6 Key Construction Risk Management Principles

Speaking in construction terms, risk is anything with the potential of causing delays, harm, or financial loss to your project. With construction projects, the bigger they are the more the inherent risks as there are lots of moving parts. Whether it’s in safety, statutory requirements, documentation, coordination, environmental issues, or labor challenges, you must identify, analyze, and respond to all risks for construction projects. Let’s go through this 6-point list illustrating basic risk management principles:

1) Identify potential hazards and sources 

There are up to 107 different construction risks that might affect your project as pointed out by the Construction Industry Institute. We may pour over many pages discussing them, but let’s just point out the most common:

Health & Safety Risks: Employees work in dangerous environments. They are exposed to heavy moving machinery, hazardous building materials, etc. Accidents such as falls may even result in fatalities.

Financial Risks: Construction projects might be adversely derailed by a lack of funds. For instance, the contractor might have trouble selling units. Prices of building materials might increase. One of the building partners might go bankrupt.

Stakeholder Risks: There many stakeholders participating in construction projects. For example, misunderstanding between stakeholders about delivery dates, costs, or expectations has even stalled some projects entirely.

Natural Risks: They may arise from the weather and other natural events, such as severe storms.

Personnel Risks: Consider faulty workmanship.

Competitive Risks: It entails what competitors might do to negatively impact your business. For instance, they might outdo you in aspects to do with pricing, resources, promotion, etc.

2) Give precedence to the most immediate and disruptive risks

Not all risks are imminent or severe enough to gravely affect your project.

For example, you might be worried about the project’s preparedness for flooding. Flood recovery may be prohibitively expensive. Therefore, risk has a high impact.

The risk should be a cause of grave concern if flooding occurs periodically. However, it is not immediate if your project is located in an area that has consistently received lower volumes of rainfall for the last 200 years.

Therefore, rank construction risks by taking into account:

Chance: The question to ask is: “What are the odds of this event happening?”  It’s all about figuring out the probability.

Effect or Impact: You want to deal with the most dangerous risks (high probability and high impact). For instance, construction errors have a high probability of occurring and carry huge consequences. One way to mitigate this risk is by getting professional liability insurance.

3) Implement risk control measures

Response planning comes after you have carried out a construction risk assessment and identified the stakes at hand. Fundamentally, there are four control measures to implement:

a) Reduce

You can reduce safety & health risks by holding safety briefings before on-site work commences. Another tactic can entail avoiding the use of dangerous building materials such as asphalt.

b) Retain risks

Retaining risks is a construction risk management technique where you agree to handle the risks in-house instead of transferring them to third-parties or insurers. You also don’t take significant measures to reduce them.

You can choose this control method if it’s cheaper than insuring the risk. For instance, it’s easier to manage the risk of pricing.

c) Transfer the risk

Risks are transferred contractually to other parties. Alternatively, you can insure against the risks. Some of the common insurance products in construction include worker’s compensation, general liability, asset protection plans, etc.

d) Eliminate or avoidance

Risk avoidance may not fit into the risk management definition as the solution entails completely avoiding the danger. For instance, you may opt not to take on a project located in a flood-prone area.

Payments are challenging and might be a potential source of risk. Get a good handle on liens waivers and construction payments when you check this resource out.

4) Allocating risk management resources & tools

You need resources, personnel, and systems to implement risk controls. Some of these resources include:

  • Risk management software: The software just makes it easier for you to create the risk management plan that sets forth the procedures for assessing risks, coordinating & monitoring risk management activities, communicating with other team members, and more.
  • Risk management plan: The risk management plan is a document detailing the actions you intend to take. It also highlights how you intend to communicate with other stakeholders.
  • Construction contingency: As more risks are identified, the money set aside for unforeseen occurrences can be reviewed and increased.
  • Seeking insurance: It’s best to engage with a construction risk insurance specialist. They can figure out the risks you’re facing and recommend the type of insurance needed.
  • Taking advantage of technologies: Take advantage of advancements such as Building Information Modeling, Augmented Reality, 3D printing, the use of drones, etc.

5) Determine the residual risk

Residual risks are the hazards left-over after implementing controls. For instance, while you may obtain asset protection for a vehicle, the insurance company only pays market value for the asset after a loss due to an accident or theft. The payout may not cover the cash still owed to the creditor/bank. The windfall of funds has to be paid out of pocket.

Similarly, E&O insurance might have exclusions, such as when the contractor performs wrongful acts that violate laws. It might not also cover pollution. Other residual risks for construction projects are on-site and require a careful reanalysis.

6) Spread the responsibilities through the company

Construction risk management is not an activity that can be dealt with by one individual neither is it a one-time affair. You must monitor, review, and make continuous system adjustments. Building a team is therefore paramount. During regular team meetings, new risks may be assessed, and cost estimates revised.

Conclusion

Construction projects certainly involve a lot of uncertainty. But leaving them to chance and not taking any measures to identify and deal with risks can spell further doom. Hopefully, the construction risk management principles shared in this guide prove to be useful measures.

Unnati Vaidya

Unnati Vaidya is a freelancer Content Writer and SEO generalist. She is an enthusiastic reader of Novels and a big fan of watching Sci-fi movies and seasons!

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