By Kendall Jones |
Effective risk management is key to every successful construction project. It can be the difference between making a nice profit and breaking even or worse, suffering a loss. So when should you begin your risk assessment? Are you doing it during contract negotiations or are you waiting until after you’ve received a notice to proceed? The truth is, risk management should begin during the bid preparation.
Putting together a winning bid package requires a lot of time and effort. It starts with reviewing and fully understanding the plans and specifications to accurately estimating costs for labor, materials and equipment. Making even the smallest mistake can mean the difference between having a winning bid proposal and missing out on a coveted project. Incorporating risk analysis into your bidding process can result in more accurate pricing and can win you more work. It can also improve your bid/no-bid decision-making process.
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. If you’ve never worked with a potential client, do your due diligence and conduct some research on them. Common risks include incomplete construction documents, site conditions, accelerated timelines, safety concerns, delays, change orders and unexpected increases in material costs.
Once you’ve identified the potential risk, the next step is to prioritize those risks. To do this you need to identify 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 with 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 effectively manage. This is a good time to review your bid/no-bid decision. 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.
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 handling multiple risks. You have to bring in additional labor or rent additional 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 which risks are 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.