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A Practical Guide to Effective Risk Management in Construction

Micke Paqvalén
03 January, 2024

From health and safety to financial security, there are a lot of different risks that construction professionals need to manage.

Undertaking projects in construction not only demands skilled craftsmanship but also a strategic approach to mitigating the inherent risks associated with project management. 

In this post, we’ll delve deeper into what risk management is, why it’s important, what common risks to look out for, and how to manage these risks.

 

Key Takeaway

Construction risk management in 6 steps: 

  • Identify the risk(s)

  • Prioritize the identified risks based on significance
  • Determine your risk response strategy
    • How will you respond to each identified risk?
  • Three categories of risk solution
    • Strategic
    • Structural
    • Operational
  • Create a contingency plan to stay proactive to unforeseen challenges

  • Revisit and revise your risk management plan to make improvements

 

What Is Construction Risk Management?

Though the first thing that may come to mind is on-site safety, construction risk management encompasses almost every part of the construction process. 

Construction risk management consists of a process or a system to identify and mitigate diverse risks within a construction project.

Any risk or challenge that could affect the project falls into risk management, from financial risks to falling bricks.

Weather uncertainties, supply chain disruptions, safety hazards, and regulatory challenges are just a few examples of the potential pitfalls that can impact your project. 

As such, all of these risks must be assessed and managed to help make sure your construction project can run smoothly.

These pitfalls are some of the reasons for the importance of having robust risk management in your construction projects.

 

The Importance of Risk Management in Construction

Construction projects, by their nature, involve intricate processes, often with different groups and interested parties, as well as external factors that can be unpredictable. 

Because of this, risk management for construction can be one of the most important parts of a project. At least a third of organizations always use risk management, and only 3% never use risk management processes.

With a systematic approach to identify, assess, and mitigate risks, construction projects can avoid severe consequences. Here are 4 reasons why risk management is crucial in construction:

  1. Cost control: Effective risk management allows construction teams to anticipate potential challenges and allocate resources accordingly. By identifying and mitigating risks early in the project, unnecessary costs can be avoided, ensuring that the project stays within budget with good cost management.
  2. Timely project delivery: Efficiency in construction is vital, and delays in construction projects can have cascading effects on timelines. Through proactive risk management, construction teams can anticipate and address potential delays, enabling them to adhere to project schedules.
  3. Safety assurance: Construction sites are inherently hazardous, and safety is paramount. Contractor risk management is crucial to ensure the safety of yourself and your team, necessitating the implementation of a robust risk management strategy. This should include safety protocols and training programs, reducing the likelihood of accidents and ensuring the well-being of the construction team.
  4. Compliance and legal protection: Adhering to local building codes and regulations is non-negotiable in construction. Failure to comply can result in fines, project delays, or even legal action. Effective risk management ensures that the project meets all regulatory requirements.

The Most Common Risks to Look Out For in Construction

In response to these challenges, the construction industry has increasingly turned to advanced risk management tools, and in many cases all-in-one construction software. 

But what are the most common risks you should look out for?

Navigating the complex landscape of construction requires an understanding of the common risks that can impede progress. Some prevalent risks faced by construction projects include the following:

  • Weather-related risks: Unfavorable weather conditions can significantly impact construction timelines where work is often exposed. Proactive risk management tools can provide real-time weather updates, enabling teams to make informed decisions about when to begin a project and what measures should be implemented to combat weather challenges.

  • Supply chain disruptions: Construction materials sourced from various suppliers are susceptible to disruptions, and complex logistics can be one of the biggest causes of failure. Diversifying suppliers and utilizing risk management tools help mitigate the impact of delays or shortages in material delivery.

  • Health and safety hazards: Construction sites present inherent safety risks. Effective risk management involves comprehensive safety protocols and continuous training programs to minimize accidents. Along with safety, construction sites present many different health risks, from exposure to hazardous materials to airborne pollutants, and physical strain. These health issues must be carefully addressed, and implementing measures such as enforcing personal protective equipment usage, conducting regular health and safety training, and establishing exposure control plans can help minimize health risks on construction projects.

  • Financial risk: Money serves as the lifeblood of any business; its presence ensures the sustenance of a robust workforce and the availability of vital resources. For 34% of the industry’s private sector, financial risks were their biggest concern. This means one of the biggest risks to look out for is risks that have a direct impact on your cash flow. These disruptions could stem from increased material costs, heightened market competition, delayed customer payments, claims, and various other factors. The better you comprehend the financial risks involved, the more likely you'll manage to stay within your budget. 

  • Regulatory compliance: Staying up to date with local building codes and regulations is crucial. Risk management tools can assist in tracking compliance requirements, reducing the risk of regulatory issues.

  • Labor shortages and lack of productivity: A shortage of workers poses a great risk when undertaking new projects. If you lack the manpower to execute the work, you become more prone to longer project schedules and potential delays in delivering a complete project to the client. Challenges with labor shortages have been circulating around the construction industry since the global recession in 2007.

Whether a shortage of labor is a concern for your project or not, you likely grapple with another workforce-related challenge impacting your project's overall risk: productivity. A 2016 study on construction labor productivity (CLP) revealed that the efficiency of two groups performing identical tasks on the same site and at the same time could differ by up to 50%. Moreover, this productivity gap could widen to an astounding 500% when comparing work executed on two distinct construction sites. Even with a complete workforce and subcontractors, it remains challenging to determine if your team is optimizing their time efficiently while staying within your budget.

  • Subcontractor default: If you're a general contractor or business owner, you're likely aware of the significant risk posed by a subcontractor that fails to fulfill obligations. The impact of a subcontractor default extends beyond schedule disruptions, as it can hurt your profit margins due to rework.
  • Change requests: Clients can often change their requests for a project, without really thinking of the consequences, and these changing client requests can pose a significant risk. It can hugely impact timelines, budgets, and the quality of the build. Frequent alterations may lead to delays, increased costs, and potential compromises to the project's integrity. The best way to mitigate this risk is to have effective communication and documentation throughout the project, allowing you to manage and prepare for potential changes before they are requested.

How To Mitigate Risks in Construction

Effective risk management in building construction is crucial for mitigating possible problems and dangers. 

Here are some strategies to address these challenges:

  • Comprehensive planning: Thorough project planning, including accurate timelines, budget estimates, and risk assessments, is essential. Anticipating potential risks allows for proactive measures to be taken, and specific tools such as a risk matrix, digital tools, or a list of possible risks (just like a punch list) can help you plan effectively.
  • Real-time cash flow management: The importance of real-time cash flow management cannot be overstated, as it directly impacts a project's capacity to fulfill financial commitments, uphold cash reserves, and manage risk. In other words, a positive cash flow ensures you keep the business running by paying for materials, labor, and other expenses on time, which are crucial in avoiding setbacks and interruptions in project progress. 

With a healthy cash flow, you're more prepared to identify potential financial risks early, allowing you to take necessary measures for risk mitigation. The best way to explain this is by an example: if you anticipate late payment from your client, a positive cash flow will still ensure that you can keep the project ongoing since you have alternative sources of funding.

  • Weather monitoring: Utilizing weather monitoring tools, or of course keeping on top of weather forecasts can help construction teams stay ahead of adverse weather conditions. Real-time weather updates enable proactive decision-making to mitigate the impact of weather-related risks.

  • Diversification of suppliers: Building relationships with multiple suppliers can reduce the impact of supply chain disruptions, allowing you to keep on even if one supplier lets you down. This diversification strategy ensures a steady supply of materials, even if one supplier faces challenges.

  • Safety protocols and training: Prioritizing safety through rigorous protocols and continuous training programs minimizes the risk of accidents on construction sites. Investing in safety measures not only protects workers but also safeguards the project's timeline and budget.

Managing approvals for better risk management

Earlier in the article we listed the most common risks to look out for, which included risks such as financial risks, subcontractor default, and change requests. This can be the result of the absence of an approval workflow, where tasks are completed and project stages are advanced without stakeholder approval. Ultimately leading to a lack of quality assurance and the potential for dissatisfied customers. Unfortunately, this can have a jeopardizing effect on both the project's success and the company's reputation. Managing approvals and having a systematic approach through a digital tool will give you an advantage in proactively managing risks such as subcontractor default and change requests. 

A subcontractor’s task will be considered complete once you’ve evaluated the quality of that specific task and approved the task through a unified software such as Buildbite. What sets Buildbite apart is its unique capability to invite customers onto the same platform, enabling them to track the progress of each task. Upon completing a task, you can send authenticated approval requests that your customer can approve, eliminating the risk of change requests and ensuring that customers are well-informed and satisfied.

 

What can construction risk management look like in 6 steps?

1. Identify the risk(s)

The first step in crafting your construction risk management plan is to identify the factors that pose the greatest threat to your project. These include the most common risks we’ve covered above. 

To have time to manage any potential risks before accepting them, you should identify the risks during the project's preconstruction phase.

 

2. Prioritize the identified risks based on significance

Not every risk is equally important for each company - in other words, a risk affecting one construction business might affect yours similarly. For example, some weather-related risks, like a hurricane, may have a different impact on your inland business compared to a business situated on the coast.

Once you've identified the risks, it's important to organize and prioritize them based on two main factors: (1) the significance of the impact on your business, and (2) the likelihood of that risk occurring.

Make sure to prioritize high-impact, high-probability risks first.

One way to make this process easier and more effective is through a risk assessment matrix. This visual tool allows you to map the significance and likelihood of each risk, providing a clear overview of all the possible risks to your construction project. 

Categorize risks into different levels (low, medium, high) based on their potential impact and likelihood of occurrence. The matrix aids in visually identifying critical risks that require immediate attention, ensuring a more structured and informed approach to risk management.

 

3. Determine how you will respond to the risks (risk response strategy)

With all the possible risks put in order, the next step is to outline your comprehensive risk response strategy. This should include defining the actions your team will take to address each identified risk and considering both proactive measures to minimize the likelihood and reactive measures to mitigate the impact. 

This step ensures a proactive and strategic approach to handling potential challenges, contributing to a robust construction risk management plan.

Risk response falls into 4 different categories: 

  • Avoid: If you don’t feel equipped enough to handle a major risk, or lack the right risk plan. The safest approach is to either avoid undertaking the project altogether or modify the project’s scope.
  • Transfer: Even though it can end up being costly, opting for this approach might prove more economical than bearing the risk directly. For example, you could shift the risk to your insurance provider or negotiate an arrangement with a supplier or subcontractor to transfer the responsibility.
  • Mitigate: Mitigating the risk means developing strategies to minimize potential threats and keep the risk as low as possible. This may include training your workers and ensuring that they are supplied with proper safety equipment to reduce the hazards associated with safety risks. 
  • Accept: At certain times you need to acknowledge, accept, and embrace risks to complete a project. For instance, you might choose to accept potential weather-related delays by incorporating extra time into the project schedule to account for unforeseen weather conditions.

Your resilience to a certain risk combined with the potential reward from the project will dictate what response strategy you might choose. You might conclude that a higher reward, such as acquiring a loyal repeat customer who is likely to provide a referral, may be worth the higher risk. Or the possibility of breaking into a new market.

 

4. Three typical solution categories, along with examples for each, are:

In construction risk management, the many different solutions you can use can be typically categorized into three main types of solutions: strategic, structural, and operational.

Each brings its unique benefits, and often a combination of solutions is the best way to mitigate risk in construction. 

  • Strategic solutions
    • Focus: Strategic solutions address risks at the highest level, often targeting changes in decision-making and project planning.
    • Examples: These solutions can include developing risk management plans and conducting thorough risk assessments during project planning. 
    • Purpose: By effecting risk management at the highest level, strategic solutions aim to establish a framework for guiding practical risk management decisions throughout the entire project. 
  • Structural solutions
    • Focus: Structural solutions involve the organizational and contractual aspects of construction projects, taking strategic plans and implementing them into the fabric of your project.
    • Examples: Implementing effective contract management practices, creating formal risk identification processes, and ensuring you have full coverage on your insurance are all examples of structural solutions to risk management.
    • Purpose: By enhancing organizational structure, structural solutions aim to create a solid, tangible foundation for risk management within your company and project.
  • Operational solutions
    • Focus: Operational solutions deal with the day-to-day execution of the construction project, focusing on the practical aspects of risk management during project implementation.
    • Examples: Establishing safety protocols, conducting regular project monitoring and reporting, and having contingency plans in place to address unforeseen events are all good examples of operational solutions.
    • Purpose: By integrating risk management into the routine activities of the construction project, operational solutions aim to ensure that risks are actively identified, monitored, and mitigated throughout the construction process.

5. Remember to create contingency plans

When it comes to risk management in construction, you can never be too careful. That’s why creating contingency plans is vital for successful risk management, as it serves as a proactive strategy to navigate unforeseen challenges. 

Construction projects inherently involve a multitude of uncertainties, ranging from weather disruptions to supply chain issues, any of which can impact timelines and budgets. 

Contingency plans provide a structured and pre-emptive response to potential risks, outlining predetermined actions to be taken when deviations from the original plan occur. These plans enable project teams to react swiftly and efficiently, minimizing the impact of disruptions on the project schedule and budget. 

By anticipating and preparing for uncertainties, contingency plans cushion the project for any unforeseen risks, fostering a more adaptive and responsive construction management approach that ultimately contributes to successful project outcomes.

 

6. Revisit and revise your plans

The final step is revisiting and revising your risk management plans.  This is a critical part of the process for ensuring no mistakes have been made or gaps left.

What is even more important is that this revising and revisiting is done throughout the project, as new risks may emerge, project parameters may change, and external factors might come into play. 

Regularly revisiting and, if necessary, revising risk management plans will allow you to adapt to evolving circumstances and ensure that your risk mitigation strategies remain relevant and effective. 

By maintaining an agile and proactive approach to risk management through regular reviews, you can stay ahead of potential challenges, optimize resource allocation, and ultimately enhance the project's chances of successful and timely completion.

Essential Features of Effective Risk Management Tools for Construction Companies

There are lots of different risk management tools out there, but what should you be looking to use? To effectively address the unique challenges of construction projects, risk management tools must possess certain features:

  1. Real-time data analytics: Timely access to data is critical. Robust risk management tools should provide real-time analytics to assess and predict potential risks, enabling informed decision-making.
  2. Collaboration and communication: Construction projects often involve multiple groups. A risk management tool should facilitate seamless communication and collaboration, ensuring everyone is aware of the best potential strategies for risks and mitigation in construction.

Top 3 Risk Management Tools

Whether you’re a construction project manager, roofing business owner, or a single tradesperson, using risk management tools can help you manage your time and tasks correctly and avoid mistakes and dangers that may slow your project.

Here are three of the best risk management tools you can use:

  1. RiskWatch: Specializing in risk management solutions for the construction industry, RiskWatch offers comprehensive risk assessment, tracking, and reporting features. Its user-friendly interface makes it a valuable tool for companies prioritizing proactive risk management.
  2. Buildbite: Through a focus on task management features, project documentation tools, and centralized communication, Buildbite offers a holistic construction management app. This allows you to effectively manage risk through all the tools you need for general construction management, compiling data, and sharing information effectively across teams, reducing the risk of errors. Become more proactive with your risk management by providing easy-to-access digital safety instructions, and gain real-time visibility into project risks.
  3. Fieldwire: A comprehensive construction management app, one of Fieldwire’s core features is to streamline risk management in construction projects. This is achieved through tools for real-time collaboration, ensuring teams have instant access to updated project plans and documents. By fostering seamless communication and task tracking, Fieldwire minimizes errors and conflicts, contributing to an effective risk management strategy on construction sites.

The success and safety of projects in construction hinge on effective risk management. By acknowledging the significance of risk management in construction, companies can navigate the intricate challenges inherent in their projects. 

With a full suite of useful project management features, Buildbite offers functionality that helps you to effectively manage risk, along with providing many other tools such as a project documentation hub and integrated communication channels to effectively manage your project.

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