Construction project managers face risk and must accurately assess and mitigate these risk, the five pillars of risk management can help them. Risk can present itself in many forms and at every stage of the project life cycle. Unmitigated risk poses a huge threat to budgeting and profitability, project schedules, and efficiency. We’ll take a look at how construction project managers can mitigate these risks inherent to construction projects. This blog will give an overview of the 5 pillars of risk management, while our eBook dives deep into these pillars.
An Overview on Risk and Sources of Risk
Before getting into the pillars or risk management, it’s important to define risk. Risk seems like it’d be easy to define since a quick search shows it means “a situation involving exposure to danger.” But that doesn’t cover construction risk, in fact, it’s broad. It can be overwhelming to try to define risk in a project with that definition. That’s why it’s important to break up and define the areas of risk.
The main areas of risk in construction usually come from these areas:
Scope – an inadequately defined scope can create risk.
Cost Management – working with inaccurate projections can cause cost overruns and budgetary issues.
Change Management – stakeholders don’t agree on changes causing stalls and such.
Stakeholders – the stakeholders have unrealistic or inaccurate goals for the project that trade contractors can never meet.
Communication – teams don’t communicate with each other causing other issues during the project.
Resources – not successfully acquiring materials and labor in time.
Force Majeure – Acts of nature cause delay, market changes impact the project, or regulations change.
These areas of risk matter because of the issues they can cause. Risk management was a system of checks and balances for protecting the public and workers from harm. Now construction firms use risk management to avoid liability and improve project profitability. With so many different ways that companies can be liable, risk management is crucial in all business processes.
Get a Handle on Risk with a Plan
In order to handle risk and be prepared for it, it is crucial to have a risk management plan. Risk management plans look at the main areas of risk and how it pertains to a project. The plan is every contractor’s attempt to quantify risk and produce a risk assessment. Risk management plans describe how risks are monitored, controlled and evaluated throughout the project lifecycle.
To build a project risk management plan, there are some similar steps that every project manager has to go through to build a risk management plan. They must define their knowledge, establish potential risks, quantifying risk, and producing a risk assessment.
Step One – Defining Knowledge
The first step in any risk management plan is to define knowledge. This is when project managers have to include project details, requirements, and prior knowledge from other projects. Project managers can use this information to build a list of potential risks, and any assumptions to build risk plans.
Step Two – Establishing Potential Risks
With the documented knowledge, then the project manager should list out potential project risks. So scope, requirements, design errors, omissions, and other areas of risks should be listed. Project managers should work on the most common sources of risk first and working into less common sources.
Step Three – Quantifying Risk
After listing risks out, it’s important to quantify all of these risks. The risks should be quantified by their probability and the effect. Project managers should also determine how risks can be managed in this step. This will be important for the final steps.
Step Four – Producing a Risk Assessment
With all of these steps completed, it will be time to produce a risk assessment. The risk assessment lays out risk by project stage, the likelihood of occurrence, and the effect of that risk. Once the assessment is completed, then the project manager can look towards monitoring and controlling risk. This will help prevent issues that occur during the course of the project.
Five Pillars of Risk Management
Staying ahead of risk means responding and being able to respond when a risk is realized in order to avoid schedule delays. The five pillars of staying ahead of risk are incredibly important for every company. The pillars of risk are effective reporting, communication, business process improvement, proactive design, and contingency planning.
These pillars can make it easier for companies to successfully mitigate risks associated with their projects. To learn more about these pillars of risk management and how they can impact risk for your business, check out our eBook The 5 Pillars of Staying Ahead of Risk.