Top Five Ways to Mitigate Risk in Large Construction Projects

By Henry Baskerville

The construction industry has experienced skyrocketing growth recently, but supply chain issues, labor shortages and inflation continue to stymie projects. Material costs are up from 20% to 80%, depending on the item. A recent poll of general contractors nationwide found that a full 80% were having difficulty finding qualified tradespeople and laborers to hire. And hiring was just half the battle. Retention can be even more difficult, with some workers jumping ship to more lucrative jobs before finishing the current job.

Given these issues, contractors and construction industry clients must protect themselves contractually. Partner Henry Baskerville shares a few of the most important legal safeguards:

  1. Cost-plus contracts. A cost-plus (also known as open-book) contract can help curb contractors’ financial exposure when labor and material costs fluctuate. These contracts are the opposite of fixed-priced contracts wherein contractors must execute the job at a set price, even if material or labor costs come in higher than originally anticipated. With a cost-plus contract, the contractor is reimbursed for their actual costs, in addition to receiving a percentage of the total cost of the project, or an agreed-upon fixed fee, to cover their project management services and overhead.

  2. Retainage clauses. Construction companies and general contractors should ensure that their contracts include a retainage clause. This clause allows a general contractor or business to hold back a certain percentage of a subcontractor’s payment until the project is complete, helping to limit the risk of losing a subcontractor before the project is done.

  3. Signed agreements with key suppliers. Locking in material costs with a signed agreement ahead of time usually necessitates a down payment. Still, it is a smart approach for bigger projects that require large amounts of costly materials, like steel or copper. The contractor then has legal recourse if a supplier tries to back out of the deal or change the price.

  4. Performance bonds. These are usually provided by a bank or insurance company and are used to guarantee that a contractor will meet the obligations specified in the contract and complete the project satisfactorily.

  5. Insurance policies. Some insurance providers offer policies that can help protect contractors from significant fluctuation in material costs. Typically, a contractor pays a monthly premium and is, in turn, eligible to receive an insurance payout if their raw material prices exceed certain predetermined thresholds.

Even when the construction market has settled down, contractors will still benefit from understanding the options available to help mitigate risk and ensure projects go smoothly. For additional information about any of the items listed above or to consult with an experienced construction industry attorney, please contact Henry Baskerville.

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