Managing the Financial Risks Associated with Construction Projects

Managing the Financial Risks Associated with Construction Projects

by Proforma Construction Inc, June 10, 2021

Contractors who work in the construction industry must learn to manage materials, manpower, and funds effectively if they plan on bringing in a project within their budget. A good contract is needed to ensure that both parties are able to work together and the financial risk to each side is minimal. Trust and respect are gained when both parties can come to an agreement by signing a contract that allows both sides an opportunity to work collaboratively. With both sides working together, agreements can be reached quickly.

Have Your Contract Reviewed Before You Sign

Once the contract for the project has been drawn up, it should be reviewed. There are a variety of questions that must be considered. Does the contract have a clause concerning construction audits? Is the contract being written to cover payment, materials, time, workmanship, or guaranteed maximum price? Are there specific rules about workmanship and performance? How is the cost being determined? Does a single contract cover all of these concerns, or are multiple contracts being written?

A contract review is always in your best interest. It ensures that all of your questions are answered, and your talking points are fully addressed. During a review, make sure to speak up if any other questions come to mind. After the contract is signed, you may not be able to express your concerns or have them addressed satisfactorily.

Make Sure That Your Monthly Payment Agreements Are in Place

Monthly payment agreements should be understood by both parties. Pay apps are used to let the owner know the amount of monthly expenses that have been incurred. In most cases, minor changes will occur on a month-to-month basis. Any changes must be supported by receipts and other evidence needed to support the expenditure.

Costs and receipts should be balanced on a monthly basis and the results shared with both the owner and the contractor in charge to ensure that both sides know exactly what is being spent. Keeping accurate records and highly detailed notes will ensure that all of the expenditures are properly documented.

Allow for Change Orders That Protect Both Sides

Construction projects are designed with precision and as much accuracy as possible. However, certain unforeseen circumstances may make it necessary to change the original plans. While some changes may be extremely costly, having spending limits in place will help you manage the situation. Thresholds are often put in place if a bid must be made in order to fully correct the problem.

Change orders should be written in such a way that both sides are able to participate in the final decision on how the changes should be handled. This keeps financial risk to a minimum for both sides. Some changes may be minimal and require very little restructuring when it comes to funding. Others, however, may be so expensive to overcome that certain portions of the project may have to be reconsidered.

Understanding how to manage financial risks when working in the construction industry is crucial to ensure the viability of your construction projects. At Proforma Construction, our professionals have the knowledge and the experience to assist you when it comes to effectively managing the risks you may face when working on your construction project. Contact us today to find out how we can help you. We can explain what you need to know about construction audits and make sure all of your needs are met within the project contract. With our expertise, you can rest assured that your project will be executed smoothly and will remain within your budget.