What Is Construction Risk Management?
Construction risk management is a process through which contractors create a risk management plan to help them identify and mitigate potential risks involved with a construction project. The plan is normally put in writing so that it can be referenced during the project and modified as needed.
Sources of Construction Risks
The first step in creating a strong construction risk management plan is to identify the potential risks involved with a project. While each project will have unique risks, the following are some common sources of risks that apply.
1. Safety Risks
Construction is a hazardous business. According to the Occupational Safety and Health Administration (OSHA), 20% of U.S. workplace fatalities occurred in the construction industry in 2019. Construction workers have to work with hazardous materials and dangerous equipment. Some work at heights and face a risk of falls while others perform excavating work and risk collapses. It is critical to address safety risks involved with a construction project and include steps to ensure your employees will remain safe and avoid accidents.
2. Financial Risks
Changes in the economy can have a devastating impact on construction companies performing work on long projects. You should evaluate a project before taking it on to determine your risk of going over budget. Your plan should address potential inflationary pressures involved with acquiring materials, labor, and equipment and budget room for prices to potentially increase. Financial risks can include all of the following things:
- Excessive labor costs
- Increasing material costs
- Rising equipment costs
- Change order costs
Identifying the financial risks of a project can help you mitigate them and protect your profit margins.
3. Labor Risks
In a tight job market, a lack of skilled and available employees can threaten a construction project. If you don't find enough skilled laborers, trying to complete a project can lead to overworked employees taking shortcuts. In turn, this can result in an increased risk of accidents and delays in completion.
4. Management Risks
A poorly managed project can create additional risks that result in delays and losses. Project management risks can also affect other sources of risks, including labor, financial, safety, and legal risks. When you plan, you need to understand the potential project management risks and take active steps to avoid them.
5. Legal Risks
Construction projects face legal risks based on their contracts, local regulations, and more. You should carefully review any proposed contract with your legal counsel before agreeing. Look at the clauses and make sure that everything is spelled out. You need to understand the expectations the project owner has for you and ask for clarification if anything is unclear.
6. Natural Disaster Risks/Acts of God
Planning for potential natural disasters can help to keep your employees safe and ensure you have the right types of insurance coverage to protect against losses. Consider the area where the project is located and its history of natural events such as tornadoes, hurricanes, floods, fires, earthquakes, and others.
7. Stakeholder Risks
Construction projects frequently involve multiple stakeholders. A problem with one can harm your ability to perform your contractual duties. Some of the types of stakeholder risks a project might involve include the following:
- Sudden design changes by the project owner
- Poor communication by a subcontractor or contractor
- Failure to communicate material or project changes
- Potential for a stakeholder to file for bankruptcy
- Failure to pay subcontractors or suppliers on time
How to Manage Risks
The first step involved in effective risk management is to identify the major risks a project will involve. This step should be completed before you agree to a contract so that you make sure the project will be worthwhile and will increase your profits rather than result in losses. Hold meetings with all of the members of the team to identify risks you might otherwise miss. Once you do accept a contract, you should continue to hold meetings to identify new risks as they arise. Make a list of all of the major risks of a project, the steps you and others involved will take to manage them, and which party is responsible for managing the risk.
After you have identified the risks involved with a construction project, you should arrange them in order of priority. This step can help you address significant problems immediately. Consider the impact a risk will have on your company or the project and the probability of its occurrence. The risks that might have the greatest impact on your company or the project and with the highest probability of occurring should be your first priority.
Once you have identified the risks and prioritized them, you will then need to determine how to respond to each one. The following four methods are how companies commonly respond to risks:
- Mitigate/reduce the risk
- Transfer the risk through bonds, insurance, and contractual provisions
- Avoid the risk by changing the project's location or design or by forgoing the contract
- Accept risks beyond your control
Benefits of Risk Management in Construction
Construction risk management offers the following benefits:
- Prevent construction site accidents
- Protect the safety of your employees
- Avoid project delays
- Prevent internal thefts
- Minimize potential property damage
- Attract new clients by successfully completing projects
- Aid in the efficient management of future projects
- Reduce turnover rates
- Improve employee morale
Creating a construction risk management plan and evaluating the risks of a potential project are critical steps in protecting your employees, your business, and your bottom line. When you create a strong risk management plan, you will be more likely to succeed on your project and manage any problems if and when they arise.
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About the author
Lisa Trymbiski is the manager at Bryant Surety Bonds leading a team of talented professionals assisting clients in the surety bond industry. Education, superior service, and compliance are her top priorities in the completion of a successful business transaction.
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