Contract documents

The first line of risk management is reading the entire contract before signing, right? Wrong. That may be the golden rule of contracts, and we’ll get to that, but the first line of risk management starts a few steps prior.

Since construction is considered a high-risk industry, it’s ideal for your team to come together to analyze risk as early as the bid phase of the project. Some of the most common risks to your construction project are:

• Seasonal slowness
• Equipment damage
• Injuries to third parties and workers
• Faulty work
• Missed deadlines

Thankfully, appropriate risk management provides a clear idea of how to eliminate or mitigate as much of the risk as possible. When you do have to take responsibility, the risk management process helps you manage the loss and build a better future.

When analyzing risk, it’s important to have team members from all parts of a project to come together to better communicate and identify risks, reduce unforeseen problems, and recognize interrelated risks.

The risk identification and application process

•  Analyze – identify and measure the risk by the impact it will have on project goals
•  Prioritize – identify what risks could cause the most loss or gain, and consider what risks have the highest possibility of occurrence
• Reprioritize – as new information is presented, revisit and reprioritize risks

By planning a risk response and implementing it, you avoid, minimize, transfer, and accept the risk.

Now, onto the contract stage.

Remember that golden contract rule? Read the contract thoroughly before signing. It’s very surprising how many details can be missed because some parties skim over the contract before signing. Since everything on a project flows from the contract, it’s incredibly important to minimize risk by reading every detail.

Whether you are an architect, owner, contractor, subcontractor, or engineer, each party must understand what is expected from them and what their liability is on a project.

For example, a typical owner/architect agreement will include these basic elements:

• The owner’s objectives for the project
• The architect’s scope of services and a description of the drawings or other deliverables the architect is to furnish
• The fees to be paid for providing those services and when they are to be paid
• The schedule or sequence of events in which the services will be provided

But, where is the allocated risk section? Usually, risk is allocated in the parts of the contract that outlines compensation or restitution when a problem covered by the contract occurs. Generally, these provisions require one party to pay for losses incurred by another party as a result of a claim made by a third party.

For example, if a worker is injured on the jobsite, the owner is “indemnified against” claims for bodily injuries to workers, so the contractor will be responsible for the worker’s loss.

AIA Contract Documents makes it easy to manage risk through widely-used, trusted, and clearly defined agreements, as well as the Insurance and Bonds Exhibit, and bond forms.

The Insurance and Bonds Exhibit can be added to AIA Documents A101 ® —2017, A102 ® —2017, and A103 ® —2017.  This comprehensive exhibit allows the parties to set forth the various insurance coverages and policy limits that will be purchased and maintained by the owner and contractor for the project.

The surety bonds are essentially promises by a surety or guarantor (a bank or insurance company) to pay the owner if the contractor fails to meet its contractual obligations. These forms are an important precaution that guard against broken contracts and strengthen the trust between the owner and contractor.

The A310-2010 Bid Bond is a simple, one-page form most commonly used on public projects. This form establishes the amount due to the owner from the surety should a selected bidder fail to execute a contract per specifications.

The A312-2010 Performance and Payment Bond incorporates covering the contractor’s performance, and the contractor’s obligation to pay subcontractors and others for materials and labor.

Some additional ways to manage risk:

• Get coverage for natural disasters, unknown site conditions, and similar risks by obtaining builder’s risk insurance to ensure contractors will be compensated to rebuild in the event of loss.
• Contractors should carry commercial general liability insurance to cover liability exposure such as bodily injury and property damage.
• Contractors may also obtain wrap-up insurance for the specific project, to include the owner and subcontractors as insureds.
• Architects, engineers, and contractors performing design-build functions should carry professional liability insurance to cover errors and omissions when providing design or other professional services.

For more information on Risk Management, visit the AIA Risk Management Program page.