There are all sorts of risks in the construction industry. Unreliable contractors and sub-contractors, theft, spiraling material costs, an uncertain economy, scope creep, interest rates—the list is long. At the top of the list, however, is your overall financial risk.
Figuring out how to mitigate financial risk in construction is a tall order. Even though it looks like 2025 is shaping up to be a good year for construction, the overall financial health of companies is less optimistic. S&P Global reports that financial risks remain elevated, seeing more downgrades than upgrades when analyzing companies.
Construction project risk mitigation is critical to maintain margins and protect your reputation, and a few key strategies can help you mitigate risk.
Conduct Thorough Financial Due Diligence on Contractors and Clients
One of the first steps in construction project risk mitigation is ensuring that all contractors and clients are financially stable. A contractor with cash flow issues or a history of late payments can quickly become a liability.
Failing to check on a contractor’s credit history and finding out later that they were struggling with severe debt can lead to project delays. When the contractor struggles to pay its subs or suppliers, the situation can get ugly fast. Delays, legal disputes, increased costs—a simple credit check could have prevented this costly mistake.
Best practices include:
- Using on-demand business credit reports to assess the financial health of potential contractors and clients
- Checking for warning signs such as high debt levels, slow payment histories, judgments, liens, or bankruptcies
- Establishing a standard vetting process that includes financial assessments before signing contracts
Monitor Financial Health Continuously, Not Just at Onboarding
A common mistake in the industry is performing financial checks only at the start of a project. A contractor or client may appear stable initially but experience financial trouble later, affecting their ability to meet obligations.
Ongoing account monitoring helps mitigate risk by:
- Tracking real-time changes in a company’s financial health
- Providing alerts when key financial indicators decline
- Allowing you to be proactive before issues escalate
Here’s how this might play out. A finance team using account monitoring might get an alert that a key contractor had a sudden drop in credit score. When checking it out, they discover the contractor has multiple unpaid invoices and is taking on more debt. While things seem fine right now, this early warning lets them secure backup contractors to improve construction project risk mitigation.
Strengthen Cash Flow Management
cash flow problems are the cause of 82% of all business failures. Delays in receiving payments from clients, as well as unexpected expenses, can put significant strain on your financial health.
You can mitigate your risks by vetting partners and clients, monitoring their financial health, and:
- Establishing clear payment schedules and enforcing penalties for late payments
- Customizing your credit policies and contractor agreements based on the financial data you uncover to accommodate any elevated risk
- Monitoring your outstanding receivables to identify at-risk accounts
Implement Portfolio Credit Risk Analysis for Smarter Decision-Making
Focusing on individual financial risks is important, but construction firms also need a holistic view of their entire portfolio. Portfolio credit risk analysis helps you monitor the financial risk across multiple projects and contractors.
This can help you:
- Identify patterns of financial distress across different contractors
- Prioritize high-risk accounts that require closer monitoring
- Make better decisions about projects, clients, and contractors
Reduce Project Disruptions Through Proactive Risk Management
Even with the best planning, financial risks can still arise. The key is to anticipate potential issues and act quickly when they occur.
Smart companies develop strong relations with multiple contractors to avoid over-reliance on any single vendor, and they keep cash in reserve to cover unexpected costs. Contingency, and crisis response, plans can help you prepare and build a more resilient organization.
Construction companies also need to make sure they have the right coverage to protect against financial losses, such as general liability, builder’s risk, and subcontractor default insurance, that fits with their risk tolerance. Performance and payments bonds also help protect against contractor or supplier failures.
Protecting Your Construction Business
Understanding how to mitigate financial risk in construction is crucial for maintaining stability and profitability. Knowledge is power and the right processes and tools can help you take a more proactive, data-driven approach to financial risk management.
Contact Command Credit today and let us show you how on-demand business credit reports, portfolio scoring and analysis, and comprehensive account monitoring can better protect your business.