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Minimize Risk - Maximize Performance
February 2010

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Helpful Industry Survey Reports 

A/E Survey Report
Insightful survey report of A/E firms and how economic conditions is impacting their business and insurance purchasing decisions.  

A/E Survey Report

Insurance Carriers
Survey Report
Survey report of 17  insurance carriers specializing in  PL for A/E firms, how firms are accepting more risk. with reducing liability recommendations.  

PL Insurance Carrier Report 


      

SmartRisk LLC

SmartRisk blend of experience in the design, construction, energy and environmental industries combined with extensive claims analysis, insurance underwriting and risk management provides the perfect platform for understanding the many challenges for firms today. As a risk and performance management firm, we address those challenges through risk analysis and firm or project specific strategies mitigating risk and liability exposures. In return, improves performance, profitability and lowers insurance costs.

As an advocate for the industry, our focus is improve your bottom line through cost effective risk management solutions. Please review our website for services and products for meeting those objectives. Please contact us if we can be of assistance.

Thank you.    

Timothy J. Corbett, BSRM, MSM, LEED GA
President
tcorbett@smartrisk.biz

www.smartrisk.biz 
T: 626-665-8150  

Characteristics of Higher Performing A/E Firms


Topics Include:


* Leadership Faith

* Market Condition Facts

* Position and Project Portfolio

* Bench Strength

* Claims & Litigation on the Rise

* Clients & Project Evaluation

* Client Satisfaction

* Communication and Documentation

* Billing & Invoicing

* Risk Management & Performance Plan  


Introduction

The last few years have been very challenging for many A/E firms with little relief in sight. Even more troubling is firms not implementing change and adapting to market conditions could find themselves in the middle of a slow, painful death. With change comes additional risk, however, there are firms succeeding and putting themselves into a better-prepared position when economic conditions improve. What are these firms doing differently?  Based on the findings obtained through SR Risk Assessments Reports (info below) of A/E firms for the past four years, there are distinct characteristics of higher performing firms. The three main characteristics are: 1) Principals have vision demonstrating confidence and “faith” and communicating their strategy to staff on a regular basis of the adjustments they are making to be successful. 2) These firms are resourceful, having the knack of filtering out the noise and obtaining critical “facts” gaining vital information, and making informed decisions and adjustments before most others. 3) They use vital information and effective solutions developing a “formalized strategy” navigating the firm forward. These characteristics and other business practices are critical for the long-term success for firms.


Leadership Faith

Principals and leaders of higher performing firms appear to be “next-level thinkers,” realizing back in 2007 and early 2008 this was a time for change, to shore-up backlogs in current markets and diversify into other segments.  Prime aspects of these leaders; vision, insights, seeing items before and further than most others however still realizing the challenges and obstacles ahead. They demonstrate faith and confidence to employees that they and their company will prevail. Helping these leaders look forward; obtaining reliable and vital information confronting the reality of the situation with brutal facts. With this information, they navigate an effective course forward. These leaders are knowledgeable of the interrelated risk-factors of their firm and the relationship of risk to business practices. They realize implementing strategies managing risk is an effective approach for improved performance and profitability. These leaders know that silence is deadly during challenging and periods of change. They clearly communicate their strategy for success to the organization with special attention given to their “stars” on how they will play a part in the company’s success.


Market Condition Facts

Successful firms have their finger on the pulse of market conditions making appropriate adjustments before being forced by market drivers. Construction industry was down 26% in 2009 according to McGraw-Hill Construction data. This follows annual declines of 13% in 2008 and 7% in 2007. Ninety-two percent (92%) of A/E firms have been impacted by the financial downturn. Many firms, including successful ones, have had reduced annual revenues and cash-flow problems. To stop the bleeding, 64% of firms’ trimmed expenses, frozen salaries, implemented reduced workweeks and 51% incorporated new operational efficiencies. Twenty three percent (23%) entered into new market and regions, and 20% invested in new technology and communications systems to keep the firm competitive. All realities and necessary changes for A/E’s driven by today’s economic climate.   


Position and Project Portfolio

Higher performers identify forces that create the demand for construction and position themselves appropriately.  These firms identify market changes early, make adjustments with balanced portfolios. With private segments down and limited opportunity, successful firms started moving early into the public sector where spending on highways and bridges are up 15%, environmental rose 8% including renovations and energy upgrades, and mass transit climbed 25%. Institutional projects are projected at a plus 3% with Health Care up 5% supported by federal stimulus funding directed at health care construction. The private, non-residential market has not yet bottomed out following a decline of 30% in 2009 with a further decline projected of 3% for 2010. McGraw Hill has an optimistic view for the residential markets for 2010 – 2011 at a plus 11%.  I suspect the residential markets will remain stagnant until the unemployment rates improve, as that is now further influencing and increasing home foreclosures, limiting the need for new construction.         


Bench Strength

Firms are reaching deep into their internal talent pools to find and create new paths ahead. Many firms have changed direction, moving into new services and project segments. The first step is improved “bench strength.” Successful firms hire talented staff to strengthen their bench as well as mentor and train internal talent.  When possible and economically feasible, some acquire another firm that fits their business plans.  These firms look into the market place, target key players, (some working for underperforming firms), and hire them thereby improving market position. This approach in obtaining experienced and knowledgeable staff has many benefits including; increased business opportunities, project performance, as well as reduced risk and exposures. Economic conditions have negatively affected many firms with many taking advantage of the slowdown to weed out poor performers. Proper staffing levels are essential ensuring operational performance. This is especially important during a time of change where higher performers are assessing staffing levels and qualification requirements compared to project needs ensuring operational performance is maintained. This is a critical component for long-term success and strategy for mitigating risk.       


Claims & Litigation on the Rise

Market conditions have increased exposures, business failures, and forced companies to implement budget-cutting measures affecting business operations. This challenging economic environment has increased claims and litigation in both frequency and severity.  SmartRisk surveyed 17 Specialized A/E Professional Liability (PL) Insurance Providers where 82% indicated A/E firms are accepting more risk today driven by slow economic conditions.  The survey can be found at: www.smartrisk.biz/products. More firms are accepting clients or work under conditions they would normally decline based on experience, claim history and unfavorable contractual conditions. Based on staffing reductions, firms have reduced QA/QC checks and reviews by senior personnel, are selecting PL insurance providers based on cost, not using a quality selection process, and are moving into new service, project segments and geographical areas without proper background, experience and qualifications – all items placing a firm at a much higher risk of claims and litigation.  Informed and successful firms realize during economic downturns that it is not the time to reduce risk management practices and have enhanced efforts.            


Clients & Project Evaluation

Successful firms realize that each client and project has its own unique challenges and risks and selection is vitally important.  Firms that have established client and project risk evaluations practices identify exposures early and implement methods mitigating risks. Key evaluation criteria includes clear project objectives and realistic expectations combined with the experience and capabilities of the firm and client. A sample of critical questions: Does the client have experience on similar projects types with positive results? Does the client have a history of filing claims? What is the financial capability of the client? Does the firm have the capacity to undertake the project and qualified staff required to be successful? What are the deliverables, schedule, and budget adequate?


Client Satisfaction

Once a firm has obtained a good client, they do everything they can to keep them happy. Higher performing firms understand that client satisfaction is essential to the financial performance, reputation and growth of the firm.  These firms average 90% repeat customers that in return lowers marketing effort dollars and reduces risk and liability exposures. One aspect insurance carrier underwriters looks for when assessing firms is the percentage of repeat customers. Like most A/E firms, successful firms have a high standard of honesty and integrity. These firms communicate clearly and frequently with clients, ensure experienced and qualified staff members, especially the Project Manager (PM) are assigned and projects are managed in an organized, efficient and cost-effective manner. 


Contract Provisions

Successful firms realize the most effective method for managing client expectations is through a well-written contract. Contracts that express clarity of services, responsibilities, schedules and compensations are the best methods for managing a project as well as an effective defense against professional liability claims. A sample of key questions firms should answer when developing contract documents: Does the contract provide a clear scope of services adequate for the project? Are payment terms clearly outlined? Are responsibilities clearly defined? Are suspension and terminations provisions included?  Are there any warranty or guarantees provisions?   Is there an equitable dispute resolution provision? Is a limitation of liability (LOL) provision included?  


Communication and Documentation

Improper communication and documentation efforts are the main cause of many claims for A/E firms. That statement alone indicates that effective communication and documentation practices are essential for a firm’s success.  Effective oral and written communication efforts have many benefits and are necessary for any project fostering an environment of teamwork and consensus for managing project progress and change effectively. These efforts include design drawings, internal and external reviews and approvals, operational reviews, project meetings, reports, request for information (RFI), management of the change order process, etc. The development and execution of an effective communication and documentation program improves performance as well as reduces risk by documenting those actions taken, decisions made and on whose authority.


Billing & Invoicing

The largest single asset of A/E firms is usually their accounts receivable. Higher performers realize the liquidity of this asset is extremely important to their financial well-being. These firms establish and effectively execute practices converting accounts receivable to cash in a consistent and timely manner. Another critical reason; during slow economic conditions a majority of claims are driven by payment issues for A/E and counter claims by clients. Payment terms are discussed and specified in contracts, including billing cycle (preferable in weeks) and documentation requirements defined. How quickly payments are processed and incentives for early payments indicated. Higher performing firms have programs that prepares and tracks invoices sent, identifies unpaid invoices, as well as unbilled work in progress. Follow-up strategies defined including when the PM becomes involved and when to contact the client to discuss status and payment options.     


Risk Management & Performance Plan
  

Certain employees and firms view risk management as only items addressing contracts and insurance issues.  Successful and higher performing firms have a much broader view and realize risk pertains to every aspect of their firms’ practice. These firms know there is a correlation between risk and performance and the “interrelated” risk factors throughout their organization effects efforts. Success projects are only as strong as the “weakest link” in managing connecting risk factors. Higher performers develop a Risk Management Plan outlining strategies and practices for managing risk within their organization along with defining how each employee plays an important role in the firms success, or possible failure. Effective risk management strategies starts from the top down which includes a persuasive mind set with daily affirmative of practices, assessing performance, gathering information, educating, mentoring and implementing effective strategies – all moving the firm forward. In return, these efforts improves performance through risk management solutions. The Risk Management Plan also makes for an excellent training program for the firm.    


Conclusion

This is a challenges period, however any firm can implement strategies and practices to increase their level of performance and risk mitigating efforts. As construction markets recover, it will be at different rates and times for each sectors. The first step is assessing business, operational and risk management practices followed by implementing effective solutions. Successful firms are rethinking strategically, making appropriate adjustments and positioning themselves addressing market needs.  Each sector needs A/E firms of all sizes and one key for success is “agility.” Firms should implement strategies including refining focus and service offerings, building sustaining relationships with important players in new markets and recognizing they may be different from those of the past. Ensure you have the experience and capabilities for offered services along with executing an effective strategy forward. Successful firms have found that implementing risk management strategies has a natural fallout of improved performance and profitability.           



SR Risk Assessments
can described as similar to a “peer review” however focus risk and liability exposures for design and building processionals. The process evaluates key business practices prone to vulnerability and loss effecting performance. Findings identify areas of strength as well as concern with recommendations for improved performance, profitability and reduced risk. SR Risk Assessments also can reduce insurance costs with insurance carriers providing premium credit for completing. Certain PL carriers offer cost-sharing and reimbursement for completing. Link
www.smartrisk.biz/report-and-profile. For more information on SR Risk Assessments or other services offered, please contact us.  

This newsletter is for information purposes only and should not be construed nor relied upon as legal advice. Readers should consult with legal counsel regarding their specific situations and circumstances.

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