Managing risk when building in challenging locations

To remain competitive and expand their businesses, smart leaders of architecture and engineering firms are constantly on the lookout for fresh opportunities. This can mean collaborating with new partners and patrons, acquiring new expertise, and exploring new geographical frontiers.

The latter case holds some strong appeal. Particularly if your firm has a chance to get in on the proverbial ground floor in a new market—whether it’s a remote location or a developing nation—the potential to dominate a locale is enticing.

The tentative opening of Cuba to American business interests is garnering much attention and speculation. The country’s state-run tourism agency, Gaviota, has set a goal of building 50,000 new hotel rooms by 2020. However, with significant issues, including lack of a skilled labor force and a dearth of modern construction equipment and materials, needing to be resolved before major projects can commence, it’s likely that deadline might be pushed back by a few years. And there’s the overriding question of American politics: The new president will have the authority to upend or rewrite the still-embryonic trade and travel agreements with the island nation.

Nonetheless, major players are positioning themselves to stake out a claim in Cuba, as well as other developing regions around the world. While prospects like these are tempting, the stakes are high—firms must be on guard to make sure opportunity doesn’t turn into failure. By identifying and minimizing your exposure, it is possible to pursue your business vision while remaining unhindered by potential loss.

Risk management strategies that are common practice at home offer important lessons about operating in emerging markets. Here are four tested principles that can help guide you to success.

Havana, Cuba. Photo: Craig James/Creative Commons.

Know when to say no. Architects must have a strong sense of their own legal authority in managing a project, particularly when value engineering processes raise questions about the design. Changes that directly impact health/safety/welfare (HSW) aspects of the design are not allowed; in America, law prohibits the owner from proceeding with them. For non-HSW issues, though, it is incumbent on the architect to refuse—in writing—changes they deem unacceptable. A letter (hard copy, not an email) from the architect, stating that the owner is proceeding at his or her own risk, should be quickly issued with a verified delivery.

Take control of submittals. Submittals are an essential part of every project. A mismanaged submittals process can make an otherwise smooth-running job a nightmare for architects and engineers, costing more time and money than budgeted. Requiring proper format and timely delivery of all submittals directs the flow of information and helps control submittals.

Specify and allocate substitutions. Substitution clauses are common to every contract. But often they are not enforced, with owners and contractors ignoring the stipulations they contain. Remember that substitutions can be perilous for a variety of reasons, including voiding material warranties and compromising building performance standards.

When the construction documents are complete, meet with the owner and identify which materials are not substitutable. Document this list in writing, and obtain sign-offs from all parties.

When reviewing a substitution, require the contractor to provide you with complete information about the substitution, written clearly and comprehensively on the substitution form. As with RFI forms, many substitution forms are inadequate for this purpose, so it is best if you create your own comprehensive substitution forms. These should indicate the format and depth of information required for you to make an appropriate assessment of all substitution requests. Consult with your professional liability advisor for guidance on drafting your own form.

Regulate and limit change orders. Experience shows that change orders always increase the overall cost of a project. Because they take time to implement, change orders stretch out the schedule, resulting in a cascade of further expenditures. Typically, 8% to 10% of the total cost of a project will be due to change orders; this is why contingency funds are important. 

However, there are certain change orders that should be treated as non-legitimate. These relate to aspects of the project that the contractor originally agrees to perform for a certain price during the design phase. Non-legitimate change orders arise when the contractor reneges on the quote and returns with a higher fee request in order to perform the same work. Reject all non-legitimate change orders and involve the owner with any disputes as to what is a legitimate change order and what is not.

Abroad and at home, if you create a clear set of procedures and carefully manage communication during construction, you can reduce your risk exposure, empower your firm to receive proper compensation for services, and ensure a more successful project. 

About the Author: Steve Whitehorn is managing principal of Whitehorn Financial Group, Inc., and the author of the upcoming book, Ensuring Your Firm’s Legacy. Whitehorn helps firms create a more significant legacy and empowers them to achieve greater impact on their projects, relationships, and communities.