Expert Commentary

Implementing SMART Risk Mitigation Plans

Construction is a risky business, no doubt. Some risks are outside of your control, like the weather or the economy. Other risks you can foresee—and once you have identified them, you can take steps to manage them, either through avoidance or controls. The purpose of your subcontractor prequalification program is just that: to identify where elevated subcontractor risks may exist so that you can make well-informed award decisions that either avoid unnecessary risk or visibly/effectively manage risks within your control.


Subcontractor Performance Risk
January 2020

There will be times where you have to make a less than optimal award decision: cases where an owner dictates the subcontractor you must use or where there are limited qualified or approved partners to perform a specialty scope, for example. These are the situations in which risk mitigation plans (RMPs) take on extra importance. These plans represent a crucial step in maximizing the chances of project success.

The acronym you likely use in goal setting for your employees each year works nicely for RMPs. That is, you should always encourage your teams to institute RMPs that are SMART: specific, measurable, actionable, relevant, and timely.

Specific

Tailor the RMP to the identified risks. The project team needs to have ownership in the plan, so involve them and possibly the sub in the development of the specific RMP measures that will help to make them successful. Ensure that the actions fit the concerns in a way that makes sense to everyone. No one is enthusiastic about an activity done just to check a box, and that approach won't yield the best outcome; make it meaningful, appropriate to the situation, and logical. Instead of vague directives to "watch their quality" or "monitor financials," make an effort to spell out what the action will be, who will do it, and at what interval. Who will do what? When they will do it? How will they do it? Why will they do it? The answers to these questions should all be spelled out very clearly in a documented/approved RMP and potentially written into the subcontract.

Measurable

There are two aspects to consider with regards to measurement and RMPs: consistently determining when an RMP is needed and then measuring the actual implementation of the plan.

The first, the determination of need, requires a set of criteria for further scrutiny. Consider developing thresholds for escalation to a higher limit of authority or required RMPs addressing the following, as well as other items that make sense for your company. Here are some examples of common criteria.

  • Quality of financial information provided (e.g., audited, compiled, or in-house)
  • Specific financial ratios (e.g., days of cash, single project limits or aggregation with your firm, Z score, etc.)
  • Subcontract size (e.g., >$500,000, >$1 million, etc.)
  • Percentage low on bids (e.g., 10 percent lower than the next bidder)
  • Specific "high-stakes" trades (e.g., concrete, mechanical, electrical, plumbing, curtainwall, building envelope, etc.)
  • Subcontractor's experience with the project type and geography
  • Safety/experience modification rating

The second, the implementation piece, requires thought around how you will validate that the RMP is being carried out according to plan. For example, can you measure what is being done or not done? Who is responsible? Are sign-offs needed? An RMP that is measurable assigns accountability to qualified individuals to follow up and monitor progress, with documentation of the entire process. Keep it visible to both project teams and at the corporate level through tracking sheets with sign-offs, compliance holds, and dashboard monitoring and make it part of your regular management agendas. This helps to ensure your plans are visible and applied as intended.

Actionable

Can the RMP be executed? "Ensure the sub's financials are still strong" is not an actionable RMP. The prequalification department will monitor a sub's financials quarterly. If there's any deterioration, "the prequalification department will advise the project manager to implement a joint checking program and discuss other possible actions with the chief financial officer, such as the direct purchase of materials, descoping, etc.," is a much stronger and clearly actionable RMP.

Relevant

Ensure that the developed RMP correlates to—and is effective in managing—the risks identified. While this sounds simple, all too often, we see risk mitigation plans that default to a simple "check financials annually" or "use joint checks" when there is a significant operational risk better addressed by operational strategies. While joint checks are not a bad idea and are often appropriate, there are many situations where fabrication shop visits, additional quality inspections, increased production or schedule monitoring, or workforce tracking may better address the identified potential issues.

Each situation should receive careful attention so that the risk mitigation measures are aligned as directly as possible to the risks identified in prequalification/sub selection. Catchalls are not usually effective. And, although some of the identified steps may be considered "how we manage all work," the fact is that specific, identified risks warrant specific focus.

Timely

Most importantly, the time to take these steps is early—before you go too far down the road with the sub. After a subcontract is signed, or worse, the sub is struggling to meet project requirements, it may be too late to affect the outcome. Proactive action is key. Clarify expectations as to the timing of RMP development. Set specific time frames and institute a process to monitor to ensure they are developed and timely set into action. For ongoing monitoring, creating a tie to monthly payment processes and project reporting is a natural fit, but consider what works for your organization and the project. And, moving forward, refine/evolve the plan whenever observations show it to be necessary.

While no risk management process can guarantee the successful performance of a project or subcontractor, strong risk management practices using the SMART approach, such as those above, will maximize the chances of success by matching the measures to the specific risks and ensuring implementation as planned.


Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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