Most construction projects begin with a clear budget and deadline in place. However, life happens, and most projects go over budget and are delivered later than expected. This is trying time, it is essential that all people working on these projects know how to stick to the budget and keep in line with the costs dedicated to the construction. Although the budget tends to be an estimate, there can be complexities that arise, and unforeseen hurdles that upend the originally quoted price.
Managing Financial Risk in Construction Projects
Construction sites are prone to accidents, theft, and disasters. All of these circumstances come with financial risks, and potentially huge financial outlays if the worst does happen. That is why it’s important for construction companies and individuals on the site need to use security to prevent costly disasters. From hiring surveillance teams to implementing the use of technology, there are many ways to reduce the risk of the unexpected occurring.
Examine your contract
Financial risk in the construction industry routinely comes back to the contract itself. In many cases, a company has already determined its fate before introducing any labor or materials to the site by virtue of the contract or agreement signed. The first contracting stage of the relationship can have severe consequences down the road, so it is essential to review these documents carefully before agreeing to them.
As soon as the ink is dry on the design plans, it’s likely there is a change needed. Preparing the site for construction may lead to the discovery of rocky soil that requires extra effort to remove or an abandoned pipe that needs to be assessed. Either way, there could be a dramatic change to the design. A good contract will create a proper change order and contingency usage process that protects the contractor from unforeseen costs, as well as protecting the owner from losing control of the budget. Although there may be a deadline looming, the owner should always be aware of an authorize any significant depstrongtures frostrongthe original plan.
Mitigating financial risks in a construction project also deeply depends on the insurance that you acquire and how well it protects you. The right policy should be able to step in when the worst happens so that your finances are not hit hard. Working with the right insurance agency is critical when operating in the construction industry, so be sure to find local professionals that can help feguard your business, project, and finances.
Credit Checks and Monitoring
Usually, the construction company arranges labor, materials, and equipment throughout the project on credit and collects payment from its customer once the work is completed. The construction industry runs on credit, so it is essential to have good credit practices.
As a construction company, you should check your customer’s credit at the onset of the contract and then monitor it throughout. You should also know whether your customer can pay you without filing a lien.
Create a Plan and Follow it Consistently
Approaching any problem with a consistent plan can help reduce financial risks in construction projects. Create a risk management plan to address unpredictable scenarios that can negatively impact your finances and develop strategies to minimize losses if something unexpected happens.
Monthly Payment Application Reviews
Once the contract begins, the contractor submits the monthly payment application to the owner. The American Institute of Architects has issued a series of documents to standardize the monthly payment application process. Still, contractors fill out these forms according to their accounting methods. Each payment application should be supported by evidence, such as delivery receipts and invoices.
The monthly construction costs requested by the contractor in the application should be summarized to match the evidence. Any questions or variations should be immediately addressed by the construction auditor before it escalates into a bigger problem.
Every construction project is unique and will have its own complexities. Understanding and addressing concerns up front and structuring the construction contract to be flexible when addressing pitfalls can only help minimize the risk for the owner and contractor.
For the commercial insurance to protect your business or construction mortgage to get started, contact the team at Northeastern Group Ltd. Serving New York and beyond, we are here to make insurance a snap. We can help you get situated with the right construction insurance or mortgage that suits your needs. As experts in the industry, we help you through every step of the process. We look forward to working with you.
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