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At your own risk

Risk is a bit like marmite. Some people avoid it like the plague, whilst others crave it.

Risk is, however, inevitable.

It will always crop up in some shape or form. Even if you spot a risk and take action to avoid it, almost always that will mean that a different risk pops up elsewhere.

Sometimes unexpectedly.

Recognising that risk is inevitable is the foundation stone of success in business generally (and particularly in construction, my area of specialism). It’s how you identify and manage it that makes all the difference.

Storage Wars - In it to win it?

The television programme Storage Wars is, perhaps, a good analogy. The “contestants” get a quick look inside an abandoned storage container, and then bid against each other to buy the contents with a view to selling them for a profit.

Because the contestants don’t have an opportunity to fully inspect the contents, there is a risk that what the successful bidder buys is worthless, and they’ll lose money.

The flip side is, however, that the value may be considerably more than what they paid and they might turn a profit.

Regardless, one thing is true: if the contestants don’t take a risk and make a bid, there is no prospect of them turning a profit.

Tackling risk effectively

To a large extent the same is true in the real world: unless you take on some risk you are unlikely to unlock the potential to make a profit. If you don’t take any risk on, there may be no incentive on the other party to do business with you.

One role of a solicitor is to help clients identify what risks they face, be that when they are buying a property, employing staff, constructing a new building, and so on.

Once those risks are identified, the solicitor needs to discuss with the client how to best handle them.

There are essentially three options for this -

  • Avoid the risk altogether (just walk away from the deal)
  • Mitigate the risk by taking some sort of other action (think about a plan B); or
  • Transfer the risk to another party

The construction industry has a reputation for over dependence on the third option, often referred to as “risk dumping”.

Risk dumping

It is not uncommon to see a property developer want to dump the key project risks on to a main contractor.

That main contractor will often then transfer those risks on to their sub-contractors (who may in turn seek to transfer those risks on to sub-sub-contractors, and so on).

But guess what? There’s a risk with risk dumping.

If you dump the risk on someone who can’t manage it, it may well end up coming back to you.

For example, if a main contractor dumps risk on a sub-contractor and that sub-contractor becomes insolvent, the risks and obligations of the sub-contractor will be left back at the main contractor’s door when the developer demands action.

So it’s not a universal solution.

A better approach is to look for the party who is most able to manage a particular risk, and ensure they take it on.

That way, the project as a whole will have a better chance of success. If the most appropriate person manages the risk, then it may never occur or, if it does, the effects can be effectively mitigated.

So, the next time you appear on an episode of Storage Wars, can you get me Sean Kelly’s autograph?

And meanwhile, it might be worth having a think about risk, and how it is best managed.

Jennifer Young

Jennifer was elected chairman in January, 2012, and became managing partner in June, 2020.

Posted, 03 March 2017 by Jennifer Young
Categories: Commercial property | Construction | Corporate | Litigation