Three Ways to Manage Risk in a Large Project

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Your company was just selected for its first major project – a large development project on the north side of town. You, as the prime, are going to lead a team that includes more than ten subcontractors. All together it means exposure for your small company, a great project to put on your resume, and more than a little bit of risk.

Managing Risk?

As the prime contractor, you are probably wondering about how you can protect your company from mistakes, errors, omissions, and negligence done by one of your subs. Your contract with the client will likely include an indemnification or insurance clause, requiring you to be responsible for any errors. How can you manage the risk?

What You Need From Your Subcontractor

First, be sure you have a contract with each subcontractor. Your contract should refer back to and incorporate the prime contract. Your contract with the subcontractors should have a specific scope of work and a time of performance, as well as a liquidated damages clause for failure to perform.

Second, you want to ensure your subcontractor carries insurance. Any insurance required of you by the prime contract should also be held by your subcontractors. They may be able to have lower limits, but should carry similar types of coverage. At a minimum an errors and omissions and auto insurance must be required.

Third, your subcontractors need to name you as an additional insured on their policies, and provide you a copy of this information. You do not want a certificate of insurance, also known as an ACORD form. This piece of paper confirms that the company has insurance, but does not guarantee coverage for you in the event of a claim.

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Being named as an additional insured allows your company the benefit of the protection of the other’s policy. This prevents you from being forced to make a claim to your insurance company and face the potential risk of having your rates raised. The risk in being named an additional insured is the lack of control over the defense of the claim. So if your subcontractor makes an error, his insurance company will be responsible for any litigation that ensues. If there is litigation, it would be a good idea for you to retain your own counsel to represent your interests in the suit.

When you receive verification that the subcontractor(s) have named you as an additional insured, you want to also verify that you are have primary coverage and you have a non-contributory role in the policy.

Large development projects are filled with risk, from delay claims for weather to the availability of materials. You do not have control over the efforts of others, and even you or your crew may make a mistake. You can manage risk in large projects though. One way to manage risk with subcontracts is to be named an additional insured.

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