The Merriam-Webster dictionary defines risk as the possibility of loss or injury. This explains why risk is inherent in construction. The potential for injury is high, as well as the potential to lose a lot of money. Effective construction risk management is the key to every successful construction project. It can be the difference between making a nice profit and breaking even or worse, suffering a loss. The problem is that every stakeholder in the construction project takes on a bit of risk. However, they are continually shifting the risk to others to minimize their own construction risk. With construction risk constantly shifting downhill, the subcontractors assume a lot of the risk on projects. This checklist may help to mitigate construction risk in 2022.
Different types of construction risk management
Many types of construction risk can be categorized as follows below.
Financial: Unplanned costs and material waste are some examples of financial risks that contractors assume. Tracking actual labor hours and production units closely in a work breakdown structure helps your team to produce more accurate estimates more closely to reduce going over labor hour estimates and ordering more material than needed. Those are your risks. There are also the risks out of your control such as the owner not having enough money to complete the project or late payments.
Safety: With construction as one of the most dangerous professions, job sites place safety as a major priority. To mitigate any safety risks, many construction companies mandate a daily safety checklist inspection or weekly toolbox talks.
Delay: Sometimes delays are caused through your fault or forces beyond your control. Tracking the number of delay hours and the reasons for the delay can mitigate any financial risk of liquidated damages. For example, when crews experience delays because of poor coordination by the general contractor, the trade contractor may recoup those labor costs from the general contractor.
Rework: A study by the Mediterranean Journal of Social Sciences indicated that 30% of construction work is rework. While rework may not be completely unavoidable the chances of rework can be drastically reduced in several ways. Advancements in BIM technology and virtual design in construction have provided the ability to provide constructability reviews before construction. Additionally, drawing management software expedites the publishing of drawings to ensure that all stakeholders have the most updated versions.
Personnel: The struggle is real for finding skilled labor. In a recent Commercial Construction Index survey, more than 91% of contractors have a difficult time finding skilled workers. To minimize the risk of burning out these essential resources, you want to invest in resource management solution to ensure that you’re not overworking your crew and stretching them thin. The employees may jump ship and leave you in the risk of not having enough workers for your projects.
Environmental: Natural disasters, earthquake, flood, fire are some environmental risks that may be out of your control. However, you must take these into account on your projects. A well-written contract and appropriate insurance may be enough to mitigate this risk.
Construction risk management process
Identify: The first step is to identify all the potential risks that could arise on the construction project. This should not be a guessing game. Carefully review the bidding documents, plans, and specifications for the project. Once you have a full understanding of the scope of the project, you can start identifying the issues that may arise down the line. Rely on your previous experiences by reviewing similar projects you’ve completed in the past. Get the key players of your project team together to hash out the probable risk and potential opportunities.
Prioritize: Once you’ve identified the potential risk, the next step is to prioritize those risks. To do this, you need to determine what impact each risk will have and the probability that it will occur. High impact, high probability risks should go to the top of your list. A risk with low impact and a low probability of occurrence at the bottom. Take into account how much time, money and work each risk will require to manage effectively. 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.
Manage: Now that you’ve identified and prioritized the risks, it’s time to determine how you will manage each risk. Decide if you can avoid, eliminate, reduce, transfer or accept each risk. In regards to bid preparation, risk avoidance means deciding not to submit a bid. Eliminating, reducing and accepting risks takes careful planning. Break down each risk into actionable items. Determine what additional resources will be needed and be sure to incorporate those mitigation costs into your bid. Don’t over commit your resources to handle multiple risks. You have to bring in additional labor or rent other equipment to manage all your risks effectively.
Don’t overlook transferring risks back to the owner or client. Be sure to communicate with the owner or owner’s representative when preparing your bid to get clarification on what risks they will assume and which ones you will be responsible for managing. Work with your insurance provider to determine the risks covered under your current policies along with other options for protecting your company against risks.
Identifying and managing risks are probably the most overlooked aspect of preparing a bid proposal. By starting the process early, you can avoid bidding on projects that won’t make you any money. It will also lead to more accurate bids with reasonable contingencies built in and result in your company winning more bids. Project management will run smoother, and you’ll save time, money and resources as work progresses.
Construction risk management contract items
Contract language: Too often contracts are muddied with unclear language that makes it challenging to determine reimbursable project costs. In the case of one recent academic institution, a lack of contract clarity resulted in a $2 million discrepancy in addition to costly legal expenses. Before running into a similar problem, draft your contracts using clear, transparent language so that every party involved knows exactly the reimbursable costs. One way to avoid confusion is to write clauses and provisions so that even someone unfamiliar with the project can easily understand the reimbursable expenses.
Indemnity provisions: An indemnity provisions shift risk and potential costs from one stakeholder to another. Also known as a hold harmless clause, an indemnity provision holds one party harmless against damages caused by the other party.
Insurance and bond costs: Today, many large contractors use complicated self-insured insurance and bonding programs. A project owner should fully understand the costs and potential risks related to these programs. For example, if a performance and payment bond rate are inflated by even 0.1 percent on a $100 million project, the result is an overbilling of $100,000. Ensure you are only paying for insurance coverage and limits you have specified in your contract. Carefully review your insurance policies and costs to guarantee adequate coverage while also mitigating the risk of over-billings.
Following this checklist of identifying the different types of risks in a project, undertaking a risk management process and ensuring your contracts address certain risks accordingly will help to mitigate risk in 2022.
eSUB’s project management platform is built especially for subcontractors. It seamlessly integrates with accounting software so you can manage your construction risk better while minimizing errors. It also works on your mobile, so you can track construction risk on the go and stay up-to-date.
If you’re interested in using construction management software to improve your construction cash flow, and more, schedule a demo to learn how eSUB can help.