Construction risk management involves identifying and mitigating potential risks such as hazards, timelines and other uncertainties associated with a construction project. By implementing proactive risk management and creating contingency plans, a construction team can streamline their operations, enhance safety, boost client confidence and increase their profits.
What is your construction company’s level of preparation against a disaster?
As a business or firm, you’re likely aware of the many risks of construction projects. Whether meeting the terms of a contract, maintaining employee safety on the job site or dealing with natural disasters, every project has its own set of hazards. These risks can hurt your construction projects and prove fatal to your bottom line if not managed properly.
Thus, construction risk management is a must-have for any company. An effective risk management plan must have easy-to-follow yet detailed processes to help you mitigate risks, learn how to deal with them and turn them around to boost your company. With rising costs, new industry trends and statistics, more complex projects and increased safety concerns, having a risk management plan is more crucial than ever.
Read on for our guide on how to manage risk on your construction sites. For a condensed version, jump to our infographic below.
Table of Contents
- What Is Construction Risk Management?
- How To Manage Risks in 6 Steps
- Who Is Involved in Construction Risk Management?
- Benefits of Risk Management in Construction
- Reduce Construction Risk With the Right Equipment
What Is Construction Risk Management?
Construction risk management determines the risks present in your business and creating procedures to minimize their impact. In construction, the process involves planning, monitoring and controlling instances of risk. At the center of the process is your risk management plan, a document that details the risks and your processes for addressing them.
How To Manage Risks in 6 Steps
To effectively manage risk, you’ll need to develop a risk management plan which we’ll break down into six steps below.
1. Identify the Risks
To craft your construction risk management plan, you’ll first need to identify the factors that could most jeopardize your projects. The potential sources of risks most common to construction include:
- Safety Risk: Any construction site risks or hazards that can lead to worker accidents.
- Financial Risk: Factors that impact your financial flow, including lack of sales, problems with the economy, unexpected cost increases, and competition with other firms.
- Legal Risk: Potential disputes in the fulfillment of contracts with clients.
- Project Risk: Project hazards such as poor management of resources, miscalculation of time, lack of proper policies or misunderstanding of project deliverables.
- Environmental Risk: Floods, earthquakes and other natural phenomena that damage construction sites and make work inaccessible.
Risk identification should take place during the projects pre-construction phase to allow for time to manage any potential risks before accepting them.
An effective way to analyze risks is to hold brainstorming sessions with your project team and stakeholders. The goal is to identify all the possible scenarios that could impact the project. A brainstorming session will allow all teams to contribute their knowledge and expertise. Past projects can provide a helpful reference to understand size, scope and location.
After brainstorming, hold regular meetings with your project team. These meetings allow time to review current risk plans and identify any additional risks that may occur throughout the project.
2. Prioritize Risks in Order of Importance
Construction risks vary for each company — a risk affecting one construction business might not be a concern for yours. For example, certain environmental risks, like a hurricane, may not affect your inland business like they would affect a business on the coast.
After identifying your risks, it is important to prioritize them based on two factors: First, the potential impact on your business, and second, the chance of that risk materializing. Use numbers such as dollar amounts and percentages for risk analysis when possible.
Handle high-impact, high-probability risks first and low-impact, low-probability risks last. Here are a few simple examples of risks and where we’d rank their priority:
- If an easily replaceable piece of equipment malfunctions, a contractor might handle this situation with low priority.
- A price increase in project materials that can hurt profit margins can be handled at a medium priority.
- A natural disaster could have a high impact, but there is a low probability of it happening, so you can handle it at a medium priority.
- A contractor that cannot fulfill their portion of the project must be handled with high priority.
Are you wondering how we came to these conclusions? Consider creating a 3×3 priority grid, a risk assessment matrix, like the one below. By creating a visual grid, you can accurately measure the impact and probability of a specific event. Doing this will help you determine the risks most crucial for managing.
3. Determine Your Risk Response Strategy
Once you have evaluated the priority of the risks, you’ll want to select a response strategy for each hazard. While risks are complex, risk response techniques fall into four main categories:
- Avoid the risk: If you feel unequipped to handle a major risk or do not have the right risk plan set in place, the safe option is to steer clear of the project or change the scope. For example, you may want to avoid building projects in earthquake-prone areas.
- Transfer the risk: While costly, this solution may be less costly than accepting the risk itself. For example, you could transfer the risk to your insurance provider or forge an agreement with a supplier or subcontractor to pass the responsibility.
- Mitigate the risk: When you mitigate risk, you create plans to keep the risk as low as possible. You can train workers and supply proper safety equipment to lessen the dangers of safety risks.
- Accept the risk: There are times when you need to accept the risks to complete a project. For example, you may accept weather-related delays by budgeting buffer time into the project schedule to accommodate unexpected weather conditions.
The response strategy you choose will depend on your resilience to the risks and the potential rewards from the project. You may determine that a higher reward — such as gaining a loyal repeat customer or the opportunity to break into a new market — may be worth the higher risk.
4. Execute a Risk Management Plan
Now, you’re ready to craft your risk management plan. A risk plan optimizes your risk response strategy by detailing crucial information for team members and providing a set of solutions to either mitigate, transfer or accept the risks. In addition to stating priority, an effective plan should detail which resources a team member should use or refer to for each of your defined risks.
It’s important to remember that your risk solutions can impact different levels of your company.
The three common categories of solutions and examples of each include:
- Strategy: Managing risk at the enterprise level, using an indemnity clause in insurance and using risk to improve profit margin.
- Structure: Creating a formal risk department, ensuring insurance protects the earnings stream and preventing over-participation in high-risk projects.
- Operations: Setting a process to review risks, creating a safety culture and program, managing subcontractors and vendors and preparing comprehensive documents.
In addition to optimizing your company’s ability to handle risks, you can also rely on different resources to address these complexities. Construction companies use the following resources in their risk management plans:
- Software: The right cloud-based construction management software can help you manage and process tasks quicker. These tasks may include building design, safety compliance and accounting. These functions help to mitigate risk as you handle an increasing number of projects.
- Financing: Construction business credit lines often provide a good precaution if you accept various risks.
- Professional advice: Legal firms specializing in construction contracts, bankers, accountancy firms and consultants are good sources of risk-related advice. Your insurance program can also advise you on different programs’ requirements and pros and cons.
- Technology: Using new, essential innovations such as drones, BIM and prefabricated building methods can help mitigate or eliminate common risks such as poor time management, safety hazards and weather.
5. Create Contingency Plans
With any risks you decide to accept, you’ll need to create a contingency plan — an alternative method for finishing a project despite accepting the risk.
For example, if your company decides to accept a project that provides a considerable amount of safety hazards, you must communicate those hazards to workers. Your contingency plan would provide solutions such as a list of required protective equipment and a detailed list of safety precautions they must abide by.
6. Revisit and Revise
Even after all risks have been calculated and accounted for, residual risks often remain due to unknown factors. Consistent monitoring and revisions to your plan will help increase the resilience of your business against any possible risk. Your plan will likely evolve and change over time.
Risk transfer and acceptance are common response strategies to unforeseen risks.
Who Is Involved in Construction Risk Management?
Construction risk management is not a siloed activity — it requires the contribution of everyone in the company. Updates on risk must be communicated at every level.
The three key players that participate in the construction process are the project owner team, the design team and contractor teams. Since each team has its own set of practices and procedures, it is important to look into their processes and then identify and eliminate risks wherever possible.
The information you’ll need from these teams includes
- Cash flows
- Drawings and diagrams
- Cost information
- Project files and logs
- Regulatory documents
Benefits of Risk Management in Construction
By now, it’s evident that a risk management plan can provide your company with great ease and security. While building out a plan requires a lot of effort, effective risk management provides four essential benefits for your company.
Once a risk management plan gets set, it helps make your future projects easier to assess. Team members have the knowledge and tools they need to make decisions and avoid risk while improving the company’s efficiency.
Risk management plans help teams follow all safety and security standards on construction sites. The possibility of a safety hazard is minimized, which will move projects along faster.
Being equipped with a sound plan allows teams to gain confidence over time in their projects as they balance risks. Since they can plan and quickly fix their mistakes, teams can save time and resources on their projects.
Taking on unmanaged risks can hurt your company’s profits. However, a carefully-crafted and actionable risk plan can minimize these risks. A well-thought-out risk management plan can streamline operations, enhance safety, lower costs and attract leads, often resulting in higher profits.
Reduce Construction Risk With the Right Equipment
Not all risks are negative. By setting the right strategies and using the right resources in your management plan, your company will defend against disasters and take advantage of new business opportunities.
Choosing the wrong equipment for a project may result in safety, legal or project risk. Instead of taking these risks, rent the right equipment from BigRentz. BigRentz has the latest equipment and technology for any construction job — and there’s likely a location near you! We’ll even deliver the equipment to your job site and pick it up when the job is complete.
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