Up Your Risk Management Game

Good morning everybody. Dennis Engelbrecht, Digging Deeper.

Today I want to talk about risk and in particular, your risk management program at your company. My encouragement for
the day is to up your game. Up your game, because really the landscape out there is just full of landmines today. Let's face
it with the supply chain woes we're having, the significant price rises in materials, up at 26% year-over-year for all inputs
to construction, the risks that you have today, both for completing a job on time or completing a job on budget are as
high, if not higher than they've ever been in your experience in construction.

What does that mean to you? Well, what that means to you is your job of managing risk is elevated. We can't forget that
in construction, generally speaking across the trades in the best of times we're making four or five, six or 7% to the net,
and in the worst of times, it's zero to two or 3%, and we're in a cyclical business so we go through those good times and
bad times. Well, with that kind of margin and a 26% rise in costs, obviously there's a tremendous squeeze and a
tremendous risk there.

What are you doing to up your game in terms of risk management? Keep in mind, ultimately the contractor is responsible
for price and schedule. Now what you've got to do starting at the beginning is probably your go and no-go procedures -
who you work with, what kind of work you take on, what kind of risk you take on is very much encompassed in that go/nogo analysis. And making good rational decisions and making sure you follow a rational process will help you make better
decisions as you go through that process.

Probably never more important is your contract review and your contract negotiation. Again, when the documents are all
signed, you're going to take responsibility for price and schedule. So, you better be really in tune to what that contract
says about price and schedule. What encompasses a change order, what encompasses an owner responsibility for a price
change out there. So, having a very ardent review of your contracts and making strong negotiation is very important.

Buyout: Timely buyout has probably never been more important. Again, with prices rising every day, if you don't buyout
your contracts and get it done in the first 30 days so much can change. Your supplier might withdraw their price, might
change their price, might refuse to go to contract. All of these things are happening now out there in the marketplace.
They're not happening rampantly yet, but the risk of it happening is out there. So one of your best weapons is really in
your buyout process, making sure you very quickly get to contract, make sure that your subcontractors or your suppliers
are locked in on that pricing so that something won't happen to them down the line which forces them to do something
to you.

Change orders: Again, change orders are increasing in importance with the changing pricing, first of all, but most
importantly, your responsibility for schedule. As things change, make sure you're getting your scheduled days into your
contracts as well as your price changes. Even if there's nothing but a schedule delay and not a price change, make sure
you're getting zero sum change orders to get those extra days there. You're probably already at increased risk just taking
a fixed contract length, so you don't want to increase that risk by taking on any additional risk during the course of the
project. So, you got to be very careful about that.

I've mentioned schedule several times, but what are you agreeing to in this schedule? Have you really accounted for all
the potential supply chain woes and disruptions that you're going to face? Do you really think you can complete this
project today the same as you could the same project two years ago? I'm going to guess you can't. There are just too many
items in that supply chain that you cannot control, that you need extra contingency to cover those things, and you need
for that risk to not be solely born with you unless you have those contingencies. So, make sure you have sufficient time
upfront in your schedule to allow for things to go wrong.

Other risk management things: The basics; your job turnover, launch, and all of that planning. This is where you may first
be identifying the things that can go wrong, the supply chain pieces that are going to be the most challenging and creating
your plans and contingencies around those things so that they don't bite you. So, make sure you're having an effective
informal job turnover, launch, planning session, and make sure the right people are in there to get the best plan for your
job.

Your job reviews: Hopefully they're monthly. Your monthly job reviews have to be very much on task to be looking for
again, those items that are rising up that are going to create problems, those supplier issues, subcontractor issues that
may be caused again by the whole pandemic problem.

Customer communication: Interestingly, I'm hearing from a lot of people that cooperation between owners, architects,
engineers, and contractors is probably as good and as high as it's ever been. That's fantastic because it's necessary with
all the things going on in this supply chain and with price changes, but make sure on your side that you're being a great
communicator with your customer, with your architect, with your engineer, with your end customer so that everybody is
cooperating and you are getting that kind of coordination among the parties.

You may not have thought of this, but personnel reviews, staying close to your people. In this trying time one of the worst
things that can happen to you is losing somebody mid project. As we talked about in some other blogs, the competitiveness
for people out there right now is at fever pitch. There's a chance somebody's waving some ridiculous offer in front of your
people and that you're potentially at risk. So, stay close to your people. Make sure you're doing your personnel reviews.

And then finally in upping your game in risk management, no one thing is more important than your willingness to walk
away from an opportunity. We're always concerned with our backlog, keeping our people employed, growing our
company, getting enough revenue to cover our overhead, all of those things, but look at the risk involved in the job. If
there's too much risk, walk away. Getting smaller is a much better solution than taking a five or $10 million loss on a job.
So be very careful in your go/no-go reviews. If in your contract negotiation, you're getting the willies, walk away. This is
the best time as a contractor to think about risk management, upping your game, and walking away may be a key part of
that.

Again, thanks for tuning in. Dennis Engelbrecht, Digging Deeper.