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A Complete Guide to Construction Risk Management

“Perfection has to do with the end product, but excellence has to do with the process.” – Jerry Moran

This famous quote is quite indirectly related to the global construction industry. What is visible to the eyes is the increasing number of high-rise buildings and skyscrapers. In terms of market size statistics, the global construction market size in 2030 is projected to be twice as big as it was in 2020 – from US$6.4 trillion to US$14.4 trillion. However, underneath these bright and prosperous realities lies a plethora of risk factors.

Each construction project has its unique set of challenges and risks. All construction companies know that unidentified risks can prove fatal to the bottom line. This is why construction risk management is a crucial part of every project.

Timely identification and management of construction-related risks are possible with careful planning and execution. If you, as a construction business owner, are wondering about how to get to an effective construction risk management plan, this guide is for you.

What is Construction Risk Management?

Construction risk management refers to the process of identifying the risks related to a specific project and evaluating methods or procedures to minimize their impact. As a whole, the process involves careful planning, monitoring, and controlling various possible risk instances.

At the core of construction risk management lies a plan or a document that details the risks along with measures to address them. This plan is developed in the early stages of construction planning.

In general, there are five steps involved in the construction risk management process. These include:

  • Risk identification
  • Risk assessment
  • Mitigation
  • Continued risk monitoring
  • Reporting

What Leads to Construction Risks?

Before you go deep into the construction risk management process to create plans for your projects, you first need to understand the sources that can jeopardize the work you do. The most common sources of risks related to the construction industry include:

  • Construction site hazards that can lead to workplace accidents and result in injuries to workers
  • Unexpected cost increases that can impact the financial flow of the entire project
  • Potential disputes in fulfilling contracts/agreements with clients
  • Natural phenomena like floods or earthquakes that can cause damage to the constructed property and lead to losses
  • Poor management of resources and time leading to various project hazards

Importance of risk management in the construction industry

Most construction projects are unique and risk arises from several different sources as mentioned above. They are inherently complex and may also involve several feedback processes. Besides this, there are several participants involved, be it workers, managers, or organizations whose interests may vary from each other. These differences often have a negative impact on project execution and completion.

As a technical concept, the cost of risk is indeed, one of the largest expense items for many construction companies like yours. This is where construction risk management plays a vital role. It helps the key participants – contractors, clients, or consultants, in meeting their commitments while also minimizing the negative impact in relation to time, cost, and quality objectives.

You can better understand this with an example –

Heavy duty machinery taken in use for construction projects often requires regular upkeep and maintenance. Failing to do so will most likely result in the replacement of equipment the financial implication of which may not be feasible for the business. Construction risk management in this aspect simply means inspecting the machinery for any damage or regular maintenance.

Types of Construction Risks

The next important thing in relation to construction risk management is to know the types of common risks involved. These include:

  • Safety hazards
  • Poorly defined scope of work
  • Incomplete drawings
  • Unknown site conditions
  • Incomplete contracts
  • Labor shortage
  • Rise in construction material cost
  • Damage or theft caused to the construction tools
  • Natural disasters
  • Poor project management
  • Pollution hazards

Furthermore, all these types of risks can also be classified into different categories, such as contractual, financial, operational, or environmental.

5 Steps to Manage Construction Risks

For effective management of risks, you need to develop the required construction risk management plan, which can be broken down into five steps:

1. Risk Assessment

After having the knowledge about some of the most common construction related risks, you need to identify the ones specific to your project. Keep in mind that this assessment needs to be done in the preconstruction phase so that you can get the required time to manage potential risks if any.

An effective risk assessment strategy is to brainstorm with the stakeholders and your project team. Hold such sessions with your team with the goal to identify possible scenarios that could impact the project. This way, every individual can contribute their expertise and knowledge to review the current risk plan at hand.

2. Risk Prioritization

A risk that may affect your construction business largely might not create significant damage to some other project. This is what takes us to the next step post risk assessment – prioritizing the possible risks. Now, this is to be done based on two factors:

  • The potential impact of the underlying risk on the business
  • The probability that the risk is most likely to materialize

In other words, you should keep the high-impact, high-probability risks at the top of your construction risk management plan. For example, if a hired contractor is unable to finish his part of the project as expected, this risk is to be handled before others. Similarly, natural disasters which can have an  impact, have a lesser probability of occurrence and hence, can be treated accordingly.

3. Risk Response Strategy Development

This step corresponds to the actionables against different types of risks that you have identified and prioritized. In general, there are four main risk main techniques you can follow:

  1. Avoid risk if you feel you are not equipped to handle it or do not have the right construction risk management plan in place
  2. Transfer the risk to other stakeholders
  3. Mitigate the risk to minimize its impact (e.g. providing equipment handling training to workers to reduce possible safety risks)
  4. Accept risk for timely project completion

Your response technique should be based on either the resilience to the risks or potential rewards related to the project.

4. Execution of Construction Risk Management Plan

A risk management plan can optimize your strategy to respond to the prevailing risks. It also includes detailed information about a set of solutions using which you can either mitigate, transfer, or accept the risk. In addition, an effective plan also covers resources allocated to each of the defined risks.

The following table covers the three common risk solutions with an example:

Risk solution Example
Strategy Accepting risk as a way to increase profits
Structure Establishing a formal risk department
Operations Setting a process to review identified risks

Like many other construction companies, you can also use construction management software to manage and process various tasks in less time while also mitigating the risks involved.

5. Team Collaboration to Create Contingency Plan

Last but not least, you should never consider construction risk management as a siloed activity. Instead, focus on letting the key players in the company contribute at their respective levels. Every individual related to the project should receive updates on risk and has his own set of practices to eliminate the risks.

Particularly for the risks that you choose to accept, you need to create a contingency plan. Think of this plan as a way to finish the project even after accepting the risk.

Benefits of Construction Risk Management

By now, you might have sensed how important it is for your business to have a construction risk management plan in place. Managing the risks effectively means several advantages for your company, including

Improved efficiency at work

Once you have developed a construction risk management plan, it will help in assessing all your future projects in terms of risks. Furthermore, your team members have the knowledge needed to avoid risk and hence, work at a higher efficiency.

Better safety

With risk management plans, your teams also get the right direction to follow all safety standards on the construction sites and hence, minimize the possibility of safety hazards.

Saving of time and resources

When you have a sound construction risk management plan by your side, your team ultimately gains confidence in balancing risk factors for different projects. This will help save time and resources in the long run.

More profits

While unmanaged risks can hurt the profits, well-managed risks related to construction projects result in streamlined operations, enhanced safety, lower cost, and ultimately, more profits.

Conclusion

Construction risk management is not some set-and-forget process and requires constant monitoring of your plans to handle risks. As per the business dynamics, your risk management plan should evolve over time for greater benefits.

How can you benefit from joining hands with CEM Business Solutions?

CEM Business Solutions offer a suite of construction management software solutions using which you can manage budgets, forecasts, revenues, and more. For more details about their product, visit their website.