Redefining Priorities: Risk Management, Enhanced Quality, and Minimizing Disputes

By: Tamara L. Boeck, Stoel Rives LLP, and Dwain Bateson, Bateson Consulting Services

You have likely heard it said that “you can identify a person’s priorities by taking a close look at their calendar and their checkbook.” We find this to be true with individuals and businesses in the construction industry as well.  We all spend time and money on those things that are important to us.  If our priorities are short-sighted or not as informed as they could be, however, we can be caught miserably unaware.

Serving owners, developers and general contractors for over 50 years collectively, the authors recognize that this same concept driving priorities unintentionally undermines the best laid plans of the industry.  In practice, we have discovered that only a select few companies actually look at the whole industry, “dirt to done” and everything in between, to make intentional changes to minimize risk, adopt proactive actions to better the quality and reduce the opportunity for disputes, and develop policies and procedures that focus on best practices and best brand quality, with a view to minimizing claims or litigation.

You should not be surprised that the companies we are discussing are those that are already focused on solid work and good products with competitive pricing.  Yet, as good as they may be, their system still breaks down without a front-to-back integrated plan that proactively recognizes the risk and consistently manages the process.  In our collective experience, the majority of industry companies, regardless of size, tend to reactively “back-burner” the back-end business risks (such as claim, dispute, and litigation risk) until they see the lawsuit.  Unfortunately, even then, to the extent they can, they offload that “problem” to the insurer – all too often with much less insurance coverage than they expected. These companies, as with the vast majority of their peers, have been focusing on the front-end approach to projects: plans, permits, build-out and moving on to the next project. Few companies focus on the longer-term aspects until they have to respond to a dispute. Until then, proactive Risk Management is simply not an actual priority.

Over a decade ago, we worked on a team for a client that was frustrated with the number of warranty claims, the “sausage-making” nature of the process, and ultimately, the litigious nature of the industry. It was our given goal to develop a process so that when the project was completed, the subsequent owner could objectively be confident that it had received a quality project at a fair price, one that had been inspected and documented, and ultimately transitioned with attention to crossing the “t’s” and dotting the “i’s.” Importantly for the integrity of the process, all of these procedures were outside the control or authority of the direct construction team.  No longer was the alleged fox guarding the henhouse, and no longer were any completion bonuses issued unless and until the project passed the internal verification process.  We were all held accountable as a team.

The net results of this focus were projects that our client has been able to stand behind for over a decade, in meetings with investors, subsequent buyers, and the occasional inquisitive and aggressive lawyer.  Equally as important, in the past decade with this and several other clients, we have seen the bottom-line business benefits resulting in reduced insurance premiums (by as much as 30%); increased quality brand recognition; reduced timelines for design, approval and construction; and greater resale value and valuation of the projects that were held for a period of time following completion (and dramatically reduced warranty and callback work for the contractor and subcontractors).  Ironically, this strong team approach to Risk Management by our developer and owner clients has resulted in more efficiencies for the contractor and subcontractors as well, reducing avoidable warranty or defect callbacks and chargebacks, along with their own reduction in insurance premiums as they likewise demonstrated the improvement in their underwriting risk.  When we have had an unavoidable dispute, there has also been a reduction in those costs, often down to 10%-15% of the industry average.

As Henry Ford so appropriately stated, “Quality means doing it right when no one is looking.”  In the same vein, purposeful Risk Management in the construction industry is that same quality when no one is looking, but verifying that it occurs throughout the project from “dirt to done” and every step in between.

"Redefining Priorities: Risk Management, Enhanced Quality, and Minimizing Disputes" was originally published in the Daily Journal of Commerce on October 20, 2016.

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Tamara L. Boeck is an attorney in the Construction and Design practice group of Stoel Rives LLP and may be reached at 916.319.4678 or 208.387.4256 and tami.boeck@stoel.com.   Dwain Bateson is President of Bateson Consulting Services and may be reached at 775.745.9917 or dwainb@batesonconsulting.com.