Risk management might be most effective when undertaken in moderation.
By nature, contracting is a risk. Risk might be defined as the potential exposure to loss or danger. Life itself is a risk. One of my favorite jokes is about the guy who went to the doctor and was diagnosed as terminally ill. He told the doctor, “That can’t be, I don’t drink, I never go out, I’m a health nut, and I sleep 10 hours a night.” The doctor replies, “I’m sorry you are definitely terminal.” He replies, “But I meditate two hours a day, I’m a vegetarian, I’m a virgin, and I take no risks of any kind.” The doctor replies, “Then why should you care?” Like anything else, risk management might be most effective when undertaken in moderation but there are things you can do to reduce your liability.
Through my years of being a consultant, I’ve found that risks fall into two categories, general business risk and job risk. General risks are things such as death, disability, natural disasters, theft, auto accidents, computer backup failure, etc. A good accountant, financial planner or estate lawyer can probably provide you with a checklist that can prove very helpful in these areas. For this article I’m going to focus on job risks and how to avoid them.
Each and every time a contractor bids a job, he or she is taking on risk. You’re gambling on the weather, that the customer is reasonable and will pay, that your guys will show up, etc. Such constant exposure can make contractors believe they’re immune to job risks and no matter what, they’ll persevere. Most contractors tend to take jobs they shouldn’t take by turning a deaf ear to that gut feeling that’s warning them not to take the job. Entrepreneurs by nature believe they’ll conquer and win. However, blind enthusiasm can also create unnecessary risk. Here are the five factors I believe represent the greatest risk to any job:
The Customer: Is it a high demanding or an unknown customer? Few subcontractors check customer references or perform a credit check. Some customers are unreasonable and demand things that cannot be done. Others are simply crooks and plan not to pay. A quick background check or look at local lawsuits may save you a lot of grief. If a customer is going to take advantage of you, you’re probably not his or her first victim. With consumers and residential work, make sure you use a sound, professional contract that’s been put together by a construction lawyer. Unfortunately, many of the commercial contracts subcontractors see are weighted against the sub. Know your lien rights and be wary of what you sign. And always remember, if it’s too good to be true, it probably is.
Job Size: Large jobs always have the potential for big losses as well as big profits. Big jobs are always exciting but also risky. Always ask yourself, “What happens if I don’t get paid on 30 percent of this job or can I take the hit if it loses big?” Remember that a large job also impacts other jobs as your attention and production capacity are drawn away.
Project Manager/Foreman: Is job management inexperienced or do they have experience with this type of job? There’s a shortage of good foreman everywhere. A new foreman may do great on a certain type or size of job and then fail miserably when assigned to something else. When assigning a foreman to a new task, make sure management keeps an eye on things and makes it easy to offer assistance. Don’t assume field and project management will ask for help when they get in over their head.
Experience: Experience is a wonderful teacher but at times it can be a very expensive education. Have you done this type of work in the past and have a core competency in this area? Expanding into a new trade or craft area always includes risk. Extra care should be made to measure the product, plan the job, monitor progress and stay on top of things. Try to assign a foreman who is creative, enjoys learning new things and can adapt to the situation.
Craft Difficulty: Does the job have unique or difficult craft challenges? How many tradespeople do you have that are good at this type of work? Complicated work can be very profitable as you may have been able to sell it at a higher price because competitors were frightened by it. However, you can also loose big. Even if you have the craft expertise, you still can be challenged by an over demanding schedule, jobsite conditions, weather, etc. If you get behind, it’s difficult to catch up if the craft skills are complex and tedious.
No one of the above risk factors in itself is a deal breaker but if too many of these factors add up, you might want to say “no.” Let’s see, a large job, with a tough customer, unique craft challenges, is new to your company and you have a new foreman or project manager to run it. Sounds pretty insane to me. Insanity is defined as extreme foolishness or irrationality. Remember, the job you didn’t take never kept you up at night or cost you money.