Construction risk management is an important facet of construction planning. Without understanding where risk can come from projects are open to cost overruns and other issues. When project managers don’t mitigate risks they might put projects in dire straits because of personnel, environmental, safety, and other types of risks. With the wide variety of project management and other construction and subcontractor software solutions, mitigating risk is easier for project managers than ever before. Software only gets people so far, so project managers and superintendents need to know the basics of construction risk management and what to look out for. This guide will help superintendents and project managers manage risk in their projects.
Table of Contents
The first step in construction risk management is to identify areas of risk. There are many different areas where risk can occur within a project. It’s not just limited to safety. The types of risk are Safety, Financial, Contractual, Project, Stakeholder, Environmental, Personnel, and Competitive. Let’s take a deeper look at the various types of risk.
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.
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.
Contractual – Contractual risks are risks placed on subcontractors because of the way the contract is worded. So a contract might add a penalty to subcontractors or reduce payments if a job isn’t completed on time. Contractual risks need to be considered in construction risk management.
Project – Project risks are those 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 it are project risks. These risks can impact other types of risk like financial or contractual.
Stakeholder – Stakeholder risks are risks that arise because of the stakeholders. Sometimes the owner doesn’t describe their vision completely, or makes changes mid-project. Sometimes plans change but subcontractors aren’t notified or sent new plans. Sometimes there are communication breakdowns between the stakeholders and everyone suffers for it. These are risks that can and should be associated with stakeholders.
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.
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 a 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.
Competitive – These are common risks subcontractors face. These risks are especially prevalent in Design-Bid-Build projects. Competitive risks are the pressure to price match and match delivery terms offered by a competitor. And it can risk a subcontractor’s profitability, strain resources, and lose opportunities.
The Construction Risk Management Process
Knowing where risk might come from is extremely important. Without that knowledge, a project manager or superintendent might miss some risks. And knowing the different categories of risk make it easier for companies to follow through with the construction risk management process. With all of that in mind, the superintendent or project manager can start working on a construction risk management plan or outline.
Identify the Risks – 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 Risk – 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.
Using The Contract to Mitigate Risk
In order to mitigate contractual and other risk, subcontractors should fully read the contract and ensure that the provisions and such are in plain language and easy to understand. Too many times the language in contracts obscures the meaning and can make life difficult for the subcontractors.
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 over-billing 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.
Tips For Improving Construction Project Risk Management
The process of managing risk is just three steps, and while gathering the resources needed for these three steps and building a risk management process is daunting. With these tips in mind, it should be easier to build an accurate and efficient construction risk management plan.
Keep Comprehensive Documents
Proper documentation of the project’s terms and conditions of engagement should be completed with the appropriate consultants. Construction projects require multiple contracts that must be consistent and complementary. Among the main issues to be addressed here are cash flow issues and dispute resolution rules. The project participants should rely on experienced and trusted insurance consultants familiar with current industry forms and practices to minimize conflicts.
Use Indemnity to Share Risks
This cannot be stressed enough. In case one party incurs costs due to claims made by a third party arising from a condition they didn’t have control of, the contract indemnity provisions require that the other party should compensate. A construction agreement indemnity provision requires the contractor to compensate the owner for claims emanating from bodily injury or property damage arising from the negligent performance of work by the contractor or their subcontractors. The owner should also make up for the loss to the contractor for losses arising from harmful substances at the project site, which the contractor does not have control over.
Use Insurance to Cover Indemnity
Parties in the contract should identify the risks they bear and obtain the appropriate insurance coverage to ensure each party can satisfy its indemnity obligations. Contractors should secure commercial general liability, automobile liability, and worker’s compensation/employer’s liability coverage. The owner should acquire the builder’s risk policy, which covers project improvements materials for damage due to unpredicted site conditions or natural disasters.
Benefits of Risk Management
There are several advantages realized by the owners and the contractor due to proper risk management in construction projects. These include:
Reduction of accidents to workers
Identifying possible risks and taking proper measures to prevent their occurrence or reduce their severity greatly minimize the accidents that may be experienced by workers or the loss that may arise from such accidents.
Minimizing damage to the property
The extent of damage that may occur to the properties is reduced due to recognizing some of the inherent risks and other risks that may arise, and then taking preventive measures or exploring the possible ways to handle such damages.
Loss of money and future business
Failure to complete construction projects in good time may lead to losses due to lease agreements for occupancy of the premises, extended staff hours, and more, which may result in huge losses to the business. The contractor also stands to lose credibility for failure to deliver the project within the agreed timeline, thereby losing future business and having poor relations with other parties, like financiers and so on.
Construction risk management is extremely critical for every company. Not knowing where there might be risks on a project leave companies vulnerable and ill-prepared. The concepts highlighted earlier ensure a project is completed within the set time, using the correct budget, and will follow the quality guidelines. It also minimizes the number of injuries on a team, to other parties, and prevents loss. Risk management improves a contractor’s credibility because there should be fewer delays, better quality, which leads to a reduction in competitive risk.
With these tips and tricks, undertaking the risk management process will feel less stressful. Getting together a consistent way of managing risk, and developing risk management plans will aid in developing them for every project. Construction planning is an important part of the construction process and construction risk management aids in that.