Construction Project Risk Management: A Primer

Construction is regularly cited as one of the most dangerous professions. Yet employee safety is just one of the risks that goes along with a construction project. General Contractors, who operate on tight margins, need to be aware of and account for the myriad of risks involved in a construction project. Therefore, general contractors should engage in construction project risk management before beginning each project as a way of maintaining profit margins.

Construction is regularly cited as one of the most dangerous professions. Yet employee safety is just one of the risks that goes along with a project - making construction project risk management a crucial part of any project manager’s remit.

General Contractors, who operate on tight margins, need to be aware of and account for the myriad of risks involved in a construction project. Therefore, general contractors should engage in construction project risk management before beginning each project as a way of maintaining profit margins. 

Let’s backtrack and define risk management. Construction equipment rental company BigRentz defines it as, “…the process of determining the risks present in your business and evaluating the procedures to minimize their impact.”

But how exactly does risk management relate to construction? “Risk management in construction is designed to plan, monitor and control those measures needed to prevent exposure to risk,” according to stakeholdermap.com. They continue, “To do this it is necessary to identify the hazards, assess the extent of the risks, provide measures to control the risks and manage any residual risks.”

Areas of construction project risk

Construction project risk management starts with identifying the risks to the project. The most common risks are noted below.

Employee Safety -  Because of the many potential hazards involved with construction, safety is a top concern. “Risk assessments for health and safety risks are a statutory requirement under the management of Health and Safety at Work Regulations,” notes stakeholdermap.com

Project - Defined by construction software company eSub as, “… those [risks] that occur because of the management of the project or other similar reasons. So poor project management, poor scheduling, and the issues that arise because of these shortcomings are project risks.”

Financial - These risk factors impact a general contractor’s financial flow and include unexpected costs (think change orders) and cost increases related to materials and other essential elements.

Personnel This risk relates to finding and retaining the appropriate workforce – in terms of skill set and numbers. A global shortage of construction workers has been well documented. This can lead to crews being overworked and not performing as expected and can even drive some employees to quit.

Environmental/Natural – Everyone who has ever been involved with construction at any level knows the risk that poor weather presents. Risk to a construction site can also come in the form of floods, fire, earthquakes, and other natural phenomena. 

Contractual Up to 30% of construction projects end up in litigation. Risk assessments must account for disputes over the fulfillment of contracts and penalties incurred over not meeting a project’s completion deadline.
 

Likelihood and Priority of Risk Occurring

The next step is to determine the likelihood of the risks occurring on the project at hand and noting if there are any unique risks for the project. BigRentz suggests that risk identification occur “during the preconstruction phase of the project to allow for time to manage any potential risks before accepting them.” They add that conducting brainstorming sessions with those who will be on the ground and stakeholders is a good way to “to identify all the possible scenarios that could impact the project…”

Once your firm has identified the potential risks that may occur on a construction project, they need to be prioritized. Prioritize the risks based on the impact they would have on your firm and the probability of them occurring. Strive to quantify the impact

This can and should be used as part of a guide on how to manage the project or even whether or not to take it on. Those risks that are high probability and high impact need to be considered more carefully and regularly.

If you’ve identified a large number of high impact, high probability risks, it might be time to walk away and move on to your next opportunity,” says eSub.
 

Construction risk assessment

Ideally, once the risks involved in a construction project are identified, they would be removed. Unfortunately, that’s not always possible, but it is possible to manage risk. Your firm has multiple options on how to deal with risk.

  1. Avoid the risk - ie pass on the project. As noted above, if the risk is too great, it might be best to simply pass on the project.
  2. Transfer the risk – This can be done via insurance or through a contract with a subcontractor (who is more equipped to deal with the particular risk) or supplier.
  3. Mitigate the risk – In this scenario, general contractors strive to find ways to lessen the risk. A simple example is to ensure proper and strict safety protocols are followed on a project where employee safety is a particular concern.
  4. Accept the risk – Every project includes risks and some need to be accepted, including the weather. The team should develop plans on how to best deal with these sorts of risks.

Ways to Manage Construction Risk

As part of accepting the risks involved with a construction project, it’s important to find ways to address or manage them. There are six options for this - software, training, financing, insurance, professional advice, and new technology and methods - according to Capterra, an online resource connecting buyers and sellers of business software. 

They say “… the right construction management software can make tasks more manageable and quicker to process. All of these advantages also help mitigate risk.” 

Keeping employees trained on relevant equipment and materials and staying up to date on technology and methods can reduce risks. 

Construction project risk management is an important skill that must be mastered by general contractors. Doing so will help mitigate risk and improve the profitability of the general contractor. In addition, when general contractors are seen as good managers of risky projects, their reputation will be enhanced, and it will lead to more business.

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