There will always be a risk that something will go awry during construction projects. When something does go wrong, the result is usually costly time delays and additional material, labor, and damage costs.
Most construction business owners view insurance as their first line of defense. Insurance is an appropriate risk-management tool, but it is not always economically feasible or efficient to insure every possible risk.
Many risks are better handled through risk transfer, risk sharing, risk retention, risk control, risk prevention, or risk avoidance.
For more on how insurance fits into an overall business risk strategy, see Understanding Business Risks and Insurance.
Risk management approaches
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Transfer of Risk.
There are parties, aside from your own insurance, to which you might transfer the risk. Two common methods are being named as an additional insured on another party’s policy and express indemnification (hold harmless) clauses in contracts.
When you are named on another party’s insurance, their coverage can respond to a loss that affects you. For example, a general contractor might require an electrical subcontractor to name the contractor as an additional insured so the subcontractor’s policy helps cover eligible losses.
Indemnity clauses vary in scope. A broad-form indemnity (type one) shifts responsibility to the indemnitor even if the indemnitee was partly at fault. A comparative-fault clause (type three) limits indemnity to the indemnitor’s share of fault. The intermediate form (type two) is common: the indemnitor assumes risk unless the loss was solely the indemnitee’s fault.
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Risk Sharing.
Contracts can allocate responsibility so each party is liable for losses caused by their own actions or inaction. Clear contract language helps avoid disputes and ensures each party understands its responsibilities.
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Risk Retention.
All construction businesses retain some minor risks because it is not cost-effective to insure every possible loss. Minor errors that cause a few days of rework are typically paid from operating funds.
Insurance deductibles are another form of retained risk. Whatever risks you retain should be valued and funded so losses can be covered if they occur.
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Risk Avoidance.
Some risks are best avoided entirely. For example, choosing a noticeably cheaper material that could be defective may jeopardize your project quality and reputation, so avoiding that option is prudent.
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Risk Prevention.
Risk prevention focuses on stopping negative events before they happen, often through routine care and housekeeping. Simple measures—keeping walkways clear and securing idle tools—can prevent many accidents.
Prevention should include ongoing training for employees, supervisors, and managers.
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Risk Control.
Risk control aims to reduce the severity of losses when events occur. Examples include posting emergency response numbers and maintaining first-aid supplies so immediate help can be summoned.
Like prevention, risk control benefits from regular training and clear procedures for employees and supervisors.
To learn more about practical steps for managing job-site risk and contractual liability, see Understanding Risk Management in Construction.
Frequently Asked Questions
What is the difference between risk transfer and risk sharing?
Risk transfer moves responsibility to another party, such as through insurance or indemnity clauses, while risk sharing allocates responsibility among parties so each covers losses they cause.
When should a contractor rely on insurance versus other risk tools?
Use insurance for large, unpredictable losses; use contracts, safety programs, and retention for manageable or predictable costs to balance coverage and cost-effectiveness.
How can a business decide which risks to retain?
Assess the likelihood and financial impact of each risk, then retain risks that are low cost and predictable, and insure or transfer risks that would cause significant financial harm.
What are simple, effective prevention steps for construction sites?
Basic measures include regular housekeeping, secured tools and materials, posted emergency contacts, and consistent training for all workers and supervisors.