Escolar Documentos
Profissional Documentos
Cultura Documentos
Assessment &
Prequalification
By Ryan Howsam
In construction, money is
made or lost on a project before
the job even starts. The ability
to make the right decisions in
pricing risk before submitting
the project bid directly impacts
how successfully (or unsuccessfully)
margins are protected.
The question is, how do contractors leverage the opportunity that lies in front of them while ensuring that the
right decisions are being made?
For the typical contractor, the difference between a good
year and a great year can equate to just two or three
bad jobs. To keep the number of bad jobs at a minimum,
contractors are adopting more sophisticated approaches
to manage and mitigate project risks than they ever have
before. They understand that competition for projects
remains high and that margins are still low following the
economic downturn. Combined, these two factors are
pushing contractors to be smarter about which projects
they bid on, how they bid, and which project risks they
do (or dont) shoulder.
Adopting these new mindsets is critical because todays
recovering market is helping to produce more work for
contractors. While this is a welcome and positive trend, it
also creates some potentially negative consequences that
must be accounted for and properly managed.
During the recession, for example, many contractors
right-sized their companies by cutting overhead (namely
by reducing labor forces). As the economy picked back
up, and as contractors backlogs have grown, hiring has
also increased. As a result, the overall jobless rate for
construction workers is dropping back to pre-recession
levels. In fact, the construction unemployment rate has
almost aligned with the national unemployment rate for
the first time since 1951.
Part of this is due to a labor pool that has been shrinking
since 2007 a phenomenon driven largely by the exodus
of Baby Boomers (who are turning 65 at a rate of 10,000
individuals per day) from the workforce, and the large
number of workers who exited the construction industry
completely during the downturn.
To top it off, a national oil and gas boom has lured many
of these workers away with newer and higher-paying jobs.
Combined, these challenges have contributed to a war for
talent within the construction industry, making it increasingly
difficult for contractors to locate quality, skilled, craft labor
for both current and future projects. According to FMIs Craft
Labor Recruiting and Retention 2015 Survey Report, 24%
of respondents will be unable to bid more work and 32% will
experience slow growth if their companies cannot reasonably
meet the need for skilled labor and tradespeople.
Contractors finances are still at risk in this recovering economic climate. Balance sheet health eroded during the recession, with low-margin projects pursued and won as a way to
help weather the storm and keep the lights on, so to speak.
However, as contractors win more work, and as backlogs
increase, the work margins for those backlogged projects still
remain low and have, in turn, put a great strain on working
capital. As a result, contractors are three times more likely to
fail now than they were during the downturn. And for those
contractors that dont fail, project-related quality issues are an
increasing problem due to staffing, skill sets, and working capital challenges.
5%
10%
15%
20%
25%
Moderate
Opportunity for
Cost Savings
Low
High
Design
Preconstruction
Award
Construction
Mobilization
Demobilization
Post-Construction
Although the line item details will differ among companies based on type of work performed, the foundational elements of financial, safety, and insurance risk
must be included for the assessment to be valuable. In
addition, the project risk assessment needs to be supported by three key elements:
1) Processes: The contractor must have well defined processes in place that are consistently executed across
projects.
2) Tools and Techniques: The contractor must have scalable
tools and techniques to address project risk.
3) People and Behavior: Both the delivery team and
management need to own the risk and be proactive
in addressing it; otherwise the processes, tools,
and techniques will be ineffective.
There are two main buckets to a formal risk assessment
approach: external risks and constructability risks. For each
project, potential areas of risk should be identified and placed
in the appropriate bucket, as shown in Exhibit 3. For example,
constructability will probably include: labor, materials, equipment, schedule, project type, and jobsite.
Next, each general area is broken down into its risk components and analyzed, weighed, and scored for risk. (See Exhibit
4.) As an example, when looking at project type, experience
should be considered not just the companys overall experience with the particular project type, but also the experience
of the project team.
The result of this analysis is a project risk assessment dashboard with a green, yellow, or red risk rating for each element. (See Exhibit 5.) This will help the reviewer price the
project while taking the potential risk into account. Depending
on the competitive environment, the final bid price may
differ from the ideal price. The project risk assessment is
then used to proactively manage the additional risk with the
processes, tools, and techniques previously discussed.
Individual Risk Elements
to
CONSTRUCTABILITY
Owner
Partners
Subcontractors
Architects/Engineers
Contract
Regulatory
Labor
Materials
Equipment
Schedule
Project Type
Jobsite
FINANCIAL
SAFETY
INSURANCE
PROJECT TYPE
Scope
New Build vs. Retrofit
Modular/Prefabrication
Project Size
Rsum/Experience
Commissioning
Environmental Consideration
RSUM/EXPERIENCE
Issue
Score
Notes
Consider
Now, examine individual elements of the project risk assessment process. Start with grading each element a process
thats based on the loss potential, the offensive and defensive
strategies tied to the frequency and severity of specific risks,
and the potential financial impacts to the project. Some of
the most common are as follows:
Owner
One aspect of this risk element is to understand how the
owner is financing the project. For example, a high-end
condominium development project was underway in Miami
during the height of the housing bubble. Developers were taking 20% down payments on units. When the housing bubble
crashed, developers walked away from the projects unable
to pay the contractors. Some contractors took units in lieu of
money, becoming de facto property owners and managers.
Average
2.2
2.0
1.9
2.2
1.8
2.4
CONSTRUCTABILITY
Labor
Materials
Equipment
Schedule
Project Type
Jobsite
1.6
2.3
1.8
1.8
1.9
1.8
Regulatory
Equipment
Schedule
Look at incentives to complete early. What are the risks to
the schedule, both on an increase and decrease in fee? The
greater the likelihood of schedule disruption, the more pricing should reflect the risk.
Project Type
Different project types will determine the risk built into the
project. Max price, for example, features a different profile
than a design-build or T&M project.
Jobsite Conditions
Working in lower Manhattan vs. building a pier vs. constructing a warehouse on an empty lot drives costly decisions
around material delivery, staging, parking for laborers, and
mode of traffic issues, to name a few.
As each element of the project risk assessment is examined,
consider the financial, safety, and insurance concerns as
potential project impacts. Finally, the ultimate project pricing for risk should reflect the severity and frequency of the
risks identified. Ask: Is it billable? How much will the contract
sustain? And, if risk is managed correctly, will the profit be
realized?
Safety
Just one bad subcontractor can undermine an entire project.
EMR safety statistics are the benchmarks upon which most
All the upfront work in identifying risk and building out the
subcontractors are qualified. For government work, generproject risk register will be wasted if the right downstream
ally an EMR of 1.0 or below is required. An argument can be
parties arent selected. A good project risk assessment and
made that OSHA statistics are more valuable benchmarks to
formalized handoff process combined
with a best in class prequalification proEXHIBIT 6: Subcontractor Management: Prequalification
cess can help ward off potential issues
with subcontractors and suppliers.
In the absence of information, project
teams may assume that all subcontractors working on a project are equally
qualified. Getting to know the subcontractors as well as possible helps identify, manage, and mitigate such risks.
As a result, the project team will be
educated about every aspect of the job
and forced to review the project with
a fine-toothed comb. This will not only
help identify and mitigate risk, but it can
also create a competitive advantage.
For example, the project team that
Components
Financial
Qualifications
Safety
Experience
External Project
Experience
EMR
Formal Super
Feedback
References
OSHA
Internal
Experience
Endnote
1. Beware the Recovery: What History Teaches Contractors and Sureties,
by Thomas C. Schleifer, ENR, January 14, 2013.