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Real World Tips on How To Manage Risk with Subcontractors

Subcontractor risk management is unique because of their place in the construction money chain. Contracts are the primary way risks get managed in construction. For subcontractors, the risks often flow down to them. If they aren’t careful about the risk they take on, they can get overwhelmed very quickly. That’s why subcontractor risk management is often improved by handling risk at a company level.

The four widely accepted categories of risk are strategic, operational, financial and compliance. Most construction businesses spend a lot of time on the strategic area because those are the risks directly connected to construction projects.

Strategic Risk Foresight

Scholars on risk management point out that viewing your strategic risk from a portfolio view rather than from a project view will make risk management easier and more efficient. Most projects will have risks that are similar, so managing those risks as a group is beneficial. But, there’s another aspect to viewing risk like this. When you look out over your whole portfolio of projects, you can treat the total risk similar to how you’d manage a stock portfolio. You can arrange your risk investment in projects so you have a proper balance of risk across them. Some projects will carry greater risk than others so your investment in those projects is offset by your investment in projects with lower risk.

One way to make this type of company-wide subcontractor risk management work for you is to rank projects according to how risky they are. Once you do that you can assign the right resources according to the risk posed by each project. This helps you find the balance between insurance and other ways of managing the risk. But, you will also see the projects that aren’t right for you from a total risk perspective. In that way you can avoid taking on too much risk.

Sometimes, when using a company-wide risk management process, you might move to a more offensive stance when it comes to the projects you’ll take on. There is ample evidence that when risk is allocated according to who has the best chance of handling it, the total risk for any given project goes down. So, if you can find projects where risk is handled that way, you can improve your company-wide risk. A prime example of this is projects using integrated project management. Other good candidates for improving your risk distribution include projects using building information modeling, value engineering in the early project stages, and target value design.

Handling Business Risks

Beyond projects and contracts, subcontractors also have their own business risks that fall into the operational, financial and compliance categories. Not only are some of these company-wide, but others are department specific. So when subcontractor risk management comes from a company-wide perspective you avoid the silo approach where each department deals with its own. This is especially relevant for subcontractors with multiple locations. If you’re not viewing the big picture of risk, then the picture isn’t really very clear about the total exposure. When it comes to long term planning you also need to have all the details on company risk exposure. These categories of risk vary from subcontractor to subcontractor, but the following are some of the most common ones:

  • While accidents and injuries are covered by insurance, there are risks that are not covered by insurance and a careful review of insurance contracts is necessary to find the exceptions. Next you need to compare those exceptions to your work environment to see where insurance might not cover losses.
  • Increasingly, data security is a prime risk. Mobile devices tend to fly under the radar as new entry points to company information–this is especially prevalent in small companies, but even large ones can have this exposure. There’s also the continuing challenge of user authentication.
  • Protecting private information is especially challenging for global companies. The compliance landscape varies from country to country leaving companies to navigate widely varying privacy rules. But even for companies doing business in a single country, maintaining data privacy for clients is tough. Again, the available access points to client data are growing, and as contractors connect to client systems they run the risk of opening doors for malicious use.
  • Reputation is highly important in construction and with the many new ways of spreading the word, (either negative or positive), about a business’ reputation, risk has increased exponentially. Increasingly, anyone concerned with their reputation needs to be proactive about protecting it. This means considering potential risks to reputation that could come from vendors, other contractors and even owners.

Subcontractors have the best chance to excel when they view their risks within the context of their business strategy. Doing this requires you to identify the risks and make them transparent so everyone knows what they are, and where they occur. You can help people understand the effects risks pose to the business by communicating what those are, and how they affect the company’s operations. But you also need to actively track risks and spend the needed time analyzing them. In particular, it’s important to know how they’re being managed and to review that information regularly.

As with safety, when risk is incorporated into the company culture, everyone becomes a risk manager and subcontractors can excel at delivering the company’s mission. This adds value to the company, and finding the value in risk is another tool for managing it.




Please reach out to us with specific questions so we can help steer you in the right direction. We want you to have all the information you need to make an informed decision about the contracting resources available to you in the market today.

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