Construction Risk Management
Construction companies are no stranger to risk. Everything from job site hazards to labor shortages to bad weather can negatively impact a construction company. Risks are an inevitable part of life, but you can take an active role in understanding and responding to risks through risk management. This way, you gain greater control over risks so your company can thrive, no matter what comes your way.
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What Is Construction Risk Management?
Risk management involves identifying and analyzing the risks that can be detrimental to your construction company and finding ways to mitigate those risks effectively. It's essential to the success of a construction company and the well-being of its workers.
One way to understand risks is to think of them as possibilities or uncertainties that threaten to negatively affect individuals, projects or your company as a whole. Another way is to think of risks as loss exposures — conditions that could lead to some type of loss or negative consequence. Risk management, then, is about identifying these possibilities or loss exposures so you can be better prepared to avoid or respond to them.
The process of risk management is ongoing. That's true for any company, but especially so in the construction industry where each new project can come with a new set of risks you need to manage. All construction companies should have an individual or team responsible for proactively managing risks.
Common Construction Risks
Each construction company may face its own set of risks, which may evolve over time. That's why every company needs to conduct its own assessments to identify risks. Many of the risks that commonly face construction companies fall into the following categories:
1. Safety Risks
A key category of risks for construction companies is safety risks. Construction is widely regarded as one of the most hazardous industries. Out of all the worker fatalities in private industry in 2018, approximately one out of every five was a construction worker. Construction sites can pose many safety hazards. For example, workers can fall from heights, be struck or crushed by equipment or be electrocuted by power lines.
Aside from the obvious ramifications of employees being injured or even killed, safety hazards can lead to other serious consequences for a construction company. This includes fines from the Occupational Safety and Health Administration (OSHA), lawsuits, medical costs, delayed project timelines, damage to your company's reputation and a decrease in employee morale.
2. Financial Risks
In a sense, all risks are financial risks since they can indirectly affect your company's profitability. However, some risks fall squarely into the category of finances. These risks can have a direct impact on your company's bottom line. No construction company wants to take a step backward financially, but financial risks can have that effect if not properly managed.
Some financial risks are internal, meaning they begin and end with your company. This includes poor financial management or the cost to repair or replace damaged equipment, for example. Many financial risks, however, are external. This would include the condition of the economy, increases in material costs, higher interest rates, theft of your equipment or competition from other construction companies. These and other external factors can arise and pose a threat to your company's financial success.
3. Project Management Risks
Managing projects can also come with certain risks. For instance, poor communication between a client and your team could lead to conflicts or unmet expectations regarding project deliverables. Problems like miscalculating the necessary resources to complete the project, creating an unrealistic timeline or taking on too many projects at once are also common risks for construction companies.
Not all project management risks are internal. When you're working with subcontractors, you can run into possible conflicts or delays that are, at least to some degree, outside your company's control.
4. Environmental Risks
For some industries, the outdoor elements may never enter into the risk management equation. In construction, though, it's a critical consideration since 95.1% of construction jobs involve work outside. In some cases, the terrain may simply pose challenges that require new types of equipment to navigate it.
In other cases, the weather is a major source of environmental risks. Extreme temperatures or weather events like storms can make it impossible to work safely, affecting project timelines. More serious natural phenomena like floods, earthquakes or tornados can wreak havoc on a construction site, potentially demolishing all the work that has been done or setting companies back significantly.
5. Personnel Risks
Construction companies have equipment and other assets that are integral to their success, but they are made up of people at their heart. Construction is a labor-driven industry. Companies can't function without a crew of qualified and motivated workers, yet construction companies struggle to fill hundreds of thousands of job openings. The labor shortage is a well-known problem impacting the construction industry as a whole.
There may be other personnel risks that affect your company, as well. For example, high turnover rates or your workers lacking the experience they need for certain jobs can pose problems and hinder your success. Crew members may also misuse company time or other resources or fail to abide by your company's policies.
How Can Construction Companies Manage Risks?
To manage risks effectively, construction companies must take the process one step at a time and then continue cycling through the process as new risks arise. We can break this process down into four basic steps, which we'll look at in some detail in the following sections:
- Identify Risks
- Assess Risks
- Respond to Risks
- Monitor Risks and Refine Strategies
Construction companies may find it helpful to invest in resources that will assist them in conducting risk management. For example, some software programs can help companies with risk management. You may prefer to choose a more general project management software that includes some risk management features. Whether you use software for risk management or not, resources like this guide can help you create an action plan for effectively managing risks in your company.
1. Identify Risks
Before you can effectively manage risks that may impact your company, you need to know what those risks are. Consider the five categories of risks we discussed above. You need to determine what specific risks within these categories and potentially outside of these categories your company is vulnerable to.
According to OSHA, a failure to identify present or potential hazards is one of the root causes of construction injuries, illnesses and incidents. This same failure can leave you vulnerable to all other types of construction risks. Let's look at some ways you can identify risks:
- Review the data: For safety risks, review data on common construction accidents, such as accidents included in the "Fatal Four." This data can provide insight into risks that are likely to present themselves at a job site. You can also look at industry data to see what sorts of financial, project management or personnel risks are common to other construction companies and may apply to your company. Meteorological data can be a helpful source for identifying environmental risks.
- Inspect job sites and equipment: Inspecting a job site regularly can also help you find sources of safety or environmental risks that can be remedied before they cause serious issues. This could be something as simple as a tripping hazard that you can fix right away or something unavoidable that leads you to invest in personal protective equipment (PPE) or other safety measures. You should also inspect equipment regularly so you detect issues before they lead to dangerous malfunctions.
- Consider past incidents: Considering past incidents can help you identify risks of all types. Past accidents, for example, or even close calls can help you know what safety risks to look out for in the future. Try to investigate the root causes of these incidents so you understand the problem thoroughly. Look for trends in the types of losses or mishaps you've experienced in the past so you can develop solid strategies to manage these risks in the future.
- Get input from workers: Members of your company can likely provide their own expertise or firsthand experience to help you identify some of the risks that may affect your company. Conduct a survey or hold a meeting where you invite workers to share their ideas of some of the potential sources of loss exposure they see on the job site or in your business operations. Keeping the lines of communication open with your crew can also help you anticipate personnel risks.
2. Assess Risks
Identifying risks is the first step, but you also need to closely assess those risks and determine which risks are the most serious. For each risk you identify, you must determine the risk magnitude. To make this determination, you should:
- Consider the consequences: Understand what you stand to lose if a particular risk were to come to fruition. First of all, what type of loss would it cause? If the loss is financial, can you quantify just how impactful it would be? For example, a stolen piece of equipment, on average, costs a company $29,258. In addition to understanding risk magnitude, knowing the possible losses a risk could cause can help you know how much you can reasonably invest into responding to the risk while still coming out ahead.
- Determine the likelihood: You must also determine the probability that a risk will affect your company. Some risks materialize much more frequently than others. For example, the risk of an employee being injured in a fall is generally more likely than the risk of an earthquake damaging your construction site. Look at the trends you identified in the previous step to see which risks are most likely to occur so you can give special attention to these risks.
Using the information you just established, you should prioritize which risks deserve the most attention in your risk response. Risks that both carry serious potential consequences and are likely to impact your company are the ones that carry the greatest risk magnitude and should top your list of priorities. These are the risks you want to work especially hard to address.
Beyond these high-priority risks, determine where other risks fall on your list of priorities. Some risks may merit a medium level of prioritization, while others fall to the bottom of the list since their risk magnitude is especially low.
3. Respond to Risks
The third step is where you use the information you've gathered to plan and execute a response. Responding to risks doesn't always look the same. The best way to respond will depend on the nature of the risk. Some risk response solutions are intended to:
- Eliminate risks: Some risks can be effectively removed from the equation. For instance, if you identify an obvious and avoidable job site hazard, you should immediately remove the risk. In other instances, you may not be able to remove risks, but you can avoid them by choosing not to take a particular job, for instance. Sometimes, taking on risks can be worth it when the opportunity offers a big potential payoff. Construction businesses must assess each new opportunity to weigh out the risks and the potential reward.
- Mitigate risks: Many risks are unavoidable to some degree. Part of responding to these risks is finding ways to make them less likely to occur or to lessen their impact. For instance, you might invest in PPE or other types of safety products to protect workers from common job-site hazards or provide training to help workers adopt safer practices. If you have run into issues with project timelines stretching longer than anticipated, a response may be to invest in software or training to help improve your methods of project management.
- Account for risks: Another part of responding to unavoidable risks is making room for them. For example, when you're scheduling work, it's smart to build in a cushion to account for unexpected problems that come up. This way, risks such as hazardous weather have already been accounted for to minimize its impact on your company. Accounting for risks may also look like budgeting for unforeseen costs. You should also develop plans for how you will respond if certain risks materialize and cause a serious problem.
- Transfer risks: Another strategy for managing risks is to transfer the burden of risk to another party. You may be able to make arrangements where subcontractors or suppliers bear responsibility for some risks, for example. In many cases, risk transfer takes the form of insurance policies. When you take out an insurance policy, you take on a more predictable, ongoing cost, and the insurance company takes on the risk of catastrophic costs. Construction companies can take out various insurance policies to cover different types of risks.
4. Monitor Risks and Refine Strategies
Even if your company focuses on a specific aspect of construction or a particular geographical area, not everything remains constant. From one year to the next or even one project to the next, some risks that were previously major concerns may have dissipated while new risks may have cropped up. Some existing risks may come with more or less serious consequences than they did before. As risks evolve, so must risk management strategies.
That's why construction companies need to continually monitor risks and make changes where needed to keep their risk management processes up-to-date and effective. Look for ways to improve your risk management process, especially when it comes to the way you respond to risks. Are there trouble spots that require better methods to eliminate, mitigate, account for or transfer the risk? Being proactive about refining your strategies can help you identify, assess and respond to risks with increasing effectiveness over time.
The Benefits of Risk Management
Before you invest time and money into risk management, you'll want to know whether it's really worth it. Risks can expose your business to serious losses, but risk management can protect your business and help you capitalize on some major benefits, including:
1. More Informed Decision Making
Having a fuller understanding of risks can help you make decisions more quickly and with greater accuracy. When you're presented with a business opportunity, you'll have the framework and understanding needed to quickly determine what sorts of risks may come with that opportunity and whether you want to move forward or forgo the opportunity. You can also make more informed decisions about the best ways to respond to risks and grow your business.
2. A Safer Work Environment
Since an important part of construction risk management is mitigating job site hazards, you can enhance the safety of job sites through risk management. A safer work environment is better for your workers, and it's better for your company. Avoiding safety incidents helps you move projects along on time and on budget and allows your workers to enjoy a more positive experience working for your company. Safety incidents are some of the most serious risks a construction company can face, so managing these risks is paramount.
3. More Accurate Scheduling and Budgeting
When you're budgeting and scheduling without a mature risk management process in place, you're likely to run into unforeseen problems. Projects will probably take longer, and unexpected costs might come up. Construction companies that understand risk management are better equipped to schedule and budget with accuracy since they can anticipate drains on time and resources that don't exist in a best-case scenario.
4. More Reliable Results
Construction companies want to make all relevant stakeholders happy and deliver on their commitments. That can be difficult to do when there are unknown variables that can suddenly impact your plans. Construction companies that manage risks effectively can better predict and make allowances for risks so they can make promises that are more accurate and are backed by a track record of reliability.
5. Greater Efficiency and Higher Profits
The above benefits and more all add up to one significant benefit for your company: a better bottom line. Managing risks helps your company become more efficient. As you cut unnecessary costs and time, you'll see your profits increase. You can even scale your business more effectively when you have a solid risk management process in place.
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