Introduction to Our Research Project
So you’ve been introduced to our Latvian Interns Anete and Helmuts. Now it’s time for me to introduce our research project. Since Anete is an engineer and construction manager, Helmuts is a construction lawyer, and PFCS is in the business of building inspection, construction management, and building claims & litigation, it seemed natural to investigate and summarize best construction risk & claim management practices from both sides of the Atlantic.
As I often do at the beginning of an investigative endeavor, I used our "Proving the Obvious Using Google" method to begin this research. I searched the terms "Construction Risk Management" and "Construction Claim Management." The full results are below in the respective sections and at the bottom of this article in the "Research" section. The point is that construction risk & claim management are topics deeply considered by professionals at the top of the construction industry all around the world, and there is a lot to learn and consider for our projects.
A Map of the World
For those new to construction risk management and/or construction claim management, we want to create "a map of the world" so that anyone interested can understand the big picture, and more quickly learn to recognize important landmarks along the trail. One of the many things that makes construction an interesting business is that no two projects are exactly alike. Of course, this also creates difficulty, since construction projects are generally expensive and complex, which creates risks. And sometimes these risks turn into claims.
Construction risk management happens primarily before and during construction, and construction claim management takes place mostly during and after construction. Professional risk and claim management are deeply integrated. In the most sophisticated organizations, claims that arise downstream were considered early in the project, and processes were outlined for what to do, first to avoid them, and second to mitigate the harm they can cause.
The Size of the Global Construction Industry
The global construction industry generated an estimated total revenue of $8.6 trillion in 2016, representing a compound annual growth rate (CAGR) of 7.1% between 2012 and 2016. According a to report by ResearchMoz ("Global Construction Industry Guide 2017…") growth is forecast to accelerate and reach a value of more than $13 trillion by the end of 2021.
In the U.S. the construction industry has more than 650,000 employers with over 6 million employees and creates nearly $1 trillion worth of structures each year. Construction is one of the largest customers for manufacturing, mining and a variety of services. A study performed for AGC by Professor Stephen Fuller of George Mason University found that an extra $1 billion in nonresidential construction spending adds about $3.4 billion to Gross Domestic Product (GDP), about $1.1 billion to personal earnings, and creates or sustains 28,500 jobs.
The European construction industry as a whole is worth more than $1 trillion. With 3 million enterprises and a total direct workforce of 18 million people, the construction sector contributes at around 9% to the GDP of the European Union. 99.9% of the European construction sector is composed of small and medium-sized enterprises (fewer than 250 employee). In the EU, the average size of construction enterprises is of 4 workers (employees or not). Small and medium businesses produce 80% of the construction industry's output. Small enterprises (less than 50 employees) are responsible for 60% of the production and employ 70% of the sector's working population.
Construction Risk Management
When you search "Construction Risk Management" in Google you get "Risk management in construction is designed to plan, monitor and control those measures needed to prevent exposure to risk. To do this it is necessary to identify the hazard, assess the extent of the risk, provide measures to control the risk and manage any residual risks."
Our top-level framework, we call the ABCs of Risk Management, includes:
Avoid potentially dangerous situations
Be really good at what you do
Cover your assets
In the following articles we will examine sophisticated strategies for identifying risks and the steps professionals take to mitigate them. The point of all this is to identify (inventory) potential risks, then analyze and control them. Common strategies include transferring risks through contracts and insurance, and reducing them through process management and quality control.
Common Construction Project Risk Management Activities Before and During Construction
Composing or adopting and customizing a Risk Management Plan
Composing or adopting and customizing a Quality Management Plan
Making sure all key team members are adequately skilled, experienced, and capitalized
Insurance requirements that are appropriate for all applicable team members
Contract terms that distribute risks to the appropriate parties
Building in quality control check points and verification mechanisms
Documenting the quality of the processes and work, sometimes by independent third parties
Identification of potential claims and addressing them prior to their becoming a dispute
Construction Claim Management
We have been working on construction claims since the 1990's, and writing and presenting on the subject for almost 20 years now. As with risk management, there is a spectrum of professional practice that runs from "close to criminal incompetence" at one end, to "so much management that you might as well pay your opposition whatever they have asked for." We want to teach people to avoid either of the extremes.
After more than a decade in the business of dealing with claims (in 2010), we outlined our "Claims Management Strategies" continuum:
Head-In-Sand: Delegation outside the organization = Abdication
Hope and Prayer: Hope is a strategy. But a bad one.
Cowboy / Caveman / Swashbuckler: Yee Haw!! Usually O.P.M.
Project “Piles”: Most common.
Force of Genius: Closely related to Project Piles, only better.
Project Files: We’re getting there :-)
Project Level Data Structure & Analysis: Yea Baby!!
Portfolio Level Analysis & Analysis: The Promised Land.
Common Construction Claim Management Activities During and After Construction
Understanding the contract documents, especially as they relate to the scope of work, and change management
A professional file (document) management process discipline, so that all relevant files can be easily and quickly retrieved (this is WAY harder than it seems like it should be)
A mechanism that verifies files and project documentation are being managed consistent with the plan (inspect what we expect)
Structured training for construction managers in documenting changes in the scope, budget, and schedule for the purposes of assigning responsibility for these variations from plan (or contract)
Third-party verification of conformance with plans and contracts compared to actual scope (including quality), budget, and schedule
Regular (monthly) reports to management regarding potential claims or quality problems
A team “First Responders” is identified prior to or immediately upon notice of a potential claim: Lawyer(s). Expert(s) (internal and third-party)
A written Claim Management Plan
A Claim Management Budget (best, probable, and worst case scenarios) that considers the cost of lawyers, experts, expenses, time, and settlement or verdict
A structure for regularly updating the Claim Management Plan and Budget to reflect current realities
We always make a preliminary review of the existing literature.
Then we have meeting and conduct interviews with the smartest people we know. In this research, this will include:
Mediators / Arbitrators
From there, we will publish our findings via this blog, eventually more formally in printed articles, and maybe even presentation at a construction risk and claim conference.
Articles in This Series
(THIS ARTICLE) Construction Risk & Claims Management in the US vs. EU
Top Issues in Construction Projects in US vs. EU (COMING SOON)
Construction Risk Management in the US vs. EU (COMING SOON)
Construction Claims Management in the US vs. EU (COMING SOON)
Google "Construction Risk Management"
Construction Claim Management