Construction Risk Management Guide

What is construction risk management? 

Risk management in construction involves recognizing possible hazards, assessing their consequences, and putting policies in place to lessen their financial impact on the company. A construction risk management strategy is created during the first phases of the construction planning process.

It describes potential project hazards in detail and the risk response to address them by assigning someone on the staff to own and resolve the issue.

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Types of Risk in Construction Projects

Types of Risk in Construction Projects

Construction is a risky industry! Is it not? The heavy equipment and machinery, toxic chemicals, accidents, and fall dangers are terrifying enough! These are hazards for the personnel and contractors that work on-site.

However, dangers do not just affect contractors and workers. The project owners face their own set of hazards. Scroll down to discover more about the many dangers in the construction sector. 

Safety Risk

When it comes to the development and completion of the structure itself, a lot may go wrong in the construction sector. Likewise, a lot of possible circumstances might endanger the health and security of your workers as well as those of other workers at the site.

Dangerous environments increase the risk of work-related sickness or injury as well as short- and long-term financial repercussions. 

Financial Risk

These risks included those related to investments, inflation, lack of funding, currency exchange rate variations, tax structure changes, sand and stone royalty arrangements, time and cost overruns, etc. 

Legal Risk

There are political motivations for the site location, including the involvement and presence of union labor, the need to engage local staff, changes in political leadership, modifications to laws and regulations, and import-export limitations and processes. regulations pertaining to safety and pollution, licenses and permits, etc. 

Logistics Risk

Logistic hazards, such as transportation facilities and construction equipment availability, are critical in global supply chains. They can cause major project delays and losses, as well as uncertainty about the likelihood and severity of damages, injuries, and liabilities.

Physical Risk

Inadequate or low-quality procurement of resources, Non-availability of the material—quality as well as quantity; weather conditions, like extremely hot or cold temperatures or heavy rainfall; unsafe working conditions; fire, waste, theft, etc. 

Contractual Risk

Unrealistic time schedule, Conflicting conditions of the contract, Delay in possession of the site, Payment problems, Extra works or variations Claims and disputes, Differing site conditions. 

Project risk (design and technical risk)

Technical hazards encompass everything that prevents you from producing the product that your client desires. This might include uncertainty about resources and material availability, insufficient site assessment, or an unfinished design. These risks are most frequent when the project scope and needs change, as well as when there are design faults or omissions. 

Environmental Risk

Environmental risk, which we could also call acts of God, arises due to floods, earthquakes, landslides, wind damage, epidemics, pandemics, and the occurrence of any type of natural disaster. 

Management (leadership and organizational) risk

Management risks involved the wrong selection of the project team, no project manual or documented procedures or processes, a project being too complex for the available resources, Inadequate communications infrastructure, poor quality control, unsatisfactory control of status review meetings, the inability to take timely corrective action, and a lack of competent or experienced personnel in the project team. 

If there is a failure to identify any particular risk, then other steps in risk management cannot be implemented for the risk. Before beginning any building project, it is highly suggested that you evaluate the dangers indicated above. 

The Construction Risk Management Process

The construction risk management process

  • Identification 
  • Assessment 
  • Mitigation 
  • Monitoring 
  • Reporting 

Step 1: Identify risks.

Identify unique risks in construction projects early, preferably during the preconstruction phase. Hold brainstorming sessions with the team and stakeholders to identify potential negative scenarios. Review past projects to understand current risks.

Regular meetings with the team and stakeholders can prevent risks from sneaking up as the project progresses. This includes reviewing current risk management efforts and identifying potential future issues. 

Step 2: Prioritize risks in order of importance

Prioritize risks in order of importance

Then the stage is about prioritizing the risks and determining which ones deserve further attention and resources. You may use the findings of your risk analysis to prioritize the risks based on their severity and urgency.

To prioritize risks, consider using factors such as the cost-benefit ratio, stakeholder expectations, or regulatory requirements. You should concentrate on the risks that are most likely to occur and have the greatest influence on your project’s important components.

Step 3: Assess the Impact

The next stage after risk identification on the project is to ascertain the likelihood, frequency, and seriousness of these possible hazards. This calls for a number of inquiries: 

  •  What is the worst that could happen?
  • What is the likelihood of that event?
  • How much would we lose if it occurred?

The firm ascertains the likelihood of a loss occurrence and the extent of the losses throughout the project evaluation.

One of the most important aspects of risk assessment is keeping track of project and financial data. A company’s risk assessment will be more accurate the more historical data it has to examine.

When a contractor bids on their first hospital project, their risk assessment will be far less accurate than that of a contractor that has completed 10 hospital projects and has accumulated performance, safety, and financial records. 

Step 4: Prepare a Response

  • Accepting the risk 
  • Avoiding the risk 
  • Controlling the risk 
  • Transferring the risk 

When faced with a recognized risk, an organization might choose to transmit, control, avoid, or embrace it.

  • Take the risk: There are some dangers that are considered worth taking on in order to seize a worthwhile opportunity. 
  • Reduce the risk: This might entail rejecting the contract outright or altering the scope of work. 
  • Manage the risk: An organization can put policies in place to lessen the possibility of a loss occurring and/or its effects on the business. To lessen the effects of a late payment, a contractor can decide, for instance, to safeguard lien rights with high-risk clients or on projects exceeding a specific size. 
  • Risk transfer: An insurance plan or a construction contract are two ways in which a contractor might assign risk to a third party. 

Step 5: Execute a Risk Management Plan

Execute Risk Management Plan

Image source: olympus-global

With detailed documentation on things to address, one can easily go about effectively executing the risk management plan. However, one thing to note here is to be prepared for unexpected risks and events leading to a risk; learning and documenting for the future are the keys to execution. A thorough periodic monitoring of the execution can help in greater productivity boosts too.

Step 6: Create contingency plans and recover losses.

In the event of a loss, the business should aim to limit and recover losses. There are other ways to recover and mitigate losses, such as: 

  • Making an insurance claim
  • Making a mechanics lien or payment bond claim.
  • Bringing legal action
  • Filing for bankruptcy
  • Sending accounts to collectors

Policies and procedures for loss prevention and recovery should be included in a construction company’s risk management program as necessary. 

Step 7: Review the Results

Contractors must regularly evaluate their risk management program, taking into account both achievements and setbacks, and update the procedure to reflect new information.

The method of managing construction risks needs to be continuously improved. Any risk management program should be flexible enough to accommodate changes in the industry as a whole as well as historical performance. Even five years ago, the risk picture in the construction industry was very different from what it is now.

Future developments in the building sector will result in new dangers as well as new approaches to control and lessen them.

Who Is Involved in Construction Risk Management?

In construction projects, several parties are involved, including the owner, consultant, contractor, subcontractor, and supplier. Each side has its own dangers. Risk transfer refers to the transfer of risk liability to another party, either through insurance or a contract.

Hence, a properly documented and coordinated risk management approach is required to prepare each tier of the workforce for potential challenges. 

Benefits of Risk Management in Construction

Benefits of riks management in construction

Risk management should not be a reactive technique for when projects go wrong, but rather a proactive approach that is followed from the beginning of a project and serves to enhance overall development toward positive results.

When utilized properly, it may assist in ensuring that risks are identified and addressed in a timely manner with little impact on the project. 

The following are some advantages of project risk management in the building industry: 

Predicts likely problems

Project risk management can significantly change an organization’s culture, making it more proactive, future-ready, and adept at identifying potential problems.

It fosters employee confidence, promoting a culture of safety and accountability. This, in turn, leads to lower expenses and improved financial performance. 

Promotes growth

Risk management helps businesses minimize risks by recognizing and evaluating them, enhancing efficiency and decision-making. It requires a thorough examination of processes and risk variables, aiming to reduce exposure to dangers and ultimately lead to success. 

It helps to stay competitive

Project risk management strategies help companies survive adverse events like recessions or pandemics. Active communication among departments and stakeholders helps share knowledge. Post-COVID-19, construction companies have included force majeure clauses in contracts to mitigate risks from unforeseeable events. 

Business process improvement

Project risk management helps companies gain insight into their operations and processes, identifying inefficiencies. For instance, if a sales department isn’t meeting targets, the risk management department investigates and recommends improvements, such as changes in lead generation or customer handling. 

It enables better budgeting

Improved project risk management allows companies to better control their finances, identify waste, and create efficient budgets. It enables them to achieve their goals more efficiently than competitors. 

Reduce construction risk with the right software and equipment

In this digital age, choosing the right software for your construction risk management requirements is crucial. Therefore, I am presenting to you some of the top choices in construction risk management software: 

Procore – construction risk management software

Procore construction risk management software

Procore is a construction risk management software that simplifies work from tendering to closing out. It offers real-time visibility, project management, quality and safety reporting, and financial management.

With over 1,000,000 projects completed in 150+ countries, Procore offers 24/7 customer support, seamless integrations, and tailored training for specialty contractors. 

Autodesk construction cloud

autodesk construction cloud project management

Autodesk’s construction management software offers secure collaboration and timely project delivery for general contractors, specialty contractors, and owners.

With over 2 million projects under its belt, it provides real-time insights, integrates with existing tech stacks, and simplifies complex tasks.

Zepth – AI-Powered Construction Management

Zepth is an AI-powered construction management

Zepth is an AI-powered construction management tool designed for various business types, including owners, general contractors, architects, and engineers. It offers end-to-end lifecycle management, scalable tools for productivity enhancement, and data-driven decision-making.

The platform includes dashboards, insights, automated reports, document management, quality and safety software, meeting and collaboration tools, field reports, project financials, and insights.