What does $3.4 million in liens filed against a once successful construction company and Construction Risk Management have in common?
It was reported by The Florida Times-Union that a once successful and prominent construction firm, in business for 78 years, had 20 liens in excess of $3.4 million filed against them in a period of 3 months. It was noted in the article that a key factor in these filings was that the firm had five major projects nearing completion at nearly the same time. Additionally, the firm was quoted as saying that disputes over payment and several cost overruns had aided in the default of payment to its subcontractors. This combined caused the firm to fail on its obligations and eventually dissolve. The financial shortcomings of the construction firm meant that a bond insurance company had to be called in to help complete the projects. Unfortunately, stories of this nature happen all too often.
So you may be asking what does this story have in common with Construction Risk Management?
Simple: Construction Risk Management, specifically funds control and construction progress monitoring, could have helped to prevent the issues that occurred during the construction firm’s projects. Funds control and construction progress monitoring, when used in conjunction, accomplish the following:
- Ensure that there is no comingling of a project’s funds with another project’s,
- Monitor the construction process to ensure that progress is on track,
- Help to minimize overruns by tracking change orders; and
- Payment of the subcontractors directly each month for the amount of work completed during that draw period.
What exactly is Construction Risk Management and how does it differ from a Bond?
Construction Risk Management is comprised of several aspects to help ensure that the construction process goes smoothly and to ensure that a project is not halted prior to completion. CRM is a recognized bond alternative by many banks and government agencies. Additionally, construction risk management costs less to the client than a bond. A bond usually costs 1-2% of the project cost, while CRM will cost significantly less – typically about 1/3 to