How to Manage Business Risks Faced by Contractors

How to Manage Business Risks Faced by Contractors


GlobalLinker Staff

GlobalLinker Staff

11 Aug 2015, 12:37 — 5 min read

What is the formula for success? A business consultant would suggest enhancing productivity through innovative ideas for attaining success. On the other hand, a risk consultant would propound the theory of assessment of business related risks.Both are equally right and interestingly, neither can be achieved without the other.

Successful identification and effective hedging of operative, financial, and human risks that may adversely affect a business are the cornerstones of any profitable undertaking.Though a necessity for all organisations, risk management is of critical importance for enterprises that operate at multiple sites or are involved in a wide array of complex operations. Such enterprises cannot solely depend on a handful of employees. Projects undertaken by contractors serve as an ideal example of this genre of business.


Here are some FAQs regarding risks faced by contractors.

What type of risks does a contractor face? Are these risks different for different types of contractors?

Various industries have various types of contractors. Though each business activity is unique and encompasses procedures and techniques specific in nature, the following are the common risks faced by all:

  • Heavy Machinery Shortage
    A contractor may be working on more than one project simultaneously. Lack of planning may lead to shortage or under utilisation of heavy machinery and other equipment.

  • Raw Material Shortage
    Adequate and regular supply of raw materials at the site is of pivotal importance. Delay in receipt or lack of availability may lead to losses. 

  • Inferior Construction
    Workmenship is crucial to the success of a project. Besides skill, the work quality depends on the quality of supervision andavailability of adequate manpower.

  • Safety Hazard of Workers and Other Third Parties
    Accidents at construction sites are not unheard of. Reimbursement of medical bills and payment of compensation for loss of lifeand other third parties may affect profitability.

  • Insolvency of Third Parties
    Insolvency of subcontractors, suppliers and other bad debts take a toll on the contractor’s cash flow.

  • Climatic Conditions
    Budgeted cost and time schedules may turn askew due to bad weather, floods, earthquake, etc.

  • Inconsistent Laws
    Change of state laws, inordinate delay of project clearance, inconsistent government policies could lead to increase in project costs.

  • Demand Pattern
    Often a drift in consumer preferences may influence demand strongly. Such an eventuality may spell disaster for the contractor’s present and future projects.

  • Cash Flow Issues
    While the contractor’s cash in-flow depends on the regular receipt of claims, the cash out-flow would depend on the requirement of materials and other unforeseen expenditures. Inadequate cash-in-hand may stall operations leading to delay and losses. Hence, it is advisable to maintain sufficient cash for daily operations.


How can one mitigate such risks?

A contractor can protect himself from financial losses due to some of the above risks by opting for these insurance policies:


  • Contractor’s All Risk (CAR) Insurance
    This comprehensive cover protects the contractor against monetary losses due to damaged property, equipmentor machinery. Claims arising from third party liability or injury during work in progress at the project are also covered under CAR insurance policy.

  • Erection All Risk (EAR) Insurance
    All losses due to accidental damage to property during erection and storage are covered under EAR Insurance.

  • Fire Insurance
    This insurance policy is a safeguard that protects a contractor’s office/ workplace/ warehouse from fire.

  • Group Health Insurance (GHI)
    A contractor may facilitate health checkups and medical reimbursements of his/her workers by opting for Group Health Insurance Plans.

  • Workmen's Compensation (WC)
    WC insurance policies cover the contractor’s liability towards his/her employees under Workmen's Compensation Act 1923, Fatal Accidents Act 1855 and current labour rules. Compensation for total disablement, partial disablement and death during the course of employment is provided for under this policy.

A contractor works in a complex business setup. It is advisable to opt for these insurance covers for maximum relief and financial support in crisis.

Know more about how to safeguard your business and key assignments



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