Managing Risks in Construction Projects

Construction projects can be as thrilling as they are challenging. For project owners, they represent creativity and progress—but they’re also a significant undertaking filled with uncertainty, tight deadlines, and high expectations. 

There’s often an imbalance of expertise between project owners, who only engage in construction occasionally, and contractors, who live and breathe it daily. This imbalance can lead to stress and, sometimes, trouble navigating risks. That’s where today’s episode comes in handy—we’ll uncover some of the warning signs of troubled projects, how to mitigate risks, and how contracts serve as the foundation for safeguarding success. 

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Identifying The Warning Signs of A Troubled Construction Project

About the authors
Todd M. Conley
Jeremy L. Baker

Transcript

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Construction projects can be as thrilling as they are challenging. For project owners, they represent creativity and progress—but they’re also a significant undertaking filled with uncertainty, tight deadlines, and high expectations.  

There’s often an imbalance of expertise between project owners, who only engage in construction occasionally, and contractors, who live and breathe it daily. This imbalance can lead to stress and, sometimes, trouble navigating risks. That’s where today’s episode comes in handy—we’ll uncover some of the warning signs of troubled projects, how to mitigate risks, and how contracts serve as the foundation for safeguarding success.  

As much as no one wants a construction project to go off track, it happens more often than we’d like to admit. The good news is that there are some early warning signs that can help you spot trouble before it escalates. 

One common red flag is continued delays. While occasional delays are expected, persistent setbacks and missed milestones can indicate deeper issues that may lead to cost overruns. 

Addressing timeline problems early is crucial to keeping the project on track. Another warning sign is poor-quality schedule updates. Accurate scheduling is essential, so if contractors are skipping updates or submitting vague and inaccurate ones, it could be a sign they’re hiding delays to avoid accountability.

Unexplained changes in work sequencing are also a cause for concern. Overhauling work plans can result in “trade stacking,” where multiple trades work in the same space simultaneously, causing inefficiencies and further delays. Workforce shortages are another indicator of potential trouble. These issues, often tied to unpaid subcontractors or payment disputes, suggest financial instability on the contractor’s part, which can disrupt the entire project.

An increase in RFIs (Requests for Information) might seem routine, but a sudden spike can signal design flaws or contractors fishing for opportunities to push change orders, driving up costs. Similarly, changes in project management teams can be a red flag. If experienced project managers are replaced with less qualified individuals mid-project, it’s often a sign of trouble ahead.

Lastly, subcontractor disputes can wreak havoc on a project. While occasional disagreements are normal, frequent disputes or work stoppages between contractors and subcontractors can lead to significant delays and spiraling costs. 

By staying vigilant for these warning signs, you can take proactive steps to address issues before they derail your construction project.

Knowing these warning signs is just the first step, so let's explore how contracts can help you stay ahead of these risks.  

Contracts are often seen as necessary paperwork, but smart contracts are actually one of the most effective tools for managing construction risks. They set the rules and expectations in stone (no pun intended). But here’s the catch—not all contracts are created equal.  

Some owners lean on overly one-sided contracts, shifting all responsibility to the contractor. While that might seem like a good idea upfront, it can backfire, leading to ongoing disputes and claims. A well-structured contract fosters collaboration between owners and contractors while clearly allocating risk.  

When preparing construction contracts, focusing on key provisions can help mitigate risks and avoid disputes. Start with payment terms and tie payments to clearly defined objective milestones rather than vague progress payments. This approach ensures contractors have reliable cash flow while protecting owners from the risk of overpayment. 

Next, address conditions for payment withholding. Clearly outline scenarios where withholding payments is permitted but include safeguards to prevent work stoppages that could derail the project. 

Don’t forget about landlord construction requirements. Failing to address specifics like cleanup, noise limits, or access restrictions can lead to unexpected change order requests. Tackling these issues upfront reduces headaches down the line.

Completion requirements are equally crucial. Substantial completion should be explicitly defined. For instance, in a power plant, substantial completion isn’t just about having a constructed facility, it’s about meeting specific performance criteria. 

Provisions for bonuses and liquidated damages also demand careful thought. Finding the right balance between incentives and penalties ensures the project goals are fairly represented and reduces the likelihood of disputes. 

Finally, consider warranty allocations. Contractors should be held accountable for warranties on any equipment they procure, fostering clarity and accountability on both sides.

By focusing on clear, practical, and well-balanced contract provisions, you can significantly reduce risks and set the stage for a smoother construction process.

Successful projects require a focus on collaboration and accountability. To keep everything on track and ensure your contracts work for you rather than against you, consider these three key approaches.

Firstly, adopt a partnership mindset. Treat contractors as partners rather than just service providers. When both sides understand each other's objectives, whether it's timely project completion for owners or steady progress and payment for contractors, the chances of success significantly increase.

Secondly, simplify your contract terms. Overly complex legal language can create confusion and alienate teams. Instead, use straightforward, practical language that project managers and team members can easily reference throughout the project.

Finally, be realistic about handling disputes. Prolonged litigation rarely benefits anyone involved. Instead, set clear and achievable goals for resolving conflicts early on. Engaging legal counsel before things escalate can help find smarter, more efficient solutions.

By focusing on these principles, you can foster smoother collaborations, clearer communication, and more effective conflict resolution in your projects.

Even with the best contracts, disputes can happen. Here’s how to manage them effectively.  

Engage legal counsel as soon as a dispute arises. Early intervention allows for tailored strategies.

Keep clear and consistent documentation throughout the project lifespan. Good records are your best defense if disputes escalate.

Stay solutions-focused. The primary goal should always be getting the project back on track.

Disputes don’t need to derail a project if approached strategically.  

To wrap up, construction projects succeed or fail based on how well risks are managed. Recognizing the warning signs early and creating contracts that foster collaboration can protect your project, save resources, and strengthen your working relationships.  

If you’re ready to take your next project to the next level, ensure your contracts work for you—not against you. And remember, effective project management and legal counsel are your strongest allies.  

Thank you for listening to Womble Perspectives. If you want to learn more about the topics discussed in this episode, please visit The Show Notes, where you can find links to related resources mentioned today. The Show Notes also have more information about our attorneys who provided today's insights, including ways to reach out to them.

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