How to Manage Financial Risk in Construction Projects

September 10, 2020

Every construction project is a successful collaboration between the owner and contractor. At first, the project goes fine, but certain clashes or strains can put the collaborative relationship at risk. Mostly the questions arise out of finances. Hence, financial risk in construction projects is common.

Are they charging more? Will quality get compromised? Will the target be achieved within the expected time? These are some of the frequent questions that arise and put everything at risk.

Usually, the construction manager or a general contractor poses a different level of understanding based on their experience. However, this sometimes creates a hindrance. The estimates are drawn, and job complexity is defined, but something unforeseen occurs to upend the originally quoted price. People often keep wondering, did I pay too much? Was the contractor qualified enough?

In this article, we will let you know some tips so that you can avoid paying more than needed.

Managing Financial Risk in Construction

Pre-Contract Reviews

Before contacting a contractor, inviting a Certified Construction Auditor (CCA) and CPA to conduct a pre-contract review is always a wise option. As the popular adage goes, “An ounce of prevention is worth a pound of cure.”

Getting a review done sets up your mind and gives you a depth about the guidelines involved in the contract change orders. In this way, you can draw valid points before creating a contract that benefits both parties. Some of the important points that a construction contract should include are:

  • Ensuring a clearly defined construction audit clause
  • Type of contract being negotiated
  • Accounting pre-construction expenses
  • Defining the cost of work

Monthly Payment Application Reviews

Once the contract is signed, the contractor is supposed to pay a monthly payment application (Pay App) to the owner. To standardize this process, the American Institute of Architects has created a series of documents for the monthly pay app process.

Each pay app process is required to be submitted with evidence, including subcontractor invoices and delivery receipts. However, many contractors submit this form according to their wish.

The owner and contractor are required to reconcile construction costs and sum up to support the amount requested in the paid app. Upon discovering discrepancy, an auditor should choose to rectify the situation by negotiating between the parties.

Remember, budget and billing problems worsen with time. Therefore, identifying and correcting such issues strengthens the trust and goodwill between the owner and contractor.

Change Orders

There’s a popular saying, “as soon as the ink is dry on papers, there is a change.”

A construction site is not always squeaky clean. Hence, preparing the site for construction may lead to the discovery of an abandoned pipe or soil that asks for removal. Thus, the cost of removal will be automatically added to your estimate. Now, the owner might feel that he wants his building more accessible, but that would pose a risk to the electrical setting. This would altogether require a new plan, which will also escalate the costs.

A good contract allows change order and contingency usage processes that protect the contractor from unforeseen costs as well as allow the owner to take control of the budget. Creating thresholds for project change needs to be discussed upfront. No surprises are unrealistic, but both the parties involved should be acceptable to change.

Financial risk in construction is common as every construction project brings its own set of unique complexities. If you feel that the construction costs are taking a toll on your budget, it’s time to involve an experienced attorney. We, at Patterson and Associates, are here at your disposal to resolve financial issues. Contact us to discuss your project needs.