How to Manage Risk in Construction
To manage risk in construction companies must have processes in place that allow for smart and thorough decision-making.
Every aspect of your construction project comes with risk. From the site, materials, time of year, staff, budget, schedule, and safety – there is risk everywhere.
However, this risk should not be a deterrent – rather we at PCS want you to look at construction risk as opportunity. Construction risk is an opportunity for you to improve every aspect of how you approach and manage construction.
When you put risk front-and-center you can acknowledge the potential points of failure and loss – allowing you to improve your construction project before you start digging.
At PCS, we care about the success of your construction project. We want your project to be successful – the more construction projects that are completed on-budget and on-time the better it is for the entire industry.
What is Construction Risk?
Construction risk is anything that can expose your construction project to loss or failure. Every construction project is unique and has its own risks.
The key is in identifying and admitting that risk is reality. Construction comes with risk – this is a fact. However, if you take the time to assess the risk and make decisions that keep this risk at the forefront, you can manage risk, preventing it from resulting in loss.
What are the Types of Construction Risk?
The types of construction risk include:
- Occupational Risk. Injuries, illness, and human error are occupational risk factors that underscore the importance of having safety protocols and standards in place.
- Financial Risk. Cost overruns, lack of funds, material costs, contract disputes, changes in government support, and delays that interrupt revenue opportunities make financial risk a huge point of concern. Think of the construction projects that are abandoned half-finished because of poor financial planning – this is preventable and manageable risk.
- Project Risk. Schedules, processes, planning, and protocols must be in place to give your construction project the opportunity to succeed. Without these must-haves, project risk is guaranteed.
- Stakeholder Risk. Scope creep, change orders, inadequate design and planning, poor communication, and lack of project clarity are risks that can break a construction project.
- Contracts Risk. Know who you’re working with and why you’re working with them. It’s important that every contractor is vetted and that every contract is reviewed by an independent team that does not have a connection with any company or party involved in the construction project.
- Environmental Risk. You cannot control the weather, but you can be prepared for challenges such as tornadoes, floods, earthquakes, and intense cold/heat. Environmental risk also includes thorough site plan review and understanding the challenges of underground/overhead utilities or archeological discoveries.
Every construction project comes with its own set of unique risk. Do not make assumptions about risk based on another construction project.
How Can I Manage Construction Risk?
To manage construction risk, you must have processes and proven methods in place that allow you to make smart and balanced decisions. It’s important these processes help mitigate new construction project excitement.
All too often we meet with people who are so excited about the opportunities their construction project will bring that they neglect to admit that their project is ripe for risk and loss.
To manage construction risk, do this:
- Determine Project Scope. This includes completing feasibility studies, reviewing designer and architect sketches/plans, project materials and availability – all keeping in mind the ultimate goal of the project.
- Define a Project Budget. To do this properly, it’s key that you identify all costs involved with the project. This includes studying architect and engineer plans, reviewing all contracts, assessing the viability of promised government/city funding, using value engineering, and defining a construction cost contingency for the project.
- Establish Project Benchmarks. Project benchmarks are crucial in keeping the project on-track and in identifying when the project is slipping and missing deadlines. These benchmarks allow you to make adjustments and contingencies before the project is at risk.
- Plan. Leave nothing to chance. Make sure everyone knows the goals of the project, schedule, budget, and who is responsible for each aspect of the project. Make sure that all paperwork is in order so that your project can start on-time.
- Communicate Openly. Miscommunication is a real risk. Establish an open communication policy that gives everyone involved the confidence to speak up when risks are identified or when the project is not going to plan. It’s key that change orders, scope creep, and other factors that can impact budget, schedule, and materials are discussed.
- Ongoing Project Assessment. Disputes, problems, delays, and challenges are going to happen. It’s important to have an independent team that works with you during construction to mitigate the risks that can arise. Rely on this team to keep communication open, to assess project progress, identify potential financial risk, and resolve stakeholder and human risk.
Construction risk is a reality, but it doesn’t need to be a limiter. The process of assessing for risk allows you to identify areas for improvement and strengthens the viability of your construction project.
Do not be afraid of construction risk. Contact us to learn how our team can provide the independent oversight and industry experience to help you manage risk, avoid problem bids, stay on budget, limit costly overruns, and gain more value for your construction dollar.
About the authorLee Thomas, MBA is the chairman and CEO of Project Cost Solutions. Lee has over 20 years of hands-on operational process experience under his belt. He is deeply committed to seeing your construction project succeed.