Risk Management for the Construction Industry: Tips from the Middle Ages

No, this isn’t the latest abode of a wealthy energy executive in North DFW … it’s a picture that represents a very important principle. It’s not the foreboding, protective nature of these walls that I’m most impressed with. It’s what a would-be assailant would encounter prior to the walls, that illustrates my point.

By definition, a moat is a deep, broad ditch, either dry or filled with water, that surrounds a castle, other building or town, historically to provide it with a preliminary line of defense. Okay, throw in a few Trinity River alligators and you really have my attention.

It’s ironic that so much effort and time goes into the construction of the walls, when the preliminary defense system, the moat, was equally imposing to would-be attackers as the first and most likely repellent of the attack. Imposing you say? Yes, remember these were built before the days of Maverick missiles, Navy Seals, and Michael Phelps. Moats were simple, crude, yet extremely effective in providing security during the Middles Ages.

Managing Risk in the Construction Industry

Providing an effective barrier of protection around your company is vital in handling liability issues that may arise, and the manner in which you transfer risk to others effectively involves at least two key steps. When it comes to managing the risk that you encounter in your business each day, it’s vital to first identify the risk, understand the risk, and then make an educated decision as to how much of it you are willing to retain within your company, and how much you’d prefer to transfer to others.

In no other arena, is strategic transfer of risk more prevalent and important than in the construction industry where physical structures are built in the elements, by humans with hand tools, emotions, and bad weather. Home buyers accustomed to a world of precision technology have a hard time understanding the complexity of building a product that you and your sub crews craft with dirty hands in the world of the “mud, the blood, and the beer.” (Thank you, Johnny Cash! By the way, beer has NOT proven to be an effective risk management tool … just some free advice there.)

The Importance of an Effective Subcontractor Agreement

Having an effective subcontractor agreement in place can provide the moat that you need. With strong walls of general liability protection as an internal defense system around your business, a solid subcontractor agreement will act as your preliminary defense system and will ensure that responsibility for property damage and/or bodily injury to others is assumed by those actually negligent. It’s our desire that the castle walls never get touched. As a wise man once said, “the best weapon is the one that’s never fired.”

Most language and requirements that are contained in a subcontractor agreement are up to the subcontractor to put in place to protect you when they are working on one of your jobs. The best part is that this won’t cost you anything, and most often a subcontractor can fulfill these requirements through their current agent with little or no additional cost. Contact your current insurance agent and attorney for advice and resources on appropriate language to include in your agreement.

As always, it can’t be stressed enough, that although the subcontractor agreement can act as a good moat, builders and general contractors need to have their own general liability insurance in place. Lawsuits can be filed for myriad legitimate and illegitimate reasons, and having your insurance company cover your defense costs can help you sleep cozy in the castle.