10 Common Business Risks For Contractors

10 Common Business Risks For Contractors

Paul Monaco of Focus Oxford Risk Management explores the 10 most common business risks facing UK contractors and how to overcome them

By Paul Monaco

2020 has been a turbulent year for the construction industry. The market disruption created by Covid-19 has caused a multitude of industries to grind to a halt, with contractors among those hit hardest by lockdown restrictions.  

Uncertainty around existing contracts gives a natural cause for concern for many in the sector. Although there are usually force majeure clauses in construction contracts, many companies will be left in limbo to hear whether Covid-19 constitutes grounds for additional time and funds to complete an agreed project. 

While 2021 will likely stabilize in this regard, with the added benefit of hindsight on a chaotic year in the construction industry, there are no guarantees. In fact, disruption to the UK market existed prior to the pandemic. Uncertainty following our exit from the EU and even the long-overdue fallout of the Grenfell Fire are just two examples of the factors that are causing uncertainty for contractors. These changes may prove as disruptive as the pandemic, although across a longer timescale.

Examining data from 2017-2019, a report from Marsh has analysed contractor companies and identified commonly associated risks. From this, we have compiled the 10 factors that are most pertinent to contractors. 

1. Political & economic shifts

Unfortunately, the risks associated with a change in political and economic attitudes can turn your business plans on their head overnight. 

Aside from the pandemic, undoubtedly the biggest cause for concern is the UK leaving the European Union. Trade agreements are currently in the process of being agreed with the EU themselves, but the ramifications of any trade deal are completely unknown. 

It’s been confirmed that free movement will end, and with that could come recruitment issues. A 2018 report found that the construction industry has a disproportionately high number of EU workers compared to the industry average. This may lead to even more challenges for companies, especially those outside populous areas. 

In addition, planning and environmental considerations for construction projects could also shift over the next few years. Without the so-called ‘red tape’ of the EU, contractors could be liberated with fewer restrictions, however it would be impossible to predict the impact this would have on businesses at this stage. 

2. Health & safety

Health and safety can be thought of in two ways; protecting your staff and protecting your business from exposure to severe penalties in the event of a serious infraction. Whilst there may be modifications to on-site activities during the current pandemic, it's important to note that regulatory and legislative requirements continue to apply in the workplace. Failure to comply with the mandated protective procedures will leave you as exposed as allowing a staff member to work without protective clothing. 

Risk assessments play an integral role in keeping a contractor safe and the appropriate contractor insurance will offer support in identifying those common dangers to your business and staff. With ever-changing guidelines, updating these documents is also crucial. If you’re unsure whether or not you're complying with the correct legislation, consulting an expert is crucial. The average claim for a health and safety violation in the UK is £147,000, so it’s no wonder it’s amongst the most vital parts of your business.

3. Financial 

Traditionally, a contractor will operate on razor-thin margins, and failing to meet deadlines will often result in works being rendered unprofitable. As such, running a contractor business means understanding the implications of delays to supply chains, staff availability and indeed unforeseen events like Covid-19. Late payment is also a very common problem in the industry, as is ensuring you have the funds to take on new projects. 

Mitigating these risks is paramount, especially if you’re looking to grow the business. Securing investment, and the experience of third parties where needed, can prove fruitful and provide the added layer of financial steel needed to succeed. 

4. Project delivery times

The ability to deliver on time and as agreed is a problem that impacts contractors of all sizes. Depending on the pre-existing relationship with the client, these disputes can lead to more formal claims being raised in a legal setting. 

Often delivering a project late, or not to the standard expected, are the common reasons for dispute being raised against a contractor. When it comes to the former, for some contractors delivering over the deadline is sometimes unavoidable, as is superseding the estimated costs. 

5. Recruitment

Without a shadow of a doubt, this will become a larger pain point in years to come. As alluded to earlier, recruiting new staff will become increasingly difficult once free movement to the EU ends given that skilled labour, in particular, is underrepresented in the industry. 

Typically native skilled workers are reluctant to relocate for jobs, given the relatively short term nature of some contracts. Ageing workforces and the reluctance of millennials to adopt construction jobs, at least at a similar level to decades past, are also key hindrances to recruitment. 

Remaining constantly proactive is key for contractors and adopting the ‘always hiring’ mentality of larger companies is crucial to reduce the risks of staff shortages. If you are actively posting job adverts, then an advised salary of at least market value is crucial.

6. Cybersecurity 

The fear of cybersecurity and the need to protect from breaches as important for contractors as it is for tech companies. A business is 9x more likely to claim on a cyber risk insurance policy than burglary cover. In 2018, 52% of SMEs suffered a cyber breach, and without the correct level of cover, most were left to pay the costs as a result of severe breaches of data.

Contractors themselves are held to the same standards as traditional businesses, and that includes GDPR regulations. Attacks such as ransomware viruses are of particular threat to the construction industry, with communication and attachments often sent over email.

It's therefore important to ensure your staff are fully trained to assess the risks of such attacks - you can even find specialist insurance providers that include free consultations as part of the cover. 

7. Implementation of business strategy

Often increasing your business’ prospects has the added benefit of retaining existing clients and, for those undertaking repeat contracts, this is of particular benefit. 

Having the correct leaders in-house is a key first step, and these don't just have to be a business owner. The recruitment of skilled professionals, as well as the use of expert consultants, can help progress your offering. 

Adapting to technology, creating a specialism in one niche of the industry, and increasing scope for business are often the most relevant transformations your contractor business can undergo. 

8. Incorrect contract selection

Winning contracts is obviously key to any contractor’s business. However, when business is at a lull it can be tempting to bid for a contract outside of your scope. Selecting the incorrect contract can lead to a snowball effect of disputes and legal ramifications, followed by reputational damage.

Understanding the scale of work you can offer and the expertise you can provide are two key considerations to undertake before bidding. Large contacts can seem tempting to firms but often diversifying into smaller agreements is a better, more effective alternative for contractors. 

9. Supply chain issues

A complex project may require the hiring of sub-contractors, which instantly introduces a new level of risk for your business. Failure by them to do the job as agreed can put you under pressure and endanger a breach of contract with your client. Similarly, the supply of materials and equipment needed for a job is crucial for keeping to contract timelines. 

Once you have experienced these issues, adding a measure to mitigate that risk is relatively simple. Over time, using consistent sub-contractors and suppliers you trust to deliver on time should ensure you keep the risk of disruption to a minimum. 

10. Environmental 

As an industry, construction is estimated to be responsible for a third of all waste in the UK. Consequentially, contractors are under increased scrutiny to adopt a sustainable approach to projects and reduce this moving forwards. Fines and even a loss of operational license are both possible outcomes from a failure to adhere to the regulations. 

Materials, energy and water can all be used in a less than efficient way, and failure to properly move waste gives a more immediate threat. Creating hazards on worksites is all too common, increasing the chance of injury to workers.

Managing incidents of pollution can also consume valuable time, leading to a less efficient project as a whole. Ensuring best practices are adhered to is the ideal first step to ensuring environmental impact doesn’t disrupt the progress of work. 

Looking ahead

As one of the first industries to get back to work following the UK lockdown, there is some reassurance to be taken from the fact that contractors are, for the most part, ahead of the curve. And, with government commitments to building new transportation and homes across the country, there is hope for those in the construction industry.

Insurance for contractors will also improve and adapt, with potential for more iron-clad contracts in the future that account for pandemic-related delays. With the correct level of cover, it’s certainly possible to mitigate many of the business risks covered above. 

About the Author

Paul Monaco is the Client Director at Focus Oxford Risk ManagementPaul specializes in the advice and arrangement of specialist business insurance and risk management to the Life Science, Medical Device, Scientific Research and Technology sectors, from startups through to PLCs.