Construction risk management is a complicated subject, and given the many risks inherent in the construction industry, it's easy to see why. It's estimated that 37% of contracting company failures come from overly optimistic growth projections that lead to credit overextension and 36% are due to performance issues from inexperienced staff. In fact, when looking at the top five reasons, issues with poor construction don't even make the list.
These types of issues can make contractors overly cautious as well. It's estimated that 5% of contractors deal with risk by avoiding it at all cost, while another 20% choose to deal with the risk at its source to keep control of the risk factors. Are you wondering where your company falls in terms of construction risk management and how you can safely take on risk with your business? In this post, we'll talk about what construction risk management is, where it shows up in construction, the eight specific types of construction risk, and how to assess and reduce risk in your contracting business to avoid putting your entire company at risk.
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What is Construction Risk Management?
The traditional definition of risk is the possibility that you'll suffer a loss or damage from a specific factor, aspect or element of the environment, strategy or approach to a process. Our lives are entirely filled with risk, from car accidents to food poisoning to sinkholes under our homes to severe weather emergencies.
But what is risk in the construction industry? Risk is uncertainty, such as not knowing for certain whether your supplier will be able to provide you with the required materials, as we've seen with recent supply chain shortages. Risk is exposure, such as liability from a problem when your construction isn't as solid as it should be. Risk can be multidimensional, requiring that perfect storm of circumstances to create an actual problem for your business.
Risk is centered around events that are uncertain which will have a negative impact on your project or business. As an example, having flooding occur at your job site increases the risk that the surface soil will subside and cause issues with bearing the weight of the foundation, because it has a negative impact of the foundation possibly failing. Winning the lottery, on the other hand, is not a risk, because you would benefit from it.
If that is risk, then what is risk analysis? Risk analysis is the overall process of assessing risks in a qualitative or quantitative fashion. You can measure the risk that leaving poor-quality materials in place would be, which is how the assessment process works out. The assessment needs to include at least an estimate of how uncertain the risk actually is as well as its predicted or forecasted impact on your project.
As an example, if you were a concrete company doing a large slab pour for 10,000 PSI concrete, you may have a batch that was poured too wet. The risk of leaving that concrete in place, as compared to removing it and repouring it, can be estimated by measuring the concrete. If it has too high a slump that will not set up to provide proper strength, the risk is too high to leave it be. This means that it will need to be replaced.
By understanding what risk assessment is, you can manage your risk. Risk management is the process involved in using your risk analysis to develop strategies that will reduce your company's risk. It involves looking at each situation and deciding whether the risk is worth the possible reward, such as not having to spend money on repouring low-strength concrete on your project.
By measuring the slump of the concrete mentioned above and rejecting or repouring it, you're managing risk by preventing poor-quality materials from being used in your project. If, on the other hand, it has a fairly good slump measurement, you may be able to leave it in place as the spec only calls for 8,000 PSI concrete, because the risk of failure would be very low.
Risk in construction falls in many areas, but is mainly defined as actions that leave a contractor's business at risk. We manage that risk by ensuring that we're building quality construction that will stand up to the test of time. We also do so by making sure we're not overextending our credit, taking on jobs too complex for our expertise and similar factors that put companies at risk.
How Does Risk Occur in Construction Projects?
Though there are any number of ways that risk will occur on construction job sites, there are several common risks that should be regularly checked for on your projects. Though it's not an exhaustive list and will always contain low-risk items that have not made the list, here's a quick look at some of the most common construction project risks that you'll run across:
- Client/user scope changes
- Competitive factors
- Construction cost increases
- Construction delays--
- Contractor default
- Contractor incompetence
- Economic and business conditions
- Enforceability of contract
- Engineering changes and design development
- Failure of equipment
- Force Majeure
- Inaccuracy of construction cost estimates
- Late delivery of equipment
- Operational accidents
- Operational performance
- Permitting licensing delays or rejection
- Poor quality of construction
- Regulatory or legal challenges
- Site conditions
- Strikes and work stoppage
- Unavailability of skilled labor
As you can see, there are many potential sources of risk in the construction industry, coming from a wide range of factors. But what are some of the biggest threats to the construction industry as a whole?
8 Types of Construction Risk
There are eight specific types of risk on a construction site. Knowing this makes it easy to get caught in the trap of having a single, long, incomplete list of possible risks on your construction site. Instead, classify the different risk types and do some work in each risk area to mitigate those risks and improve your company's potential for growth. In this list, you'll find the eight categories of construction risk that can impact your business that you'll want to stay on top of on your projects.
- Performance Risk: If you're taking on a project that is beyond your expertise, it's of vital importance to stay sharply on top of this risk before it leads to schedule risks. This can include issues with quality, overall job site performance, project scope or technological requirements. This isn't to say that you shouldn't try these projects, but try to keep the amount of growth you're undertaking to a single sector to prevent multi-faceted complications to your project.
- Schedule Risk: This is one of the most common types of risk in construction, as projects go over their anticipated or promised completion date. Delays can be caused by inexperience of the crew, unexpected damage that needs to be repaired, poor planning, issues with subcontractors or suppliers, shipping delays, and any number of other possible issues, which can lead to financial risk.
- Financial Risk: Another area where contractors have had to deal with serious issues in the past few years, financial risk is the chance that the project will go over budget. This can happen due to inexperienced crews not working quickly or efficiently enough, material costs going up, unbilled changes to the project that the contractor absorbs or similar issues. It's easy to get caught up in optimistic projections, but make sure you include a solid buffer to handle these types of issues.
- Safety Risk: Construction is among the most dangerous industries in the world, with its "fatal four" accounting for the bulk of deaths in the industry. This includes falls, being caught up in equipment, electrocution and being struck by objects. However, there are other safety issues that should be taken into account in construction risk management, including climate-related illness such as heatstroke or hypothermia. Make sure your crew knows what to look for in safety hazards.
- Contractual Legal Risk: What will happen when you sign on the dotted line that you're going to meet particular benchmarks? If you don't meet those benchmarks, you may find yourself liable to the potential legal repercussions and penalties, which can cost you your business. Make sure to thoroughly review any contract before you sign it. If you don't understand or are unclear on any portion of the contract, contact an attorney and go over it with them.
- Environmental Risks: Hurricanes. Flooding. Blizzards. Intense heat. Drought. How will these environmental risks impact your business? Flooding can cause soil subsidance, while drought can impact your crew's performance. Make sure that you've secured appropriate levels of insurance for your project that take these issues into account so that you have some coverage if things don't work out on the job site.
- Incremental Risks: A power-tool battery here, an extra accident there, and suddenly your business is at serious risk of going under. Though incremental risks don't cause your company to fail one at a time, when combined together, they can create a serious risk for your company when combined together. Take the time to review these relatively small risks to ensure that they continue to remain small, rather than adding up to a big problem for your company.
- Catastrophic Risks: Among the possible issues that could include catastrophic risk include natural disasters such as earthquakes, economic disasters such as severe market crashes, or materials issues such as serious shipping delays. All of these issues, if significant enough, can cause a catastrophic risk that can seriously impact your company's growth and profitability.
The uncertainty of construction risk management is created by a combination of external factors, including site conditions and weather, along with internal factors, such as organizational structure and safety training. By taking steps to minimize the overall risk of a particular project, you'll ensure that your company is much more likely to see growth instead of failure, all while helping to build profitability and efficiency into every action taken on the job site.
How to Assess Project Risk in Construction
When you're working on a particular project, how do you assess its overall risk? There are three specific areas of concern when working on construction risk management:
- Schedule: Will the project go over schedule? This is a fairly common issue in construction, and it's a great reason to pad your scheduling a little to provide extra room in case of production, material sourcing or similar issues.
- Cost: Will the project overrun its budget? Cost overruns are also a very common issue that can arise, as labor and materials expenses rise. For this reason, it's important to include a buffer to cover unexpected expenses.
- Performance: Will the final outcome/output meet the goals of the project? These are often the most spectacular and catastrophic risks, such as projects that fail to meet structural requirements, causing property and personal damage.
The best way to handle these issues is to plan for risk. This is most easily handled by including buffers in scheduling and expenses, as well as performing regular tests on performance to ensure that the structure is up to specs. But beyond your initial planning, it's also important to monitor risk on the project as you go forward. Slip and fall accidents may not be an issue in August drought, but become much more serious in October rains, so adapt your plan as conditions change.
How to Reduce Construction Risk
Fortunately, when you're undertaking construction risk management, you don't need to figure it out from scratch. There are several common risk management frameworks you can work within. Which one is best? The one that works for your business, as there is no single definitive way to assess and manage construction risk. These options include:
- ISO (1) Assessment (2) Treatment (3) Monitoring and (4) Communication
- Society for Risk Analysis SRA (1) Assessment (2) Characterization (3) Communication (4) Management (5) Policy
- Project Management Institute (PMI) (1) Identification of Risks (2) Qualitative Risk Analysis (3) Quantitative Risk Analysis (4) Planning for Risks and (5) Controlling Risks
Once you've gone through the assessment process, it's time to develop your risk management plan. Bear in mind that risk management is a continuous process, and setting up a single plan without revisiting it as your project rolls forward may leave you vulnerable to other risks. For this reason, you'll want to regularly go through this process to update your plan over the construction process.
- Identify the Risks: Generally speaking, start by looking for specific sources of risk, such as reviewing vendor security policies and walking through your job site to find specific hazards. You'll want to take a look at each of your risk categories and create a thorough listing of all hazards to your business.
- Analyze Risk: Once you've identified all your risks, it's time to look each one over. Take into account the impact the risk will have on your project, the kind of exposure it creates, the probability of the risk happening, the timeframe in which it would happen and how you would classify that risk. A direct hit from a tornado happens quickly and has a large impact, but may not be very likely.
- Develop Risk Response Plan: The next question is how will you respond to the risk. You can avoid it altogether, but that may prevent your business from growing. You can transfer some of the risk by requiring a range of liability waivers in some situations. The risk can be mitigated, for example by adding grip tape to ladders in wet weather. You can also accept the risk if it's not too serious, such as accepting the risk of an earthquake in Florida, because it's unlikely to occur.
- Execute Risk Management Plan: List your potential risk sources and categories, create a risk matrix based on impact and probability, reduce risk through the right software, such as schedule analytics like SmartPM's Schedule Optimization Platform, that helps break down data for access and visibility for everyone on the team. Technological innovations could be used, such as analytics to study the odds of severe weather. Develop contingency planning for when risks meet a particular threshold or metric.
- Monitor and Control Risks: As your project rolls forward, take time to both track your existing risks and identify new ones. Reclassify your risks as needed, and create risk reports to keep everyone in your enterprise on the same level to improve risk response.
- Measure Risk Management Process Efficiency: In emergency management, checking how effective a specific action can be is a large part of the risk management process. Once you've had a chance to complete a project, look back over your project to update your overall risk metrics and perform another risk audit to see what areas surprised you, so that you can respond better in the future.
What are the Benefits of Construction Risk Management?
But why should you go through this entire process? Is construction risk management really worth all the effort? In short, construction risk management provides you with a range of benefits to improve your operation. But how will these benefits help you grow your business and improve your financial and market position?
You'll see improved productivity and efficiency, boosting your company's profitability and bottom line. Your workers will enjoy improved safety, ensuring that they'll want to keep working for you for many years to come. Your customers will realize better overall quality of work, making them come back to you for their next project. You'll avoid potential liability issues that can cause serious legal issues for your company, whether now or in the future. You'll protect your company's reputation, ensuring that you'll be able to remain in operation and running profitably for many years to come.
By having a solid grasp of how construction risk management works, you can take effective steps to protect your business against the potential risks inherent to the construction industry. One of the easiest ways to avoid some of the many issues found in the industry is by using software that makes it possible to ensure that everyone is doing what they need to so that your interests are protected. Digital transformation is increasing the need for efficiency and technology on the job site, and we feel that our app delivers many options to grow your business.
SmartPM puts the most vital parts of your business' scheduling in the palm of your hand. You can remotely manage your crew, keep everything moving and find potential issues with your schedule that could lead to financial and contractual risk to your business. Please feel free to learn more about our contractor product, to request a demo of our comprehensive app or to contact us today at firstname.lastname@example.org or (404) 329-3000 with any questions or concerns.