From August 2023 to August 2024, A&E and construction firms spent $38 billion on mergers and acquisitions, more than triple the number from the previous year. Investments by private equity firms were also at a record high, more than doubling.
Some of the leading targets of mergers and acquisitions were firms specializing in artificial intelligence and automation, a growing trend in the architecture, engineering, and construction industries that aims to help improve overall project efficiencies.
In any merger or acquisition, conducting a thorough risk assessment with proper due diligence is extremely important–but perhaps even more so when assessing the risks associated with integrating innovative technologies.
Leading Causes of Unsuccessful Mergers and Acquisitions
There are many reasons a merger or acquisition may create financial losses, or fail to perform up to expectations. Here are some of the major areas that should be considered when performing due diligence and conducting a risk assessment:
Contractual Risks and Liability Exposures
When acquiring or merging with another firm, firms need to be aware of the contractual risks and liability exposures they are taking on. This includes existing and previous contracts that may include unfavorable provisions or uninsurable terms, and issues related to the scope of service, budget, timeliness, errors and omissions, and quality control and assurance processes for specific projects. Many claims are not filed until five to eight years after the completion of a project, so it is important to review not just existing projects, but completed ones as well to get a full sense of the liability exposures associated with them.
Operational Practices
Differences in operational procedures, project management systems, data standards, and internal and external communications practices can create inefficiencies, disrupt operations, hurt project performance, and add risk exposure. Understanding where these differences are, and having an integration plan in place can help reduce risk and make the merger or acquisition more successful.
Cultural Misalignment
Mergers and acquisitions often lead to changes in both leadership and personnel. Differences in leadership structures, decision making styles, operational practices, and compensation packages can create cultural shifts that lead to key personnel leaving the firm, thereby weakening the firm’s overall operational performance. That is why it is important to have input from key personnel on both sides of the merger or acquisition before and during the integration process, and clearly communicate changes in structure or procedures to facilitate a smooth integration.
Tim Corbett from SmartRisk®, a top ten risk management consulting firm, presents an A&E On-Demand Webinar, discusses the elements that need to be considered when assessing the risks of a potential merger or acquisition, along with common failures of risk assessments that can lead to a merger or acquisition creating financial losses, or losses to profitability.
Risk Assessments for Mergers and Acquisitions
As a leading risk performance strategist, SmartRisk develops unique risk profiles for individual firms by looking at ten key categories of risk and exposure, including
- Staffing levels, staff experience, and training
- Project and client selection processes
- Project team selection
- Contract liability exposures
- Communication and documentation
- Overall business management
- Risk management culture
Every firm’s risk profile is a little different, and these risk profiles can help firms identify their own strengths and weaknesses, as well as the strengths and weaknesses of the firms they are seeking to merge with or acquire. By identifying areas of concern and providing recommendations for best practices, SmartRisk can help assess the risk exposure associated with a potential merger or acquisition, and offer strategies to help make it smoother, and more successful.
Value-Added Services for A&E and Construction Firms
Admiral Insurance Group is a leading provider of professional liability insurance for architects and engineers, and is known for its expertise in the liability associated with changing laws and technology. As part of our AdmiralProâ„¢ Design Coverage, Admiral partners with SmartRisk to provide A&E and construction clients with contract reviews, risk analysis, and risk reduction strategies.
If you are a retail agent or broker with clients in the architecture and engineering industry, we encourage you to connect with one of our wholesale broker partners.
