Managing Construction Risk for Better Odds of Project Success

Lots of things can ruin a construction project. Financing, cost overruns, Mother Nature, material defects, permits, and the list goes on. Of everything that takes down a good project, insurance compliance shouldn’t be one of them. However, 74% of organizations inconsistently use risk management practices in project management (PMI). On a construction site, that risk could cost a company millions of dollars.

McKinsey & Company reports that large capital construction projects typically exceed timelines by 20% and run up to 80% over budget. These time and cost pressures create a unique gamble for project managers when it comes to insurance compliance. Do they keep a project moving and risk a claim or delay a project for insurance and risk the timeline? Let’s see how the bet pays off.  

A general contractor’s project manager hired a plumbing subcontractor for its $25 million construction site. The project timeline was 18 months. The manager didn’t validate the plumber’s Certificate of Insurance (COI) before they began work because of quickly approaching deadlines for the inspection and drywall installations. The plumber caused a flood and injured a worker on the job. The plumber’s insurance had expired leaving the general contractor responsible for both losses. The amount of the claims increased the GC’s insurance premiums for several years. The contractor’s bids became less competitive with its increased operating costs. The time delays to repair the flood damage also added up. The two-week delay cost nearly $650,000. A failure to verify one COI lost this general contractor more than $1 million.

When many things can go wrong on a construction project, it’s important to make sure insurance compliance goes right. Keep things on track by adding these actions to your project management to do list:

1) Review past projects – Start by analyzing what happened previously. Identify areas of risk and how they were handled. Check the performance and compliance of vendors and subcontractors. Benchmark that compliance number. Conduct an overall assessment of what went well or failed on the project. Build improvement processes for the next construction project based on the findings.

2) Create a compliance culture – This action easily delivers the most long-term loss prevention, but often gets overlooked by companies. Rather than risk mitigation residing in one department, the most successful companies manage risk throughout the organization. Educate staff, even those not on the job site, on the importance of insurance compliance. Provide examples on the negative consequences of taking shortcuts. Train staff on what coverages vendors and subcontractors need. Add a compliance metric as part of every project manager’s job performance assessment.

3) Set realistic timelines – Claims are more prevalent on projects behind schedule or with compressed timelines. Unrealistic timelines pressure project managers to cut corners on compliance. Tight deadlines also make insurance companies nervous. Insurers familiar with construction projects can identify a tight timeline and may charge higher premiums. General contractors pay more for their own insurance, as well as for the subcontractor’s work, who is likely to pass on the cost of their own increased premiums in the bid.

4) Know your contract – Contracts can vary by third party, project, or scope of work. The project team must understand what coverages the contract requires. Ensure staff identify unacceptable insurance exclusions and check required endorsements . Most importantly, eliminate non-compliance by reviewing vendor and subcontractor policies against their contract. This is the best bet for protecting a project.  

5) Create a system of controls – Managing risk by tracking documents manually is unrealistic. Adopt a system for tracking COIs electronically that provides project managers with mobile access on job sites. Develop processes between teams that hold payments to third parties during non-compliance and claims issues. Minimize risk by establishing regular timeline reviews. When loss events do happen, ensure staff know how to gather information and proceed according to the insurer’s requirements.

6) Monitor compliance daily – Send internal and external automated alerts before vendors and subcontractors become non-compliant. Avoid project delays by validating insurance before work begins. Make it a policy that third parties with expired COIs or nonconforming coverage cannot work until the issue is resolved. A delay to get a vendor or subcontractor properly insured costs far less than a claim.

7) Audit your process – Putting a process in place is not enough. Check insurance compliance procedures every three to four months. Assess overall compliance performance against the benchmark and the goal. Continue identifying areas of risk and modify the process accordingly.

With construction projects, insurance tracking and compliance shouldn’t be a gamble. Make your next construction bet a good one with myCOI. The cloud-based platform digitally tracks COIs and sends automated alerts before non-compliance becomes an issue. Insurance experts back the platform for policy reviews keeping every project covered. Eliminate spreadsheet tracking and unnecessary risk by letting myCOI clean up your next construction site.