Construction Risk Management

Construction risk management is a commitment that Decor Construction takes seriously. We mitigate a number of risks through on-going education and training. Capterra, a construction management software company, shared a great guide to help companies identify potential risk.

1: List the Potential Sources of Construction Risk

To start managing your construction risks, you need to be able to list out what could jeopardize your projects. Take a deep breath, because the list can be long:

• Occupational risk: Injury, possibly fatal, to a worker because of behavior, methodologies or technologies used, weather or a third party.

• Financial risk: Such as unmanaged growth, lack of sales, rising interest rates, overtrading, problems with the economy, and increases in oil and building supply prices.

• Contractual risk: Penalties you may have to pay for not completing a job on time.

• Project risk: Lack of proper project management, inadequate company policies or lack of application of such policies, miscalculation of time and resources required, and more.

• Stakeholder risk: Problems of communication, misunderstanding on the deliverables or closeout of a building project, insufficiency of stakeholder funds (often these risks can be solved with construction management software).

• Natural risks: Floods, earthquakes, and other phenomena that damage construction sites or make access for work impossible.

• Competition: Pressure to match the price or delivery terms offered by a competitor, possibly putting your profitability at risk or straining your resources, loss of a project or opportunity to a competitor, and more.

Running a company that keeps you awake at night, worrying about all the things that might conceivably happen, is no fun. The next step is, therefore, to focus on the risks that are significant for your construction business. (Or if you prefer, on the ones that are really worth losing sleep over!)

2: Rank Construction Risks in Order of Importance

Other construction companies’ key risks are not necessarily your own, and vice-versa. For example, their office may be situated in an area prone to earthquakes, while your office is safe elsewhere. In other words, start with an open mind about possible risks and don’t limit yourself by using somebody else’s list.

That’s a risk in and of itself.

Having said that, some risks tend to materialize more often than others. Contractor company failure statistics illuminate the following top five reasons:

1. Unrealistic Growth (overextending credit lines, taking on too much work): 37%
2. Performance Issues (lack of experience and/or staff): 36%
3. Character Issues (transfer of ownership, key person leaves): 29%
4. Accounting Issues (insufficient cost and time tracking, non-compliance): 29%
5. Management Issues (lack of training, poor project management): 29%

Interestingly, poor construction does not feature in this list. Most building work is done properly, either because contractors want to do a good job anyway or because building codes and inspections keep results in line, stage by stage. Poor business practices are a more common cause of failure. Construction firm owners and managers with good technical know how often struggle with the management side.

But let’s get back to your risks, meaning the ones that are most likely to affect your particular project or enterprise. There is a simple and effective way of evaluating the importance of each construction risk. It depends on two factors:

• The impact on your business
• The probability of the risk materializing

If you had numbers (dollar figures for the impact, percentages for the probability), you could simply multiply the impact by the probability for each risk, and then rank the results in order. A bigger result would indicate a higher priority risk to manage. Hard numbers are not always easy to come by, but you can still use estimates to rate impact and probability as low, medium, or high. The risks with both high impact and high probability are then clearly the ones to address first. For example:

• An increase in the price of building materials could hurt your profit margins. On the other hand, this is just one factor in the total cost of a project or in the total expenses incurred by your company. You might rate both impact and probability as a medium.

• The area around a building site has a history of catastrophic flooding, which would make access impossible and put an already tight schedule in jeopardy. These floods are infrequent, however (every 15 years or so). The impact is high, but the probability is low.

• A key subcontractor on your project is in severe financial difficulty and may close down overnight, bringing your own project to a halt, leaving your workers idle and causing significant delay. In this case, both risk impact and probability are high.

To show others quickly and intuitively what the risk situation is, you can draw a simple 3×3 grid with low-medium-high probability up against the left-hand side and low-medium-high impact from left to right along the bottom of the grid. Then write each risk in the corresponding square. The ones in the top right corner (high probability, high impact) are the highest priorities.

3: Deal with Each Risk

Although construction risks may be varied and complicated, risk management techniques fall into four simple categories.

1. Avoid the risk. For example, you may choose to refuse building projects in areas prone to earthquakes.
2. Transfer the risk. Insurance is a common way to do this. An appropriate contractual agreement with a subcontractor or supplier may be another.
3. Mitigate the risk. For instance, safety hazards in construction will continue to exist. Proper safety equipment and training for both workers and managers can help reduce the dangers.
4. Accept the risk. Weather, for instance, is uncontrollable and can cause delays in construction schedules. However, good construction project management can sometimes work around the problem and lessen its impact.

The approach you choose to manage a risk can also be optimized in terms of the reward associated with the risk. Profit, a repeat building project from a customer, or getting a key construction project reference to break into a market are all examples of rewards that you may be looking for. Higher rewards may require higher levels of risk. However, higher levels of risk do not automatically yield higher rewards.

To learn more about our construction risk management practices, call Decor Construction at 918-382-7663 today!