Guide to Construction Risk Management

Guide to Construction Risk Management

We’ve all heard about construction projects that faced major setbacks – sometimes even disasters. Whether it’s an issue with the contract or materials, a serious injury on the job site, or something more unpredictable like a natural disaster, every project faces risks. Construction risk management needs to be a priority for all projects.

What are Construction Risks?

Construction risks are potential issues that can be damaging to a construction project – perhaps even deadly. They can have serious consequences to the project, including:

  1. Need to perform additional work
  2. Delays to the project schedule
  3. Quality defects
  4. Cost overruns
  5. Potential litigation

That’s why it’s important for a good construction manager to anticipate risks and their impact at the earliest possible stage – before the project even starts.

What is Construction Risk Management?

Construction risk management is a process of identifying and assessing the risks to a project, and developing procedures to minimize their impact. Planning and monitoring for risks are essential, to ensure that they can be controlled, dealt with, and turned around to help your company.

The Risk Management Approach

While every company has their own way of managing risks, there are three key steps that are central to all good approaches:

  • Risk Identification – This step should be done as early as possible in the project process – ideally during the pre-construction. Identification involves identifying any and all risks that could result in an increase in the project’s cost, a delay in the project schedule, or a loss of profit. Risks can come from both internal and external sources, and be related to finances, contracts, operations, and even the project environment. 

Tip: As the project progresses, hold regular meetings with your project team to review your risk management efforts and identify any new risks that may pop up. 

  • Risk Quantification – Once the risks have been identified, you need to analyze each one to determine what the likelihood or probability is that it could occur, and the impact each risk might have on cost, schedule, quality, safety, client relationships, or the contractor’s ability to fulfill the obligations of the contract. High impact, high probability risks should be tackled first, while risks with a low probability and impact can be dealt with last.
  • Risk Mitigation/Response – Determine how you want to respond to each risk so that you can initiate actions and implement strategies to head them off. Beginning with the hazards that pose the greatest threat to your project, decide whether the best approach would be to avoid, transfer, mitigate, or accept the risk.

Risk Mitigation Plan

Once you’ve synthesized all of the risks that may impact your project, you can put together a risk mitigation plan. This plan should include the priority of each risk, its potential consequences, as well as response strategies. The plan may need adjusting as the project moves forward. 

Tip: Risks need to be evaluated not only from a project perspective but also a business standpoint. The construction manager should consult with senior management and their company’s legal team before pursuing large/unusual projects. 

It’s your job to bring the project in safely, on time, within budget, and in accordance with the owner’s expectations for quality, regardless of how many surprises show up. If you have a good plan for managing project risks you’re already halfway there!

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