Spotting Trouble Early: The Contractor's Risk Management Scale

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ℹ ABOUT THIS EPISODE

Join Wade and Stephen as they delve into the intricate world of risk management in construction. Discover practical strategies for assessing and mitigating potential hazards in your projects with a simple one to five rating system. They discuss real-life examples, the importance of safety measures, and the role of proper contracting in managing risk. 

Tune in to learn how to protect your construction business from financial losses, injuries, and reputation damage through systematic risk assessment and management.

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⌚️ In this episode:

• 00:44 Understanding Risk Factors in Construction
• 01:48 The Importance of Systematic Risk Assessment
• 03:43 Weather and Contractual Risks
• 05:02 Common Pitfalls and Risk Mitigation
• 06:18 The Role of Risk Managers and Advisors
• 16:02 Safety Measures and Toolbox Talks

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Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | SuretyAnswers.com

Transcript

Wade Carpenter: [00:00:00] You ever wonder why some construction jobs feel like walking across solid ground while others are like balancing on scaffold during a windstorm? The difference often comes down to how well you spot trouble before it spots you.

Today we're breaking down a practical risk assessment system that helps you rate potential project hazards on a simple one to five scale. Like a good foundation inspection, we'll show you how to systematically check every corner of your project time, location, materials, equipment to identify where problems might be hiding.

This is the Contractor Success Forum I'm Wade Carpenter with Carpenter & Company CPAs, alongside Stephen Brown with McDaniel Whitley Bonding and Insurance.

Stephen, what's the most surprising risk factor you've ever seen and the contractors completely miss?

Stephen Brown: It's, there's so many of them Wade. It's just hard to say any one. And I know that he says that's not what I asked you, Stephen, but it's true. There's so many. It's always something small that becomes something big. Because if it just stared you in the face, anybody [00:01:00] could get that. But it's the details. They say the devil's in the details. That's definitely a situation here.

One thing that I was hoping our listeners will get out of this podcast is understanding that there is an understanding to risk. Construction's one of the riskiest businesses there is.

There's so many different ways that you can lose money, or someone can get hurt, or you have property damage to customer's property. There's so many ways of dealing with it. And as a risk manager, Wade, that's what I do for a living.

You say, no, no, no, no. You're an insurance and bonding agent. What we do day in and day out is we try to help our customers manage their risk. And it can be done by purchasing insurance, but it could also be done by avoiding that risk altogether. It could be done by contractually transferring that risk to someone else or something else.

But it all starts with understanding the risk. And I would say on every project or everything that you're doing, you need to start saying, [00:02:00] what risks are inherent right now that I know about? And also talking to some of your key folks on your board of directors. Hey, I'm starting a new project in so and so. You see any problems with that?

I tell you what, so and so was telling me such and such happened, you might wanna think about that. Just putting all the information together to analyze the risk. I think it's the best reason we should have had this podcast.

Wade Carpenter: I was trying to think about this from a standpoint of, what's gonna happen? I mean, it's common somebody's gonna get hurt that's why we have workers' comp insurance. But there may be some factors out there that we don't even think about, or maybe it's just in the back of our mind. Maybe it's something about a job that could go wrong and maybe you should think about.

So I was thinking about this in a context of, you got a weather forecast out there, but they say, okay, it's a 20% chance of rain, or a 60% chance of rain, or, we've had some bad weather to here, you know, it's like a level one risk or a level four risk or something like that.

My thought was could we [00:03:00] have some kind of rating system, like just a simple, is this something that we should think about? Is it something we should think about insurance? So that's where I'm throwing it back to you. What's your thoughts on that?

Stephen Brown: Risk managers definitely think about it and have systems to measure it. When you mentioned weather, what a perfect analogy. You just can't do construction projects indoors, most of them. Some of them you can get them dried in for the winter, keep your folks busy.

But every element of construction project depends on the weather. And you're right. That's something you can measure. That's something you can put in your contract based on forecast projections, that I'm gonna need more days to finish this project. Your expectations as an owner of when this project should be finished and when I can do it, need to be negotiated.

And you're like, I bid the job and they gave me the timeline to do the job. If that's the case, make sure you analyze your risk and don't bid the job if it's not something that you can do. And I know that sounds simple and you're like, God, what a stupid thing to say. But I see people forgetting that.

I see people bidding work [00:04:00] all the time. They just can't even tell you what the liquidated damages are for being late and not finishing a project on time. It's absolutely terrifying to me because I see the end result so many times. What happened? I thought you were gonna make money on that job. Oh, we ran into this and we did that. Things happen in construction, right?

But I would just say, look at a project. Look at hiring someone. Look at setting up a business system. Look at bidding a job. Look at finishing a job. Look at purchasing and maintaining equipment.

Everything you do, you can analyze the risk. And good construction company owners, they know from experience that they have these risks. And they'll tell you exactly what they're concerned about.

Bond underwriters always have a perception of the risk. It's their job to. So you're gonna do something new that you haven't done before, in a location you've never done it before, in a short timeframe with high liquidated damages? And you're walking into a situation contractually where you're throwing out the baby with the bath water. You're just giving it all to the owner. [00:05:00] These are all high risk situations. There's a reason that folks are worried about it.

So it's not just the risk of you losing money on the project, but it's the risk of someone getting hurt and not being able to go home. It's the risk of you destroying your company from your reputation standpoint.

But I would say just simply, Wade, A lot of systems involved with those four things I me ntioned: identify the risk, avoid the risk, contractually, transfer the risk or buy insurance, insure the risk. So that's it in a nutshell.

And how you can do that is just simply taking a situation. I'm a list maker, I make lists all the time. On a to-do list, there's an important factor on it. You do the same with risk. Just give it a score, a situation that pops into your head, a one to five what your perception of that risk is at the time you're thinking about it, and then later on as you manage that risk, can you do things to minimize that risk, you prioritize things on a scale of one to five when you first think about it.

And then as you [00:06:00] start delving into that risk assessment, you implement things that make it less risky or you charge more for the unknowns if you can charge more.

But either way, if it shows up on your radar, there's something you can do before the job starts to minimize that risk in absolutely every situation.

Wade Carpenter: This takes me back to my early twenties when me and a buddy, I guess the wives would go out, but he and I would have contests on eating wings and trying how hot that hot sauce could be. You know, you got the mild sauce and then you got the three mile island, maybe these ghost peppers. I've seen some hot sauces have some kind of rating system.

But you know, I'm taking a risk that I'm gonna be miserable that night after I ate all those wings, and I'm probably down towards the wimpy side now on those hot wings.

But sometimes we need to think about is this risk something that might come back to bite us later, like those wings?

Stephen Brown: No, I mean, that makes a lot of sense. And I'm not trying to [00:07:00] be a naysayer or someone pessimistic in it.

Wade Carpenter: No. 

Stephen Brown: I see things happen all the time. And I wouldn't be in business if construction wasn't a risky business. I wouldn't be making my living in what I do.

But for example, you just think about someone that's doing roofing work that doesn't do it all the time. You do it all the time. You know what those risks are, right?

Wade Carpenter: Yeah.

Stephen Brown: And if you don't do it all the time you perceive that risk as being very risky. I can tell you with insurance underwriters, some of them have a long memory of a risky situation where it got botched and it cost them a lot of money, and that's all they know.

And sometimes you say, but there's no risk involved. Yeah. I don't care. It's not something I want to do. And I fight that all the time.

I'll give you an example, electrical contractor installing traffic lights. What do you think an insurance underwriter would say about that? Would they want that risk from a liability standpoint? 

Wade Carpenter: Probably not..

Stephen Brown: Yeah, but at the same time, once you install the system, there's so many tests [00:08:00] involved that back up that system that once that system is signed off by the municipality where you're installing that traffic signal, then the liability's gone. Just the backup system for a manufacturer of a traffic light, it goes to blinking red, right? When there's a power outage? How many times has that default been tested? And whose liability if it doesn't go to red and there's no color and someone just goes motoring right through it? whose real fault is that? You're the motorist. You need to be aware of these things.

So the first reaction is, oh no. I'm not. I know if they do that, I no, we're out. That's just way too risky. What about someone doing the wiring for railroad crossing? For just the wiring for it. What about the mechanical system to make the gates go up and down? If someone said that was too risky to do, there'd never be railroads.

Someone had to develop it and someone had to take the risk to manufacture it and install it. And they got paid a lot for taking that risk when they first started, didn't they? Until gradually things calmed down and maybe the [00:09:00] risk wasn't as bad. In the construction industry, Wade, what I see happen so much, you asked me at the beginning of the podcast, what's the number one thing that you've seen? And I said it's something small. And that didn't answer your question, did it? The main risk I see is underestimating your exposures.

Wade Carpenter: Yeah.

Stephen Brown: You gotta be systematic in understanding what those exposures are.

Some people they underestimate it because they just hadn't given it thought. And I just want our listeners to think about it. Think about it as a process, think about it as something that you should teach everyone that works for you and works with you to think about it the same way. We most certainly have our systems in place as an insurance agency, or we wouldn't be in business. 

Wade Carpenter: That sort of brings me to my next question for you. My car, they have this idiot light that says check engine. Is there a standard, check engine? Should you think about this? And some of those warnings might be nuisance warnings, but some of them you really need to pay attention to. I would guess, if it's something that you don't do every day, you're probably not gonna be thinking [00:10:00] about that. Do you have any standard list?

Stephen Brown: That's a great question, Wade. Yeah. You could start with the OSHA, the government saying I'm gonna mandate that you're safe on the job. And I'm gonna make you do a log that tells me how many hours your employees have worked, and how many accidents you've had.

Your workers' comp experience mod is often a reflection of how safely you run your business. And it's an ongoing battle between you and the National Council of Compensation Insurance on making sure that you keep your mod down.

A lot of companies just won't work with you if you have a high experience mod because that means you've had a lot of claims.

Other measuring sticks for risk, first of all, from a bonding standpoint, do you have the cash in your company to weather the storm?

The next one is contractually. Are you signing something that's putting all the risk on you, or is the owner gonna share some of that risk? Ideal contract, remember, whoever writes the contract is writing it for them. So don't ever forget that [00:11:00] whoever presents the contract is presenting what is best for them. Don't be afraid to change it.

You might get some backlash. You might get well, I don't know. But if it doesn't make sense and it's not doable to you, who cares? You don't want to do it. Or maybe you do, but nevertheless, that's the game you play every day.

Other systems to manage it and track your risk are, like you said, the weather, the timeframe, location of the project. That's everything. And we've had other podcasts on materials. What kind of specific mechanical computer issue driven situation is coming into play on your project, either through you or one of your subcontractors? If you're a subcontractor, you're doing it. And how do you manage that?

Wade Carpenter: Yeah, I think, that sort of goes to where I'm thinking about this episode of, a lot of contractors are not going to be clued into all these things that could possibly come up. And, nobody can know everything. Maybe having some kind of checklist would be great.[00:12:00] 

But I think about financial investments, stocks and bonds. People get an advisor for their financial investments. But in this particular case, people I think forget that you're essentially acting as their advisor in this risk factor. So, I think, picking up the phone and calling you and saying what is it that I should be thinking about, I think would be a great thing to do.

But you know, I think you sort of serve the same purpose as a financial advisor. I mean, obviously a different role, but, I don't think everybody knows everything. And you've seen so much in your career. What are your thoughts on that?

Stephen Brown: From my standpoint, you get what you pay for. I work on straight commission. You don't pay me a salary to do what I do. So, it seems to me like if I'm not charging you a fee as a professional, you don't see me that way. But I can assure you, my customers see me that way and depend on me. They depend on me a lot to exercise my experience and my knowledge. And I love it, because everybody wants to work with someone that takes your advice, right?

But, the ultimate risk and the [00:13:00] decisions fall to you as the owner operator of your construction company. Those risks fall to you. And always systems in place help. If somebody can do something dumb, it's they're gonna do it, right? That's what everybody says.

But if you have just the simplest thing of having a morning toolbox talk about safety, cuts accidents by 80%. It's effective. So you can say, I haven't got time for that. We gotta get going, they know what they're doing and we do this all the time. But you took the time to tell them that safety's important and it's not an option.

And you're also telling them that you care about them not getting hurt. But more importantly you're saying, we're not gonna tolerate it. I'm not letting you do something stupid. It's just not gonna happen. You gotta do that. So there's a million reasons why these systems work and they're effective. 

Wade Carpenter: Yeah it does seem like it's just some kind of financial or whatever, it's a poker game f or these contractors, it was like, we're taking a risk, and we're betting that one thing or another is going to go our way.

And so, that's where I would say [00:14:00] you probably need an advisor like Stephen to go out there and help you count the cards. 

Stephen Brown: Yeah, I'm not playing the game for you.

Wade Carpenter: Yeah, I mean you are ultimately gonna be making the decision as a contractor, but you know when you've got somebody advising is looking over your shoulder and can see the other guy's cards too, I think that's exactly what Stephen brings to the table.

Stephen Brown: There's nothing more exciting in a poker game than putting a winning hand down taking your buddy's money. There's just nothing. It's intrinsically wonderful to do and horrible when you lose. But it's the same thing when you've got a job that you're making really good money on and it's coming in ahead of time and you're gonna tweak out a little more profit than you expected.

That's celebration time. That is the ultimate successful feeling and you can have it more often by managing your risk.

Wade Carpenter: Yeah, absolutely. And we've also used this, I guess I'm full of analogies today, but you know, like triage. When you're going into a situation especially if it's a contract you're [00:15:00] not familiar with, I think you need to figure out what those risks are. And again, picking up the phone and calling Stephen, I think is a good idea.

Like, okay, what do you need to prioritize first in a medical situation? Where is it we need to put our thoughts and what can happen and avoid the worst case scenario? And if you're gonna go back to that poker analogy, if you're gonna take the risk on that, at least you need to understand what the potential downfall that can be.

One of your famous lines, you said many times on this, there's only a upper limit on how much you can make on a project, but there's no theoretical bottom on how much you can lose on a project.

Stephen Brown: I hate that saying because it's true and it's scary. Managing risk is how you keep that particular risk from bankrupting your company. Putting your company out of business and destroying everything you've worked so hard to build up.

Like the example I use for the toolbox session, I can tell you 35, 40 years ago, you could only get workers' compensation insurance from the [00:16:00] state pool. Nobody offered it voluntarily. They didn't want to. Safety was not talked about. It wasn't an issue. Now, if you haven't shopped your workers' comp, you're paying too much. It's coming down significantly every year.

It's something that helps make the insurance companies profitable. If they're not profitable, they're gonna raise your rates all across the line. So something good happened to change that.

You remember me telling you that story about, I was talking to this old guy about safety and I was just a youngin in the business. And I was excited. It seemed like something I had discovered myself.

None of my contracting customers talked about it. We didn't spend a lot of time in the office talking about safety. And he said to me, he goes let me tell you something. We run a safe project. Be cause they know that if they're not safe, I'm gonna kick their ass. I'm like, oh that's good. How often do you have to do that? All the damn time. I'm always on their ass.

Have you ever had any specific injuries or safety [00:17:00] problems that happened to you? No. No, I never have them because-- I'm like, really nothing? He goes there was that one guy. I said, what happened then? Oh, he died. And I said, what did he do? He goes, I told him not to work around that skylight without tying a rope around him. So he fell through the skylight and died? Yeah. I told him, and I looked at him in horror. I like, what kind of monster are you? I mean, seriously, you are a freak. Not to mention that he just had that attitude. But that was the old school contractor. And believe me, there was nothing to be proud about when somebody died for not listening to his advice. I told him, so he did what he was supposed to do, right?

Wade Carpenter: Yeah.

Stephen Brown: Wrong, he didn't. Anyway, that's just another story. I didn't mean to take up the time of the podcast, but now there's these toolbox talks in the morning. People have bought into it, changes occurred, losses have calmed down. That risk is minimized.

Wade Carpenter: If I could, I'll put you on the spot here. [00:18:00] Do you have any kind of generic list or checklist that maybe a contractor could download or something from you that would say these are some risks you may need to think about, or maybe different types of projects? We talked about a recent episode is project design and build, that kind of stuff. I never thought about those kind of risks before that. 

Stephen Brown: Risk and Insurance Management Society, we have lists on your specific trade. It's tied to your specific risk to your particular industry. It's a checklist. It's something that we do as agents that help us assess the risk going in and what we can do to help you, and also help them communicate to you some risk factors that you may not have considered. How do you get that? Definitely they're available on the OSHA website and they're also, if you wanna reach out to me let me know what industry you're in. Send me an email, Stephen@mcwins.com, and I'd be happy to send you a risk checklist for your type industry.

Wade Carpenter: I think that would be great. Absolutely.

Stephen Brown: Okay.

Wade Carpenter: So [00:19:00] any other wrap up thoughts? For me, I think it's just something about things that can pop up and ruin your construction company. I've seen weird things happen. I'm sure you've seen a lot more than I have.

Stephen Brown: My advice is when that gut's telling you something's wrong, pay attention to it. Take a few seconds just to write it down on your list. And then later on when you go back over your list, you go, yeah, that did pop into my mind. I meant to do something about it.

Do I need to follow up on that? It's just a very simple habit, and I hope by listening to this podcast, at least our listeners are thinking about how they manage risk and what they need to do about it. Be cause our whole objective is to make construction easier for you, not harder.

Wade Carpenter: We did that recent episode, I think it was pretty cheap insurance to make sure you don't have a huge downfall. And sometimes maybe reaching out to find out if it's something that may not cost that much, but if it allows you to sleep at night, I think that'd be well worth it.

Stephen Brown: Yeah. Everything from building bridges to working in and around active [00:20:00] railroad tracks to demolition implosions to the most absolutely risky type of construction you can imagine to the simplest, most routine things from a drywall contractor, from a painter getting on, you know, a ladder, number one cause of accidents, the list. And also jumping off a trailer when securing a piece of equipment, jumping out of a piece of equipment. Number one cause a loss for workers' comp claims. So we'll leave on that point, but I can just say that we have managed risk at McDaniel Whitley the most difficult possible scenarios. And it always can be managed. There's always a game plan for dealing with it.

Wade Carpenter: Okay. I appreciate you bringing this to us today and if any of our listeners have any questions, thoughts, comments, reach out to Stephen or drop them in the show notes below. We do this every single week. And please share, subscribe, do all that stuff. It always helps us out and we will see you on the next show