Is High-Stakes Contracting Worth the Gamble?

January 14, 2008
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Many people enjoy riding unicycles. You may be one of them. Done correctly, it’s a safe and healthy activity. What about unicycling on a tightrope, or across a gorge? Do you still feel quite so confident in your skills? In short, is it worth the risk?

As a contractor, you know that some customers and projects are higher risk than others. What may be an acceptable level of risk in one market may not be worth it in another, or with a different labor pool. How do you evaluate and control risks for your company? Is the payoff worth the risk involved? Can the risks be mitigated or offset by contractual agreements or practices?

The National Institutes of Health defines risk management as “the process by which risk is reduced or controlled. Risk assessment information is used, along with other information, such as values, cost, and feasibility, to arrive at a risk management decision.” It’s a practice in reducing your company’s vulnerability by using a systematic process of risk identification and mitigation. In the HVAC field it’s most often referred to in large commercial-industrial situations, but it can have ramifications on the residential side too. In fact, risk management can be practiced in almost any business.

The risks of not thinking about potential risks can be high. “Four or five bad jobs can wipe out the profit for a year,” said Steve Canter of TDIndustries, Dallas.

“Risk starts with how we stay away from trouble jobs and owners,” said Bob Hammond of ACCO, Glendale, Calif. “In design-build work, we have a lot of ability to control the product, the process, and the schedule. Mostly we can’t control it in plan-spec. It scares us to see the quality of some customers.”

Some of the questions this mechanical contractor asks are, how much control will they have in the project? Does the company have a labor presence in that area? What other labor risks are there?

INTERNAL APPROVALS

In Hammond’s company, new projects must go through a risk evaluation and approval process, where the new project is reviewed by more than one person in the company. “Approvals go from a verbal OK to inches-thick documents,” he said. They are reviewed by the project manager and the management team.

Cantor’s company uses a review panel. New projects must fill out a risk assessment form. “If you exceed any categories, you have to get permission for it,” he said.

Without proper screening, there can be problems when less-experienced employees agree to bid on high-risk jobs. Can you get out of it? “Sometimes you can do it gracefully and bid yourself out,” said Hammond.

Another problem that the review process can negate is the temptation of kickbacks, or adding a little private work for the employee’s benefit. “We really try to keep all our project managers’ hands on the table,” Hammond said. The company spells out where it stands on such practices very clearly. “If it happens on a public job, termination is immediate.”

This graphic illustrates the cycle of risk management strategies that can be applied to HVACR contracting. (Click on the image for an enlarged view.)

RISKY MARKETS

Are any markets more prone to risk than others? According to Hammond, the hospital market in California is not a happy place to be. “The inspection process is death,” he said.

“It’s definitely risky work,” agreed Floyd Springer of Hussung Mechanical Contractors Inc., Louisville, Ky.

Condominiums can also be high risk, said Hammond, if the general contractor doesn’t have previous experience with them and depending on the contract terms.

Risk can fluctuate depending on whether the facility in question is owner-controlled or contractor-controlled, said Hammond.

Service work is considered special projects, said Jim Wharton of Linc Network LLC, Canonsburg, Pa. He called service risk management “the art and science of exclusions,” spelling out specifically what the contractor is not responsible for.

Public school work, in fact the public market in general, can be risky, said Sonny Goodwin of Entech, Dallas. “Their construction schedules have forced contractors to hire more unskilled labor,” which can increase risks from many aspects.

The public market in general can be risky, said Sonny Goodwin (right) of Entech, Dallas. Pictured with him is Jim Wharton of Linc Network LLC, Canonsburg, Pa.

LABOR RISKS

Labor from illegal aliens, or those who also would be considered high risks for the contractor, was brought up. How can a contractor minimize labor risks when, as they say, good help is so hard to find?

The main way is to verify citizenship of all employees. “Most of our guys have drivers’ licenses,” said Hammond. “If someone doesn’t have a social security number, that’s a big head’s up.”

Wharton recommended hiring students who have participated in the Skills USA competitions. “I did Skills USA [VICA] growing up,” said Goodwin.

Safety and communication go hand-in-hand when it comes to reducing labor-related risks, they agreed. Maintaining constant safety communication about jobsite risks (lifting, falls, burns, chemical exposures, etc.) will help employees keep risks in mind. Lower accident incidents not only keep people on the job, but they can also factor into a contractor’s insurance rates. In short, the benefits of risk management go all the way down to the bottom line.

“Safety is the base, the groundwork, the first part of any risk management program,” stated Frank Keres of Construction Risk Associates Inc., Northbrook, Ill. “Yet, many contractors do not treat safety as part of risk management. He advised contractors to do the following:

• “Define the role of each safety person in writing, in a document that is distributed to the entire company. This is necessary as the safety person can become an ombudsman, bad guy, enforcer; eventually he will be doing a hodgepodge.”

• Make the safety person chiefly responsible for safety. “It is not the payroll distributor or the delivery person,” Keres said. “Safety personnel should act as safety personnel and not buddies, friends, owe-me-oners, etc.”

RISK MANAGEMENT MADE EASIER

Keres offered these suggestions for reducing risk. “They are usually simple, involve some action, and can be done all at once or one at a time.”

“An easy way to apply this is to look at it as a risk management punch list with all the aspects of a complete risk management program being the various rooms of the structure,” he said, adding, “These suggested actions are not answers to major problems, but put together they might just be able to resolve major problems.”

What a contractor of any size wants is a risk program “where you can put the rubber to the road,” Keres said.

• “Safety is the base, the groundwork, the first part of any risk management program,” Keres said. Define in writing to whom the safety person reports. Make sure they have direct access to the head of the company.

• Investigate all accidents. Accident investigation should be a separate part of risk management, said Keres, “because it is too important to leave to others.” Establish a written accident investigation procedure.

• Drive the data. “Find out everything your risk information system can do,” Keres said. Determine average cost per accident on each site. Develop your own reports. Set financial parameters for job costing.

• Work with your insurance broker-carrier-subcontractor. Prepare your own specifications for insurance; “at least review what the broker is submitting,” said Keres. Meet with carrier regularly.

Risk management is something most people do every day, but they don’t actually call it as such. We might think of it generally as weighing the pros and cons of any given situation. If you standardize the process in any size business, you have a better chance of fully utilizing all that risk management has to offer.

For more information, contact Construction Risk Associates Inc. at 262-780-4951.

Sidebar: Residential Risks

ROCHESTER, N.Y. - Residential-light commercial contractors may not call it risk management, but safety training plays a critical role in risk mitigation. Just ask Greg Goater, director of safety and training for Isaac Heating and A/C.

“We take the safety issue very seriously,” he said. “We save ourselves from the aggravation of having our employees get hurt, or things get damaged.” The company’s diligence helps reduce workers’ comp rates by lowering the company’s workers’ comp modification rate, or mod rate for short. It can have a very big financial impact.

A large portion of improving company safety depends on employee empowerment, giving them the right to decide to walk away from unsafe conditions. “In our safety training, we tell people that if they feel they are in an unsafe situation, to just walk away,” Goater said. Unsafe conditions could include a furnace in a basement with sewage, or clutter that could create a fire hazard.

“We support our technicians if they say it’s an unsafe situation,” Goater said. “It happens more than you may think.”

The contractor’s safety team includes Goater, top management, and supervisors. The risk management process starts with assessment and proceeds to risk aversion, training, and a feedback loop. “Our safety team also has our comp carrier and our liability carrier. We’re looking for their expertise, and we want to demonstrate that we are trying to mitigate risk.

“Our management has always been very safety conscious,” he continued. “About five years ago, we decided it would be something to pay extra attention to.” The company monitors lost time and mod rates, and since it started its formal safety program, those numbers have consistently improved.

Isaac sends a company newsletter home that includes safety information. There is a point-based incentive program, as well as a point-based penalty program. The penalty program does not penalize for accidents, Goater points out, but for unsafe behaviors that lead to accident injuries, such as not wearing gloves or safety glasses. An incident investigation committee reviews each incident to determine whether there was something the employee behaviorally did wrong.

“We’ve had good results,” Goater said. “Our record is 165 days without a lost-time incident.”

One of the biggest challenges for any new safety officer, he said, is finding explicit information on what to do, beyond the general mandate of, “make the place safe.”

“It’s one of those things where you fly by the seat of your pants,” Goater said, suggesting that there are opportunities for industry trade associations to outline a safety officer’s duties, what a program should include.

Goater will be conducting a safety-training workshop at the Air Conditioning Contractors of America’s Conference and Indoor Air Expo Feb. 5-7. For more information, visit www.indoorairexpo.com.

Publication date: 01/14/2008

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