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How to Manage Risk During a Construction Project

As the age old saying goes: "a strong offense is your best defense." This is especially true during construction projects.

Large commercial construction projects involve multiple parties, tight timelines and millions of dollars. With this many moving parts it is imperative that contractors, subcontractors and commercial property owners take proactive steps to mitigate risk and reduce liability.

So, what is your best defense? A strong contract.

While it is impossible to safeguard yourself against every possible scenario, a clear, concise contract can reduce the potential for disputes and limit your liability in the event a dispute does arise.

Use indemnity provisions to allocate risk to the appropriate party

There are many ways to mitigate risk, such as safety training, properly maintaining equipment, and working with known and trusted subcontractors. However, one of the most effective ways to limit risk is by transferring it. This is done through indemnification.

Who should be liable for project delays? Who should take responsibility for design errors? The answer: those best able to control these risks.

When negotiating a construction contract it is important to allocate risks to those in the best position to manage them. This is often done through indemnity provisions.

Indemnity provisions require certain parties to pay the cost of any losses incurred due to stated events, such as injuries, rain delays or design defects - among others. Assigning risk of loss to the party in control helps reduce these risks. When a contractor or owner knows they bear the risk of loss in a certain situation, they take steps to reduce the possibility of that situation occurring.

For example, an owner may indemnify a general contractor from defect claims that arise due to design errors. Why? The owner works directly with the architect to develop design plans, whereas the general contractor merely carries out or implements the design. Since the owner has more control during the design process, he/she is in a better position to ensure the design is free from defects.

Require parties to carry supporting insurance policies

Without proper insurance coverage, indemnity agreements are worthless. When negotiating a construction contract, make sure parties are contractually required to carry insurance coverage that supports indemnity decisions.

Using the example above: If an owner has agreed to indemnify a contractor from losses arising from a design defect, he/she will need to have an insurance policy that covers construction defect claims. Or, if the owner has obtained indemnity from the architect for design defects, then the architect must carry professional liability insurance.

Insurance policies are what add credence to indemnity clauses. These two items - indemnity and insurance - must work in tandem to adequately reduce risk during construction projects.

With so much at stake, it is in your best interests to consult with experienced construction law attorneys. The lawyers at Trainor Fairbrook have well over 60 years of construction law experience. Read more about our firm's offerings.

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