1. Learn how Construction Cost Reviews can maximize your savings at www.cbiz.com/ConstructionCostReview
RISK ADVISORY
Our business is growing yours
The expansion and development of organizations year after year make construction inevitable. Values
recorded by the Census Bureau indicate that construction is booming. In 2015 alone, cumulative U.S.
construction project spends reached $1 trillion, the highest recorded amount since 2008.
5 Major Risks
Construction Owners Face
Although many organizations continue to break
ground on new construction, undertaking large
projects comes with a fair amount of risk. Failing to
adequately understand where your organization may
be at risk can lead to overspending and, in certain
cases, legal disputes. Knowing the five major risk areas
in construction contracts can help you manage your
ongoing or upcoming projects to ensure you are not
overpaying.
Contract Language
The biggest risk to an owner lies in the contract itself.
Too often construction contracts are muddied with
unclear language that makes it difficult to determine
reimbursable project costs. When a contract is drafted
using clear and transparent language, it allows every
party to know exactly what the scope of work entails,
which costs fall within that scope of work and which
costs do not. Clauses and provisions should be written
so that someone unfamiliar with the project, such as an
arbitrator or judge, can easily understand the costs to be
reimbursed by the owner to the contractor on the project.
Clear, concise contract language can also mitigate an
owner’s risk related to potential project cost issues.
Project Budgets
For cost reimbursable guaranteed maximum price (GMP)
contracts, contractors are compensated for actual
costs incurred, in addition to a fee, up to a guaranteed
maximum amount. Because the contractor will be
compensated for actual cost as defined by the contract

2. Learn how Construction Cost Reviews can maximize your savings at www.cbiz.com/ConstructionCostReview
RISK ADVISORY
Our business is growing yours
©Copyright2016.CBIZ,Inc.NYSEListed:CBZ.Allrightsreserved.
agreement, detailed project budgets are essential to
ensure that the GMP budget is not artificially inflated. On
cost reimbursable contracts, owners need to carefully
review budget line items to confirm that the amounts
represent a contractor’s actual cost and comply with
the provisions of the respective contract agreement.
Removing unnecessary or overstated budget line items
can save owners a significant amount of money on their
construction projects before construction even begins.
Labor Rates
Each executed contract should detail the reimbursable
labor rate costs associated with your contractor and
subcontractors. It is important to review labor rates
prior to starting any work to determine whether they
are in accordance with the contract agreement and
represent a contractor or subcontractor’s actual cost
to perform the work. Contractors selected through a
competitive bidding process will likely present low, lump
sum contract amounts in order to win the work. However,
when contractors determine the price for change order
work, it is not based on a competitively bid process.
Pricing is often inflated as a result of overstated labor
rates. Many organizations have benefited from labor rate
reviews in order to guarantee they are receiving the best
possible price. You can drive down labor costs on your
projects by using a third-party construction auditor that
has a database of national contractor labor rates and
a comprehensive understanding of construction labor
costs.
Change Orders
With any major construction project comes surprises that
can increase the scope of work. Even if your organization
drafted the project contract using clear language and
selected a fairly priced contractor to do the job, there
is still the possibility that additional work outside of the
original estimate will be required. If you are required to
deviate from your original plan, a change order will be
needed. For example, if a project required additional
electrical work outside of the original scope, the owner
and contractor would execute a change order detailing
who would perform the additional work as well as the
cost of materials, equipment and labor for the new scope.
It is important to carefully review every change order to
gain an understanding of why the change is necessary
and assess pricing to confirm that it is fair to all parties.
Insurance and Bond Costs
Many contractors’ project costs are often overstated as
a result of complex self-insured insurance and bonding
programs. Contractors can also inflate their insurance
costs by billing for additional coverages not required by
the contract agreement or by billing for limits in excess
of the coverage required in the respective contract
agreement. It is important that every owner carefully
review the insurance coverage and costs related to their
project to guarantee adequate insurance coverage, while
also mitigating financial risk to potential insurance over-
billings.
Understanding the major risk areas you face prior to
beginning a construction project will help you to manage
that risk from project inception to completion. At a
minimum, owners need to execute clear contracts that
consider the pricing of project budgets, labor rates,
changes in the work, and insurance costs so that your
project can stay within budget. When each of these risk
areas is taken into consideration, organizations avoid
costly over-billings and potential disputes.
If you have any specific questions, comments
or concerns about your organization’s
construction contracts, please contact:
Mark McCarthy
CBIZ Risk & Advisory Services
RASinfo@cbiz.com | 866.956.1983