Risk Management Done Right

Four years ago, Rich Napier, president of Napier Signature Homes in Richmond, Va., was a witness in a lawsuit regarding another builder. He saw firsthand the liability issues builders face, and it got him thinking. Afterward, he solicited an attorney to take a look at his contracts with an eye toward managing his level of risk.

Risk management used to be associated primarily with insurance coverage, but it is increasingly being used to represent a more comprehensive process for protecting your business. Risk management consists of examining your entire operation and identifying threats to its success. Then it involves takings steps to decrease the likelihood that those threats will be realized and protecting your business in case they are.

Preventing Accidents
The largest risk builders face involves the safety of their workers. Liability issues are a given for any business owner, but in the building trades, the risks are especially numerous and costly. “A carpenter who cuts his finger can create a $300,000 lawsuit on a $1,000 job,” says Ahmed Abdelaziz, CEO of Omarica Home Builders Inc., in Oak Brook, Ill. To help protect your business assets and your own piece of mind, it is important to put procedures in place to limit your risk. “It isn’t possible to eliminate risk,” Abdelaziz says, “You try to manage it.”

The first and best way to reduce the risk of accidents is to do everything you can to ensure the job site is safe for your employees and customers. Abdelaziz and Napier both say their companies require workers to follow Occupation Safety and Health Administration safety procedures, especially fall protection standards.

OSHA and local building associations can be a great source for information on safety regulations and best practices, but this information does little good without enforcement. Napier uses a lot of subcontractors and has his own employees supervise job sites to ensure safety procedures are followed. In the event an accident does happen, he requires post-accident drug tests to limit his own liability.

Abdelaziz says his employees are given one warning if they are caught ignoring safety requirements. A second violation means the employee will be let go.

Mitigating the risk of job site incidents involves more than just keeping a close eye on the job site itself. The quality of employees you hire can directly impact your likelihood of accidents. Omarica Home Builders prescreens every individual working for them by performing criminal background checks on employees and subcontractors. They also choose not to make use of apprenticeships, only hiring workers with two or more years of experience.

Protect Yourself in Writing
Preventing accidents from happening is the ideal scenario, but you also have to protect yourself in case they do.

For starters, Napier requires all subcontractors to carry their own workman’s compensation and general liability insurance. He says if a sub allows his or her policy to lapse while in the middle of the job, the sub will have the cost of coverage deducted from his or her paycheck. If a sub refuses to get coverage, Napier doesn’t use him or her. “You have to protect yourself from situations dependent on other people,” he says. “Make it so the risk shifts back to them.”

Accident claims aren’t the only claims filed against builders. Whenever you take a job, there is a risk the client will try to take advantage of your services and diminish your profit margin. To minimize this risk, it’s crucial to use contracts that are clear and specific about the work you are contracted to do, as well as your responsibility after its completion.

Abdelaziz says because Omarica offers a one-year warranty on completed work, his legal team was careful to spell out in customer contracts what is and isn’t a warranty issue. One example he gave was concrete foundations. After foundations settle, a building frame might shift and cause cracked drywall, popped nails or other unforeseen developments. Omarica’s contracts outline that these aren’t covered by the warranty and protect the company from the risk that claims will be made against their work.

Educate Yourself on Risk
One of the best tools for reducing risk is education. In addition to consulting with a business attorney, Napier recommends taking classes through a local homebuilders association to keep up-to-date on safety procedures and learn about ordinance issues where you might be lax. As Abdelaziz says, “One issue that is overlooked can cost $100,000.” The lesson: You can never be too thorough in searching for ways to tighten your procedures and protect your business.