Mitigating Risk

Recent political uproar around the world has driven home the potential liabilities that U.S. construction companies face in pursuing ever-expanding global opportunities. Instances of stranded construction workers and long work stoppages in Libya, Egypt and elsewhere are vivid examples of the risks of commercial building amid nation building.

 

Despite the risks, the pull to such work remains great as emerging markets offer staggering opportunity. As the dust settles politically, experts predict construction in such countries is likely to grow, to rebuild damaged buildings and create employment. For American construction companies seeking overseas opportunities, there are several measures they can take to mitigate risk.

Selecting the Project

Conducting due diligence and assessing political risk early on can reduce the hazards that political uprisings can have on overseas projects. An initial measure that can be taken is to avoid “hot spots” and select a location less likely to be impacted by unrest. Working in the private sector may also reduce the impact that political changes can have on your bottom line. Since construction can take months or even years to complete, trying to limit the duration of a project may help to reduce the risks. It is important to note early on in a project that foreign countries may go through political changes during the time you are conducting business there.

To account for the differences in foreign geographic and climatic factors, it is good to perform environmental assessments early on in a project. These include, but are not limited to, excessive heat or cold, wind, seasonal variations, altitude and the natural environment – all of which can impact the cost and schedule of construction. Picking the project location is also important when determining how best to protect the safety and health of employees. It is important to be aware of what the local safety standards are and how they differ from U.S. standards. Job site security and the risk of theft and vandalism are significant when working overseas. The loss of equipment can cause downtime for operators. It is important to be cognizant that the local law enforcement may be unreliable or even nonexistent.

Understand Local Laws 

It is critical to your success to prepare American employees for cultural differences they will encounter both on and off the job in a foreign country. Employees should be informed of the dos and don’ts of the country’s customs and religious observances. Superintendents should be familiar with the social and cultural environment in order to integrate with locals. Language barriers must be resolved before work begins, and making sure the management team is versed in the language is one way to ensure this happens.

To help overseas projects run as smoothly as possible, it is critical to garner the support of the local community by identifying the needs of the local people and the impact your work has on their society. Understand the country’s immigration policies and requirements for obtaining work permits before entering into any contracts. 

Also be prepared for sudden changes in immigration policies, as they have been known to change without notice. Knowing the local employment laws is also very important. One question to ask is what rights and protections employees will have in the jurisdiction where work will be taking place.

Allocate Risk

Use contracts to allocate risk to local owners, investors or subcontractors, paying careful attention to cancellation, delay, termination for convenience and force majeure provisions. Broadly worded clauses that cover delays “outside the reasonable control” of the contractor will help mitigate risk. Consider the unavailability of utilities, the inability to source labor and materials, and the potential for recurrent mobilization and demobilization costs.

It is important to establish which currency will be used for payment and to consider whether interest rate changes, inflation, tax rate increases and changes in exchange rates can be allocated to local owners or subcontractors in your contracts. Contract language alone is not always sufficient to allocate risk. It is important to devote sufficient time up front to align both business goals and project-specific goals with those of the owner. Pre-construction planning, coordination and communication are important steps to ensure this happens. Consider purchasing political risk insurance – typically excluded from policies – which can provide coverage against war, civil disturbances, terrorism and sabotage. Also consider business interruption insurance, which may offer income protection and builder’s risk insurance. This can protect your company against theft, vandalism, fire, wind and hail, among other losses.

Prepare for the Unexpected

While conducting overseas projects, it is important to remember to have contingency plans and exit strategies. Ask important questions that one may not normally think to ask. For example, what would you do if an Icelandic volcano suspended flights and your employees or supplies could not arrive on time? Or, if it becomes too dangerous to complete the project, how will you evacuate your employees? Assessing these risks and creating contingency plans in advance will alleviate losses and negative consequences. Keep passports, visas and other important records in a secure location. Register with the local embassy, whose assistance may become necessary in times of crisis or emergency. Be sure to have vital supplies, including food, water, telephones and first-aid materials on hand at all times. Before stepping foot on foreign ground, retain consultants and advisors to help identify risks and put a plan in place.

Finally, continue to identify, monitor and assess risks throughout a project. While it is not possible to eliminate all risks taken when working on foreign ground, once identified and planned for, one can reduce the possibility of risk to an acceptable level. All international projects come with risks, but they can be mitigated through appropriate risk assessment and proper planning. Remember, identifying and managing the risks early on can limit the exposure and improve the chance of successful completion of foreign projects.

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