM plan begins by gathering insight into potential risks (both obvious and not so obvious) associated with your construction business. In addition to those discussed earlier, these risks might include an unexpected rise in materials costs or an unforeseen IT failure that leads to loss of vital records or project delays. Also look at your company’s history related to these items, your project records, accident logs, equipment records and insurance claims. Most data analysis and risk identification can now be automated, which can ease the process considerably. The next step involves determining the proper precautions to take to stop these events before they happen. For example, your plan might include regular equipment maintenance to avoid sudden breakdowns and delays or additional employee safety training to reduce the number of accidents. Put your plan — including specific goals you want to achieve — in writing as part of an official SRM initiative, and commit to seeing it through. 2 powerful movesTo get started on these steps, hold a meeting with your project managers, human resource reps and any other key people involved in your construction business. In the meeting, discuss potential gaps or overlaps in responsibility that could lead to safety, legal, technological or financial risks and then work to eliminate these issues. Two powerful moves you may want to consider are: 1. A methodical approach to dealing with your equipment. Letting obsolete equipment sit unused — or leaving it in service too long — could end up hurting your productivity. Equipment disposal, however, is fraught with its own rules and risks. When selling or donating old equipment, fully disclose any potential problems or hazards as well as the equipment’s inspection history (or lack thereof). Consult your legal counsel to help avoid any future liability. 2. A renewed focus on safety. To reduce costly injury claims, you might establish a safety incentive program and foster a safety-focused company culture. This may include providing employee rewards and celebrating accident-free months. And, should an accident or injury still occur, your plan should include postinjury management training in which managers are taught proper protocol to help avoid unnecessary liability. The benefits of foresightDeveloping an SRM plan for your construction company provides a number of important benefits. First and foremost, by putting safeguards in place, you’ll reduce the chances of unexpected risks destabilizing your business. You’ll also gain a better perspective on what risks could actually be beneficial to your construction business. For example, you might initially view fully automating your delivery process as a risk — and you wouldn’t be wrong, given that just about any significant technological undertaking is at least a little risky. But it’s also a move that could help your company grow if the right safeguards, such as plenty of IT support, are in place. Ultimately, you can use SRM to decrease your chances for future earnings volatility and, over time, cut unnecessary expenses, allowing you to channel income into future opportunities. And by stabilizing your operations and reducing your chances of sudden loss, you’ll help protect your reputation in the marketplace as well as with insurers and sureties. Winning the battle with a SRM PlanContractors are faced with distinct risks — risks that are often unforeseen in the chaos of tight deadlines, new project bids and the pressure imposed by a strained economy. By taking the time to develop an SRM plan now, you’ll end up with a clearer view of your potential risks and in a better position to win the battle against any prospective problems, whether minor foibles or full-blown catastrophes, that may be lying in wait for you down the road. Insurance and monitoring critical to SRM successWhen considering strategic risk management (SRM), it’s important to remember that not all risks are foreseeable or preventable. And even with a plan in place, unexpected events could still hurt your construction company’s bottom line. So, don’t be fooled into thinking that even the most well-thought-out, comprehensive SRM initiative can replace the need for adequate insurance. In fact, one could say that SRM begins and ends with insurance. Your plan should include a comprehensive analysis of your current coverage to determine whether any areas of coverage may be lacking. An annual insurance review with your financial and insurance advisors is also a must. Also bear in mind that implementing and maintaining an SRM plan requires employee time, adequate funding and a collective desire to make the plan work. Many contractors see their SRM plans fail over time as interest wanes and updates drop off. You must monitor the progress of your plan and the impact of the precautions you’ve implemented, as well as the money spent on the plan vs. the money saved through risk prevention. Appointing a manager to oversee the plan may help ensure its continuity. Find out how our expertise in construction accounting can add value to your business. Email us or call us at 1 (888) 875-9770.
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