Operational risk controls

David Bowcott

It has been almost three years since the onset of the COVID supply chain crisis. Since then, we have seen stubborn rising inflation, knock-on rising interest rates, and labour supply shortfalls. The impact of these issues on the financial health of the construction economy isn’t immediate. It is often felt by subcontractors, suppliers and prime contractors two to four years after these metrics turn for the worse.

We are now entering a critical window where financial weakness caused by a worsening of these metrics is beginning to have an impact on the financial results of the construction economy. Bottomline, all construction stakeholders need to exercise heightened operational vigilance to minimize the impact of these “company cripplers” on their organization.

So, what does “heightened operational vigilance” mean? Well, your organization likely has operational procedures that are a combination of written procedures and procedures housed within your enterprise or project management platforms. Some of these procedures may need to be tightened up, and adherence to these tightened practices is paramount to controlling risk.

TOP 5 OPERATIONAL PRACTICES TO REVIEW

Go or No-Go Practices – Your organization’s ability to vet the risk of taking on or carrying out a specific project. In this process you assess the risks associated with the project and compare those risks to the project’s opportunities. Some of the component parts of this procedure include the use of a formal risk assessment methodology, including a risk matrix; a review of the project scope, market sector, geographic location and other key metrics to ensure it aligns with your business plan, your experience and skillset with delivering the project; the establishment of a dedicated “go or no-go” team that includes senior leaders; and sign-off procedures that validate to senior management that the project has been vetted.

Prequalification – Does your organization have a formal prequalification process to ensure the construction stakeholder partners you are working with have the financial, business and safety measures in place to carry out this project successfully? All stakeholders should be prequalified, including those that are letting the contract to your company and those that you are subcontracting with to carry out the work. This includes design firms.

Award Practices – After identifying the firms you are going to enter contracts with using your prequalification process, you need to ensure that these firms have clarity of their contractual responsibilities, have accounted for all the appropriate components in their pricing, and adhere to the requirements of the contract post award. Within this category are procedures for bid levelling, clarity of contractual obligations, and assurance that all necessary documentation is provided before the contract execution begins (i.e., properly signed contract, licensing, insurance, surety bonds, subcontractor default insurance, and so forth). With labour issues contributing to a number of risks on a construction project, it is critical that your pre-award vetting process includes an assessment of both the quantity and quality of the labour forces needed to complete the scope of work per the master schedule.

Performance Security – Is your organization asking for the appropriate amount of performance security from the organizations to whom you are transferring project responsibilities? Are you asking for surety bonds or letters of credit? Is the amount being asked for sufficient? Do you have a subcontractor default insurance program in place? Are you properly using financial tools within your contracts?

Quality Assurance/Quality Control – Does your organization have a formal QA/QC team that ensures the work has not only been done, but it has been done properly? Does that team have authority to stop work when they have identified defective workmanship? Does every project get a dedicated QA/QC manual? Are your project teams conducting first work-in-place inspections?

These are five categories of operational risk control. There are others, and your organization should ensure you not only have these procedures in place, but that the aim is to be best-in-class in these procedures. Diligence around your operational risk control practices at this precarious time in the economy will be well worth the effort, both for your profitability and your corporate brand. With growing weakness in the construction economy, now is the time to act.

David Bowcott is the managing director, construction, at NFP Corp. Please send comments to editor@on-sitemag.com.