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Weighing the cost of risk

Experience enables one to develop an almost unconscious ability to manage risk. We learn to avoid potential hazards or pass on the liability to someone else, as when we buy insurance for our homes.

Unfortunately, few of us have the experience when it comes to renovating or construction to identify and manage the risks involved.  Not doing so can be costly.

In the broadest of terms, the risks commonly encountered in a construction project fall into the categories of physical damage or injury, cost increase, delay and poor workmanship.

To manage these effectively one must identify the risk, consider its source, establish the likelihood of that risk occurring and the impact or severity of its effect and identify the opportunities to mitigate or ‘pass off’ that risk. Simply, the choice is between ‘passing off’ and ‘self managing’ the risks and your selection between them will depend on your ability to control them.

In general, the risk should be passed to the person best able to manage it. There are many risks on a construction project.

One example of self-managing a cost increase risk is when an owner decides to supply the material to a contractor thinking it will save money. Most do so without considering the risks involved. Imagine the costs and delays encountered when half a dozen workmen cannot work because the owner did not deliver the materials on time or supplied only part of what is needed because the rest was out of stock! Do you pay these workmen to stand idle or do you allow them to leave the site not to come back for weeks? Neither is an attractive option!

The alternative to self-managing risk is to pass it off. The least risky and the most effective method of ‘passing off’ risk is for the homeowner is to enter into a written fixed price and time contract with a single contractor for the whole works. Do watch out, though, for the not so obvious ‘leaks’ in your ‘Ark’. To minimise this risk, the contract should be based on perfect design drawings and have full regard to avoid concealed conditions. Most important of all, the owner should make no changes to the design as the works proceed. To achieve all of this takes a great deal of self discipline and good project management technique.

The downside of ‘passing off’ risk is the cost. Contractors and insurance companies alike do not take on risk without charge, namely the contractor’s overhead and profit and the insurance company’s premium.

Before you decide to purchase the materials yourself or self-manage any risk in your project you should weigh the advantages against the disadvantages. There is no point in attempting to manage elements of the project if you have neither insufficient time nor skill to do so.

When your project begins, don’t forget to tell your insurance company of what’s happening. To undertake works in your house without telling them may invalidate your insurance. Now that would be a risk!

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By Chris Potter

Chris is the owner and founder of Chris Potter Associates. He is a highly experienced construction professional with experience as a contractor and consultant quantity surveyor and project manager in the UK and Caribbean construction markets.

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