Module 7 - Risk Management
Four classic strategies, and the exam tests the distinctions precisely.
Avoid eliminates the threat by changing the plan. Relocating a structure off a contaminated parcel avoids the contamination risk entirely. Avoidance removes the risk rather than managing it.
Transfer shifts the financial consequence to a third party. Insurance, bonding, and indemnity clauses are transfers. Note what transfer does and does not do: it moves the financial impact, it does not make the event less likely, and it is never free.
Mitigate reduces probability, impact, or both. Additional geotechnical borings mitigate the unknown-conditions risk by reducing its probability. Staging critical materials early mitigates the supply risk.
Accept takes the risk knowingly. Active acceptance establishes a contingency reserve against it. Passive acceptance does nothing and deals with it if it occurs. Acceptance is the correct answer for low-probability, low-impact risks where response cost exceeds expected value.
Opportunity response strategies mirror them: exploit ensures the opportunity is realized, share partners with someone better able to capture it, enhance increases probability or impact, and accept takes it if it comes.
Escalate is a fifth strategy in current practice for risks outside the project's authority, raised to the program or portfolio level. Know it by name.
Two terms the exam likes. Residual risk is what remains after a response is implemented; mitigation rarely reduces risk to zero. Secondary risk is a new risk created by the response itself. Transferring work to a lower-cost subcontractor to mitigate cost risk may create a quality or solvency risk that did not exist before. A complete response plan names both.
The core construction products and what they actually cover:
Commercial General Liability covers third-party bodily injury and property damage arising from operations. It does not cover the insured's own defective work, though it may cover resulting damage to other property caused by that defective work, a distinction that generates enormous litigation.
Workers' Compensation covers employee injury on a no-fault basis and is the exclusive remedy against the employer in most jurisdictions. Employer's Liability fills gaps around that exclusivity.
Builder's Risk is first-party property insurance covering the work in progress against physical loss, typically written on the project rather than a party. Key issues are who is named, whether it covers materials in transit and stored off site, the deductible and who bears it, and whether it includes soft costs and delay in start-up.
Professional Liability covers negligent acts, errors, or omissions in professional services. A CM providing professional services needs it, and an owner should require it. It is claims-made, meaning coverage responds to claims made during the policy period, which is why tail coverage after project completion matters.
Umbrella or Excess sits above the primary limits.
Pollution Liability covers pollution conditions generally excluded from CGL.
Wrap-ups consolidate coverage for all enrolled parties under one program: an OCIP is owner-controlled, a CCIP is contractor-controlled. Advantages include consistent limits, potential cost savings, and reduced litigation among enrolled parties. Disadvantages include administrative burden and the need to strip insurance cost from bids so the owner does not pay twice.
A bond is not insurance. Insurance is a two-party risk transfer in which losses are expected and priced. A bond is a three-party instrument among the principal (contractor), the obligee (owner), and the surety, in which the surety guarantees the principal's performance and expects no losses, because the surety underwrites to the contractor's capacity and requires indemnity from the principal. When a surety pays, it generally seeks recovery from the contractor.
Bid bonds guarantee that a successful bidder will enter the contract and furnish required bonds. Performance bonds guarantee completion per the contract. Payment bonds guarantee payment to subcontractors and suppliers. On private work that protects the owner from liens. On public work, where liens generally cannot attach to public property, the payment bond is the claimants' substitute remedy, and it is required on most public work. Maintenance bonds cover defects during a stated warranty period.
On federal work, the Miller Act requires performance and payment bonds above a statutory threshold, and state Little Miller Acts impose similar requirements on state and local public work. The CM should know these exist and that thresholds vary.
When a contractor defaults, the surety's options under a performance bond typically include financing the existing contractor to completion, tendering a replacement contractor, taking over and completing, or paying the obligee. The surety chooses, not the owner, and the CM's role is to document the default carefully and preserve the owner's rights, since a defective default declaration can jeopardize the bond claim.
1. Relocating a building to avoid a contaminated parcel is:
2. Purchasing insurance against a risk is:
3. Additional geotechnical borings to reduce the likelihood of unknown conditions is:
4. Establishing a contingency reserve for a known risk without other action is:
5. A new risk created by implementing a risk response is:
6. Risk remaining after a response is implemented is:
7. A surety bond differs from insurance because it is:
8. Payment bonds primarily protect the owner by:
9. Builder's risk insurance covers:
10. Professional liability policies are typically claims-made, which means:
11. Upon contractor default under a performance bond, the choice of remedy typically belongs to:
12. A CM partners with a specialty subcontractor who is better positioned to capture a value-engineering opportunity. This is:
13. A risk sits outside the project's own authority to resolve, such as a policy decision only the owner's board can make. The appropriate strategy is:
14. CGL insurance's coverage of the insured's own defective work is best described as:
Take the top five risks from your Day 21 register. For each, select a response strategy, state specifically what the response is, estimate its cost, and identify both the residual risk that remains and any secondary risk the response creates. Then write two sentences identifying which of the five you would recommend simply accepting, and why the response cost is not justified.