Introduction
Design and construction projects are risky, and claims increase during changing economic conditions. Approximately 20 percent of design firms will have a claim each year. They are distracting, costly including efforts by senior management handling the claim, time away from current projects, negative impact on the firms reputation and business opportunities. There are legal costs and increase to insurance premiums. Approximately 75 percent of litigation are caused by ineffective operational and business practices. The higher risk operational categories, top causes of claims and example of recommendations are identified in this article.
Pro5 – Evaluating Five Operational Categories
Pro5 evaluates design firms in five (5) operational categories. The Pro5 and other risk assessments have been developed based on over 30,000 claims and over $850,000 million in claim expenses.
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Over 200 Pro5's have been completed to date, identifying the following top three (3) higher risk operational categories.
Higher Risk Operational Categories
- Experience and Staffing
- Project Communications/ Documentation
- Contracts
It not surprising that experience and staffing has the highest risk rating. For years firms have had trouble finding qualified staff, especially at the Project Manager (PM), and management levels supporting project efforts.
Experience & Staffing Recommendations
- Evaluate the project and ensure the staff and expertise is available prior to developing, and delivering a proposal.
- Project Manager (PM’s) have five or more years of experience on the project type, and the time available to support the project.
- Project manager (PM) have more than technical skills including business practices, risk management, and communication skills.
- Have a standardized program identifying expected behavior, responsibilities for employees.
- Project Managers (PM) evaluated in Key Performance Indicators (KPI’s) including;
- Meeting project objectives, on-time delivery
- On-budget, obtaining desired profit margin
- Following processes, procedures (QA/QC, billing and invoicing, etc.)
- Risk management (project risk, applied measures, contract, scope, updates)
Causes of Claim
The following were identified as the top three (3) causes of claims. These can be attributed to the experience and staffing category, and not having the PM and management personnel available for completing these tasks effectively.
- Poor Project and Client Selection
- Unfavorable Contract Language
- Inadequate Project Communication and Documentation
Project and Client Recommendations
Regardless if they are repeat or new clients, some level of upfront due-diligence, Go/No Go is needed. Economic conditions and organizations continue to change. The process should consider changes when evaluating the client, project and business objectives. Sample of questions;
The Client
- Is this a repeat or new client?
- If repeat, was the previous project successful?
- Is the client financially stable and has a good business reputation?
- Has the client worked on these projects successfully?
- Is the schedule and budget realistic?
The Project
- Is there a well-defined scope of work?
- Project type we worked on before successfully?
- Do we have a project manager that is experienced and available?
- Do we have the available staff?
- Can we meet the project schedule?
Business Considerations
- Does this project align with our business plan?
- Will our fee be adequate, can we make a profit?
- Will the contract be equitable?
- Is the owner willing to fund unexpected contingencies?
- Is this the best opportunity for the firm at this time?
Enterprise-Wide Risk Management Benefits
From a broader perspective, Price Waterhouse Coopers (PwC’s) surveyed over 1,200 senior executives and found companies that put a premium on risk management are seeing better growth and increased profit margins - more than 10 percent. While 73 percent of executives say risks are rising, only 12 percent of respondents have implemented effective programs.
SmartRisk have seen similar results for deign firms. About 10 percent have integrated risk management into operations aligning with business strategies. Those firms have 10-15 percent increase in profits over other firms along with lower risk.
Benefits:
- Improved performance
- Higher profitability
- Greater client satisfaction ratings
- Fewer legal problems and claims
- Lower insurance costs
