Risk management is a vital part of success for construction contractors, owners, and lenders. Risk allocation, the assignment of responsibility for a risk to a certain party within the contract, serves as an essential aspect risk management. Furthermore, the way a party deals with this assumed risk is a facet of minimizing risk. Here are a few important issues to keep in mind with regards to construction contracts.
When entering or preparing a construction contract, be sure to allocate a certain risk to a party that can best control that particular risk. After determining what the potential risks are for any project, contractors and owners will need to decide if it is better to allocate a risk to another party or take on responsibility for themselves.
Insurance is a basic way in which you will manage risk and minimize costs if a loss is, in fact, realized. Furthermore, when working to prepare requirements for insurance, it is crucial that you ensure the limits are adequate in relation to potential losses.
The contractors and any subcontractors that are working on the construction project should carry workers compensation employers liability, commercial general liability, and automobile liability policies. Furthermore, these contractors and subcontractors should also carry an excess liability policy that provides coverage over the limits of the commercial general and automobile policies. Professional liability coverage should also be a requirement for those contractors who are taking part on any design-build functions.
Design professionals such as engineers and architects should be required to carry works compensation/employers liability, auto and commercial general liability, and professional liability insurance. As professional liability insurance typically provides coverage on all of a design professional’s projects, and not just a particular project, ensure that the total limit is sufficient.
Additionally, be sure to have contracts examined by a trusted attorney prior to signing.