How to Manage Financial Risks in Construction Projects

How to Manage Financial Risks in Construction Projects

by Proforma Construction Inc, September 3, 2020

Adding new construction to a business can yield big rewards, as long as the owner understands managing financial risks. A construction project can lead to further projects and a deeper business relationship if it goes well. However, the possibility of extra costs or faster deadlines can put a strain on both parties when changes occur along the way.
Here are essential tips for managing financial risks when venturing into a construction project:

How Independent Auditing Helps

Hiring an architect or supervisor to oversee technical aspects of construction can be a big advantage to the client. However, sometimes cost-cutting leads to cutting corners on reviews to determine progress. Strong communication is the key to making all the components of a project come together seamlessly.

Conducting an independent compliance or job cost audit before a project begins is a good practice for starting off on the right track. Staying with the basic plan in terms of costs and timeline helps build trust and confidence in the business relationship.

Reviews at the Pre-Contract Phase

One of the most reliable methods for managing financial risks in a construction project is to allow Certified Construction Auditors (CCAs) and CPAs to review your contract before it officially becomes effective. These specialists will check that both sides have the incentives to ensure a successful project.

Construction contracts need to give both parties clarity on issues such as contract change orders or contingencies. The pre-contract review needs to answer a set of questions, such as the following:

• How clearly defined is the construction audit clause?
• What are the pros and cons as well as risks and rewards of the project?
• How are costs accounted for prior to construction?
• What are all the labor costs involved?
• What are the rules and regulations related to a specific project?

Many business owners who hire contractors have limited experience with big construction projects. They tend to be unaware of the pitfalls that can prolong a project or raise costs. Limiting financial risks in construction projects can be accomplished by carefully reviewing costs and potentially added costs before the project begins.

Once a Contract Begins

After the contract is initiated, many contractors use a monthly payment application process. Contractors often use their own forms that work for their accounting methods rather than standard forms issued by the American Institute of Architects. Regardless of how the payment process works, it should be supported with work evidence, such as invoices and receipts.

The contractor requests money from the owner through a pay app, which needs to summarize all costs. Any questions about costs should be addressed immediately by the construction auditor, who needs to thoroughly review each monthly request for payment. That way, financial issues do not become lingering mysteries, and the project can move forward.

An independent auditor is a major key to reducing a construction project’s financial risk. Another important key is the clarity of the contract terms for projecting costs and possible refunds.

Prepare for Worksite Changes

Typical construction projects involve design changes once the plan is underway. An example is when the construction begins only to find there are extra pipes or harder soil than expected to deal with. Engineers must then come up with a workaround plan that may require more costs than initially anticipated by both parties.

Another change might occur when the owner is convinced midway through a project that the best scenario for long-term sustainability is to get a LEEDS certification for the building. This certification of green construction can significantly raise property value.

Managing financial risks is necessary for all owners engaging in construction projects. Are you looking for an experienced construction company in the Bay Area? Contact the experts at Proforma Construction to learn more about how we can resolve all your construction needs.