There is never a time when a construction company doesn't take at least a small risk in its projects. In this sense, it is no exaggeration to say that an exhaustive risk management plan is a “must have” in your construction operations.
However, developing a functional risk management plan is not always so easy. Each company needs to determine whether the potential risks of each project are worth its time and possibly some of its profits.
In a nutshell, here are some of the most crucial risk factors construction companies face on a daily basis:
- Intense competition for available work
- Expected to produce a high return on all funds invested
- Intense pressure to save as much money and time as possible
- Consistently low margins and lower profits
- A large number of litigation cases as well as disputes
- Safety problems
A construction company's risk management team will weigh all of the above and also create a plan to mitigate the risk of any project they decide to undertake. Once the company receives approval for a project, this team will monitor and control all items in the plan to ensure risks are kept to a minimum.
The 5 main forms of risk in construction
As we have seen above, there are a large number of risk factors during a construction project. To define construction risk in more detail, we took a closer look at the five main risk categories that should always be taken into consideration when a risk management plan is drawn up:
The first group on our list is everything related to project management and its good development. A resource management analysis, in terms of tools, materials and personnel, is probably the first step you need to take. After defining your project needs, you need to allocate responsibilities and set a precise deadline for each task.
Always try to think carefully about the obstacles that may arise during the process. This way, you can be prepared for any type of hiccup.
2. Financial risks
It is no surprise that budget excesses are, in most cases, one of the biggest “threats” to the well-being of a project. That said, it is extremely helpful for the construction management team to successfully define fiscal risks before the project begins.
This type of risk largely depends on the type and location where the work is being carried out. Simply put, here are some potential risk factors when referring to financial risks:
- Local tax system
- Inflation
- Exchange rates
All these parameters must be scrutinized thoroughly before the project takes off.
3. Legal risks
Contracts can be a source of serious disputes during the construction process. For this reason, you need to invest more time and effort in properly taking care of every detail of contractual agreements.
The responsibilities and rights of each party should have been clearly described and an explicit solution to each potential scenario should have been anticipated. In this aspect, a competent legal team is always a necessary addition, as it can significantly reduce the legal risks of your project.
4. Security risks
Accidents are one of the biggest problems in the sector. Working on-site requires remarkable focus and attention to detail. It doesn't take much, then, to understand that the project management team must always do their best to transform the field into a safe and accident-proof place. This is a continuous procedure that must occur both during the design and development phases of the project.
5. Environmental risks
In some cases, natural phenomena (e.g. earthquakes, floods) can be threatening to the successful development of your project. This is why analyzing environmental conditions based on the area in which your project is carried out is considered a must.
This way, the management team can take all necessary measures to protect both workers in the field and the progress of the project.
Construction risk management plan – guidelines
When the risk management team determines how high the risk is on a project, it will follow the guidelines below:
- Identify what the problem or problems are or what could happen.
- Identify who could be harmed or what the impact could be on project progress.
- Determine how many risks may arise if the problem occurs.
- Decide what control measures need to be implemented to prevent or resolve the problem.
- Determine if there are still risks.
- Document all risk assessment findings.
- Create contingency plans in case the first or second plan doesn't work.
- Review and revise everything above as needed throughout the project.
The reason a risk management team carefully evaluates all of the above is that the company wants as little risk as possible.
Of course, there are never guarantees that a project will be successful without many risk situations appearing along the way. Even with all the proper planning and contingencies, this danger is always present. Simple activities can cause big problems, while issues that a person thought would be a problem never happen.
However, risk can be significantly minimized with the help of the right plan and tools. This is where digital solutions are expected to play a key role in the near (digitized) future. In short, the better the sector becomes at collecting and analyzing data, the easier it will be to predict and mitigate project risk.
How a construction company can deal with risk
There are four things construction companies can do when faced with risks:
Avoid the risk
If a construction company wants to avoid major risks, it can abandon projects with higher risk levels. This is a safe option that can be highly advisable when the management team feels that they do not have the appropriate plan and processes to resolve any problematic situations.
Mitigate the risk
When a company mitigates risk, it creates plans to keep risk as low as possible. There are many things that companies can do to mitigate their risks, and they are usually quite successful when they do so. Regulations and local plans are two very common types of risk mitigation.
Transfer the risk
As for risk transfer, it is a solution that will cost the company money. However, this amount of money may be less than the money they would lose if they had accepted the risk. It is a type of insurance that allows the company to lose only the amount it wants.
Accept the risk
Construction companies often determine that it is necessary or feasible to accept the risks of a project they wish to complete. This involves looking at all the alternatives and understanding what could happen. The impact can sometimes be greater than the company wants, but that is the risk it takes by being in this business.
Four benefits of a strong construction risk management plan:
It's now clear that a solid risk management plan can save your project from a lot of trouble. Of course, no one can deny that it takes a lot of effort for a successful plan to be built. However, it can bring some essential benefits to the future outcome of the project process, the most important of which are listed below:
1. Consistent and efficient operations
Once a project team has contemplated the risk management plan for a few projects, it will be easier to evaluate future projects. After all, they will have the knowledge and tools necessary to make data-driven decisions, which will improve the company's operations.
2. Greater security and protection
Risk management teams can do much more than simply assess project threats. For example, they can create plans to ensure all on-site safety standards are followed. This way, the possibility of a terrible accident is minimized while the workplace remains safe.
3. Higher levels of trust
Risk management teams will find they become more confident over time as they continue to weigh the company's risks. In the long run, this can save the company valuable time and financial resources, both in terms of planning and correcting unforeseen errors.
4. Increased profits
Taking unnecessary risks can really harm any company's bottom line, which is why a risk management team must be in place. In short, a functional and carefully crafted risk management plan equals greater profits and fewer unnecessary costs.
Concluding
It is obvious that risk management must be considered one of the most fundamental aspects of a construction project. The good news is that with the advent of cutting-edge digital technologies, identifying risks can be much easier than it used to be.
