Tips for improving Construction Project Risk Management in 2019
Risk management in construction involves recognizing both the existing risks and those that may arise during a construction process, and then proactively managing these risks to increase chances of completing the project within the set time, cost, and quality required. For managing risk on construction projects, make sure your using subcontractor-designed construction management software and if necessary, consult experts that offer quality consulting in project management.
To manage risk effectively, reasonable business and construction practices as well as adequate preparation and review of the project contract documents should be followed. The following allocation and management concepts are important to minimize risk at the contract formation stage.
1. Determine the risk bearer depending on their control of the risk
There are various procurement procedures that construction projects take, and each has a different balance of weight, either directed to the client or to the contractor. The client’s risk mainly concerns cost, time, and quality. The client’s control over the design makes him more liable to risks that may arise from design errors. The contractor’s risk is mainly price and timescale. The contractor can effectively control damages to property or injuries that may arise during the operations, and therefore should be liable to such risks.
2. Prepare 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.
3. 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.
4. Use indemnity provisions to share risks
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.
5. Waivers of subrogation
This ensures that risks be exchanged in the way they were intended by the project participants. Subrogation allows an insurer to stand in the position of the insured to recover amounts paid on behalf of the insured for damages for which another party may be liable. A relinquishment of subrogation stops an insurer from passing apportioned risk back to the other project participants.
6. Verify evidence and status of insurance
Subcontractors should be insured because they add to the owner and contractor as an additional insured. This is because the insurer’s primary duty is to defend claims made against the additional insured. Project participants should not depend on certificates of insurance only to confirm insurance requirements. Most certificates of insurance issued by brokers are not contractually binding.
Advantages of construction project 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.
Types of risks faced by construction projects
There are several types of risks involved with construction projects, which include the following:
The risk that the project may not be finished at the set time, as a result of various reasons, such as cost overruns, technical failures, and so on.
The risk that the initial price of the item could fluctuate due to demand-and-supply issues.
Risks associated with resources
The risks related to project operations, such as unavailability of raw materials. They also include the possibility of adverse movement in prices of raw materials.
The risk that technologies in use are not fully matching the project, or are not sufficiently mature to handle the risks of the project.
The risk of physical injuries to the project team and third parties.
It is very crucial to manage the construction risks discussed by using the concepts highlighted earlier to ensure the project is completed within the set time, using the allocated budget and being of the expected quality. Also, it minimizes incidents of injuries to the project team and other parties and prevents loss of credibility due to delayed completion or poor quality which may make the contractor lose future business.