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Risk management: 6 common causes of construction claims

February 13, 2024

Risk management construction claims

How does a construction business mitigate the dangers that threaten its profitability? Put a name to them! The first step in risk management is to identify your company’s biggest threats so you can implement preventive measures or at least minimize the damage if they occur. Here are six of the most common causes of construction claims:

1. Design errors or omissions.

Inaccurate or incomplete design documents can lead to errors during construction, resulting in rework, delays and cost overruns. It’s important to conduct comprehensive design reviews before construction begins, which can be a challenging task.

To save time and money, or to meet federal funding deadlines, project owners may allow construction to proceed before the design, or due diligence regarding that design, is complete. For example, as ground is broken, an owner might have not yet established all necessary rights of way or secured all required licenses. This can lead to design deficiencies, scope changes and compliance delays. One way to streamline design approval is to leverage cloud-based project management software to ensure everyone is on the same page and all boxes are checked.

2. Scope changes and change orders.

Changes in design or project scope during construction can lead to additional costs, delays and disagreements. Early identification of potential deviations in scope or inevitable changes can help mitigate these issues. Also critical is having a sound change-order process for getting approval and submitting charges for extra work as quickly as possible. Clearly communicate your company’s policies and procedures regarding “scope creep” and change orders to project owners.

3. Disrupted or delayed projects.

Unforeseen site conditions, bad weather, labor disputes and sluggish supply chains can lead to claims for unreasonably slow work or unacceptably high costs. To minimize disruptions or delays, engage in careful preconstruction planning, mindful staffing and realistic scheduling. Put contingency plans in place. Invest in finding, training and retaining skilled project managers who can implement industry best practices.

4. Construction defects or poor workmanship.

Defects or substandard work can lead to claims for repair costs, rework or property damage. Conduct formal inspections as well as regular quality control checks to identify and rectify construction defects or suboptimal work. Proper training and supervision of personnel will also help ensure compliance with specifications and applicable building codes.

5. Contractual issues and payment disputes.

Disagreements over contractual obligations, payment terms or nonperformance can result in claims for breach of contract, delays or cost overruns. If necessary, work with an attorney to ensure your contracts clearly define scope, responsibilities, deliverables, milestones, payment schedules and change orders. To avoid litigation, many of today’s contracts also include language regarding dispute resolution methods such as mediation or arbitration. In addition, maintain accurate documentation — including daily logs, progress reports, communication records and support for change orders.

6. Safety incidents and accidents.

As you’re no doubt aware, perhaps the biggest drivers of construction claims are inadequate safety practices and failure to comply with safety regulations. Such shortcomings can lead to high workers’ compensation premiums, fines, legal action or, worst of all, serious injuries or fatalities. Establish a culture of safe practices and be sure to regularly provide up-to-date, comprehensive safety training.

By putting a name to these risks, your business can put measures in place to help mitigate them. Another method you can use to lower your risk? Ensuring your processes, finances, and best practices are in line with industry standards and fully optimized. That’s where we come in! Our team of construction advisors can help your business run smoothly. Reach out to our team today to discover how we can help.


Meet the Expert

Kevin Kalal, CPA, MBT

Kevin’s focus is on developing creative solutions for minimizing taxes, managing cash flow and strategic planning.

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