Your Construction Manager: First Line of Defense

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Now that insurance costs have escalated and some states prohibit express indemnities, it's time to focus on delivering even greater quality. But who will take on this task?

July 01, 2007
Sidebars:

Builder Insurers get into the Act

What's the Risk?

As energy efficiency obligations force home building to become more complex, home builders are quickly evaluating their construction operations to stay competitive.

Talk these days involves risk management and how builders can deliver a safe, durable and comfortable home in deference to labor talent and building product shortfalls. This task is being relegated to the front lines of construction, requiring the construction manager to adapt to this new burden.

Special Issue: Risk Management

Multi-faceted Risk Management

Risk management involves the process of reducing risk or transferring it to others. Quality is about the customer experience and how home builders can deliver a product or service that meets their mutual expectations of safety, durability, comfort and value. Home builders have traditionally favored risk transfer methods, including obligating trade contractors to indemnification agreements and additional-insured endorsements. Now that insurance costs have escalated and some states prohibit express indemnities, it's time to focus on delivering even greater quality. But who will take on this task?

The construction manager is seen as the most likely candidate. If construction managers are to become our front- line quality gatekeepers, home builders need to eliminate much of their paperwork burden, simplify schedule tasks and eliminate time-consuming chores that do not directly add value to the product.

The superintendent fits into other scenarios, too. Today's job sites waste or spoil five to 10 tons of once-useful raw materials. Yet few builders pay attention to their trades' physical waste and rarely consider the labor waste of inefficient job access, lack of power and lighting, dirty work sites and poorly maintained equipment. How we investigate and eliminate this waste depends on the quality processes we put in place and how we encourage our team to spot and challenge waste so it can be converted into profit.

The Subcontractor Disconnect

In a factory, workers are employed by the company. The company trains them, supervises them, provides them with tools and maintains their environment. This helps to deliver consistency. Job sites, in contrast, are the epitome of controlled chaotic disconnects. We struggle to communicate a timetable for their work, battle the environment to protect their materials and, once their work is installed, we fight to keep others from damaging it.

Home builders are learning they — not the trade contractors — run the factory. The tradespeople may not be the builder's direct employees, but they are arguably responsible for the work. Newer insurance products such as Wrap or Owner Controlled Insurance Programs (OCIPs) provide a more generic no-fault coverage yet come with much higher builder financial involvement. In light of this, builders are learning they must play a greater role in exactly how homes get built, what products get used, and how workers must install products to meet the growing legal risks.



Risk audits can tip builders off to high-risk issues while evaluating built-in quality.

The Cost of Failure

Many builders recognize the direct costs being sucked out of customer service budgets, but few appreciate the real cost of quality failures. A leaky window requires a visit from the builder, the window company (who in turn blames the cladding contractor), the cladding contractor (who blames the window installer, who blames the window manufacturer) and the drywaller and painter. Assuming the window is repaired the first time, it may take 2–3 weeks of homeowner inconvenience and frustration. It is estimated that the cost of a single failure is $3,500, with indirect costs such as lost loyalty, employee morale and negativity being incalculable. Yet window leaks remain the top residential risk for home builders.

According to Quality Built's 2006 survey of 75,342 completed homes, single-family homes averaged $6,124 of corrected defects, while multi-family homes averaged $7,125. This was the average of high-risk defects discovered during brief site observations during construction that were corrected by the builder. It does not include costs for low-risk issues such as paint, fit and finish, and any cosmetic issues. This $11 billion effect on our housing base reveals there is much we can do to eliminate these defects during the process and construction of our homes instead of relying solely on inspectors to catch them.

Although the nation's largest builders and insurers have endorsed third-party inspections to identify defects, quality experts agree that inspection alone cannot be relied upon to improve quality. Absent a robust quality management system with internal audit and external verifications, third-party inspections are likely to be encouraged in the industry because they have proven to significantly reduce risk over other builder methods. Builders who embrace quality assurance, encourage process development, create feedback loops to evaluate failure and take responsibility for design will eventually lessen the need for external inspections and move toward a more efficient auditing process.

Builders are becoming comfortable with third-party inspections, forensic plan reviews and insurance audits. Information from these external sources can help augment builders' internal processes and justify their quality initiatives. Quality Built has recently completed its certification and became the first such firm to achieve ISO 9001:2000 registration (ISO is the International Organization for Standards, a world-wide standards setting organization that is recognized in 158 countries). While only four builders out of 230,000 in the U.S. are ISO registered, the number is expected to dramatically rise.

And while right-to-repair legislation is expanding across the country, most agree that building a quality product is the most significant factor in reducing problems later. Some builders continue to push for liability reform, yet Darius Assemi, president of Fresno, Calif.-based Granville Homes, which completed more than 300 homes in 2006, holds little stock in legislation reform because he feels it only slows down the process of getting a homeowner's real problems resolved. He reminds builders to focus instead on doing it right. "I cannot even remember the last time we had to fix a leaky window, so I know our system is working. He smiles, "I can tell you I sleep very well at night."


Author Information
Stan Luhr is the founder and CEO of Quality Built, a national risk management firm serving more than 2,000 building projects in 28 states.


 

Special Issue: Risk Management:

Overzealous Claims Lead to Liability Woes

Liability Insurance for Homebuilders



Your Construction Manager: First Line of Defense

How Homebuilders Can Deal with Difficult Customers



How Other Homebuilders Avoid Risk





 

Builder Insurers get into the Act

Some home builders have been reluctant to move away from the old business as usual models, so insurance companies such as Arch, AIG, Lexington, Gemini and Zurich give them a little push.

Ken Maskell, vice president of Arch's west coast insurance division, requires all builders on his program to have third-party inspections and training. Maskell says both the insurer and the builder reap benefits from this requirement. "Builders would not be getting this insurance without the third-party consultants, and we know from experience that this relationship results in better quality."

Some insurers such as AIG and Gemini provide incentives for builders who can prove they are a better risk by demonstrating a defined quality assurance system. Zurich North American has a team of 19 field risk auditors trained by Zurich who visit all of its insured projects to conduct physical audits of the quality. Mike Hopson, vice president of Zurich's Home Builder Practice program, believes the audits are a great learning tool.

"We share our findings with each builder to give them our perspective of where we see areas of excellence and where to improve. It gives the builder an outside source they might not otherwise get from anyone else," says Hopson.

Insurance Rates Affected

As home builders embrace quality systems and third-party inspection involvement, more pressure will be placed on their insurers to provide rewards, rebates or incentives. In light of the recent construction turndown, insurance rates have softened but are holding close to near-record levels.

After 10 years of encouraging or mandating quality incentives, the property/casualty sector reported record underwriting profits in 2006 of $31.2 billion, according to the Insurance Information Institute. This marks only the second time since 1975 where a profit was made, but insurers are quick to point out that it would take many profitable years to wipe out the $419 billion in cumulative losses over that same period.

Yet builders are optimistic that insurers will soon notice their quality practices over other builders and earn the lowest premium rates due to solid quality efforts. "Our philosophy is that it is really hard to sue a friend, and we do everything we can to maintain that friendship long after we have moved our customers in," says Darius Assemi, president of Fresno-based Granville Homes, which completed more than 300 homes in 2006.

Assemi remembers how difficult it was for his company to attract a decent insurance rate, recalling that one insurer demanded $1.2 million for only $1 million in coverage. Now underwritten by Zurich's HBP program, Assemi feels his insurance premiums are still high but hopes to push for more reductions due to all the quality inspections, training and customer support he offers in contrast to his competitors. "This is my town. I know these people, and I know the market. We have seen the national builders come and go, but after 20 years we are still doing well here," Assemi says as he points to a house in production. "Our homes are energy-efficient, with wall-spray insulation and tankless heaters. There's a lot of hidden quality in our homes that the buyer never sees."

What's the Risk?

IT'S A CLICHÉ, BUT IT'S TRUE: running a home building company is risky business. From mold problems to injuries insurance to assurance, home builders — and their legal departments — constantly run into risk management issues.

So what are those problems? We asked home builders and risk management experts throughout the country what risk management issues they deal with. They are listed here in no particular order.

INSURANCE. From site injuries to angry customers, home builders are subject to an enormous amount liability. "How much do I offer?" "What is the scope of coverage?" and "What do I do with faulty subs?" are just a few unanswered questions. Read "Liability Insurance" on page 39 to better understand how insurance is affecting home builders and their legal teams.

NATURAL DISASTERS. Your buyer may love his new five bedroom, 4 ½ bath McMansion, but Mother Nature has other plans. Hurricanes, tornadoes, floods and earthquakes don't just affect home buyers anymore; home builders can lose precious product if a hurricane blows into town mid-build. How do you head that off at the pass? Make sure your buyer contracts have "In the event of Mother Nature" clauses. Have legal check it out to make sure it could stand up in court if necessary.

WATER INTRUSION. In most cases, water intrusion is the result of a poorly built product, including defaults such as faulty wall systems; improper window installation or flashing; or an incorrectly insulated or ventilated roofing system. If water is seeping into your homes, home buyers will likely seep into your offices —with a lawyer. Vigilant quality control with trades is the key to heading off a legal nightmare. Keep in mind, however, water intrusion as a result of Mother Nature carries a different set of legal circumstances.

MOLD. While water intrusion can be pesky, mold is downright nasty. The product of trapped-in water, mold can become a toxic, legal nightmare. For 10 years, mold has enjoyed the spotlight as a media-encouraged litigation nightmare. Moves to improve better construction techniques and materials, however, are slowly drying out the problem.

CONSTRUCTION DEFECTS. One of the biggies, construction defects can range from faulty framing to inadequate energy consumption. What makes construction defects such a difficult risk to manage is that the defect is in the eye of the beholder. What one home buyer might let slide — say a crack in the drywall — will make another wreak havoc. To read more about mitigating construction defect risk, read "Overzealous Claims Lead to Liability Woes" on page 35.

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