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Construction Risk Management Plan
Due Diligence Report
15 June, 2021
Building regulations NSW
15 October, 2021
As construction projects become more expensive and complex, risk management plans become an integral part of the construction process. If neglected, risks revolving around health and safety or unplanned financial costs can rise.
However, it’s not always easy to create a proper and effective construction risk management plan. The first step is always detecting potential risk factors and analysing their possible impact on a construction project.
When putting together a functional risk management plan, we should analyse risk factors and determine the best strategies for risk management.
Table of Contents
Construction risk factors
A good understanding of where a risk may come from is required, to be able to predict and minimise overall construction project risk. Risk factors in the construction industry can be divided into the following areas:
- Safety risks
- Environmental risks
- Legal risks
- Financial risks
- Project risks
- Contractor and client risks
Safety risks
Usually, when we talk about construction project risks, safety risks come first to our minds. Health and safety risks are related to the workforce at the construction site. Safety risks usually fall under site managers’ responsibility, since creating a safe and accident-free construction place is essential. Also, health and safety risks are managed through legislation in the construction field (such as Design and Management Regulations 1994 and other acts). Moreover, all construction projects need to have a health safety plan to reduce the possible risks.
Environmental risks
Or, in other name, natural risks, such as storms, earthquakes, and floods can jeopardise your project. Although no one can predict those risks, the analysis of the area’s environmental conditions is a must as a precaution.
Legal risks
During construction projects, many legal issues and conflicts can occur. Therefore, as a part of construction project risk management, assessing and taking care of contracts and legal aspects is vital. Sometimes, some issues, such as lack of contract fulfilment, can occur, and the litigation process might be inevitable. Situations like this increase the project risk, timeline and overall costs.
Financial Risks
Financial risks include various economic factors that can endanger the financial flow, such as an increase in cost, construction budgets, lack of sales, and competitors lowering prices. Therefore, before venturing into construction projects, it’s essential to assess any financial risks, such as inflation, tax, currencies, etc.
Project risks
Project risks in construction are issues that can arise as the outcome of poor project management, poor time calculation, poor material and resource management, or a general lack of policies.
It’s quite clear that any of the above risk factors have the potential to cause severe damage to a construction process. Thus, we trust that you understand why being able to foresee these risks is important.
Contractor and client risks
Client risks include risks such as feasibility risks, design risks, funding and commercial risks. While, on the other side, contractor risks include inappropriate assessments of cost and time frame by contractors and subcontractors, which may increase the overall cost and timeline of the construction project.
Importance of risk management in construction
Identifying and managing risk in construction can greatly contribute to the success of a building project. Each risk can be regarded as a blocker that can negatively contribute to the project’s completion. Not all risks can be removed, but some of them can be reduced to a tolerable level with the proper risk management plans in place.
Some construction risks example
Let’s start with an example: if we take a look at health and safety risks in construction, we can conclude that they can heavily impact the length and quality of the project. If the workforce is exposed to an unsafe work environment, the chance of accidents will be much higher, the project deadlines will not be met, and the company can lose their reputation. Eventually, depending on the severity of the violation, the company will lose lots of money from not being able to prevent the accidents.
What is a construction risk management plan?
A construction risk management plan is a detailed plan aimed at reducing the risks that usually come along with construction projects. The goal of the plan is to buffer the risks we identified and enable smooth project flow. During the risk management planning, all potential construction risks should be carefully estimated and evaluated. Based on that, the proper procedures and processes need to be developed to reduce their impact.
How to create a construction risk management plan?
Developing a proper risk management plan is fundamental for successful dealing with risk factors. This complex construction risk management plan should include the following aspects:
- Risk identification
- Risk ranking in order of importance
- Handle every risk individually
- Choose the right support
- Team Involvement
- Create backup plans & Revise
Step 1: Risk identification
Above, we classified the construction project risks. Now, it is your task to figure out, as a project management consultant, which of these categories apply to your project. Identification of these risks should always be done prior to the launch of your project. Provide your management with enough time to tackle the assessment of risks and deal with them.
Step 2: Risk ranking in order of importance
Ranking all emerging risks and prioritising them is crucial when it comes to construction risk management. There are two factors, based on which you can give priority to the various risks you have identified. They are: the impact that the risk can cause on your business, and the probability of risk actually emerging. Appropriate risk ranking is a crucial process in the evaluation of possible jeopardy for your project.
Risks that have a high likelihood and high impact should be tackled first. Those that are less likely to occur and impact the project can be postponed for later.
Step 3: Risk handling
There are four simple ways to deal with such a complex issue such as construction risks:
- Avoidance: If you lack the necessary equipment or skill to undertake a project, then extending or suspending it completely is the best way of handling risk. For example, refusing to build in areas prone to earthquakes or floods is a good example of this practice.
- Delegation: Obtaining an insurance policy or creating a suitable contract with your subcontractors is a proper way to minimise potential financial risks.
- Mitigation: Whenever you decide to mitigate risks, you are working on a strategy of minimising them. Safety risks can be drastically reduced if you train your team members to use the safety equipment in the correct way. Moreover, financial and project risks can be mitigated with Early Contractor involvement (ECI) which involves bringing builders on board to work on the project before the project design is finalised.
- Acceptance: weather and atmospheric factors are unpredictable and can cause delays at the construction site. However, if you have a good project management team, they can find solutions to these unpredictable problems.
Step 4: Seeking support
No matter which of these four methods you opt for when handling your construction risks, there are various support systems that will help optimise the process. The most common resources that construction companies use in these cases are:
- Financing
- Technology
- Software
- Professional Building Consultants
Step 5: Team involvement
If you want effective risk management for your construction project, involve all of your staff members. Updates or risk reviews should be transmitted to all your team members, no matter their position. Informing your stakeholders about risks is an essential step in the overall process. Your message should be communicated in a clear and easy-to-understand manner.
Step 6: Backups & revisions
Creating a backup plan or alternative approaches is important in order to stay on track with project timelines if danger actually appears. Creating contingencies or backup plans is also important, as sometimes both the first and second plans can fail. This practice will shorten delays and will help bring your project to an end quicker.
Benefits of construction risk management plans
Risk management plans are essential to the success of the project, in many ways:
- Improving safety at work and reducing risks of accidents,
- Increasing project completion rate and company profits,
- Prompt detecting of any risk and reducing its impact,
- Higher operative efficiency,
- Increased vigilance and bigger project flexibility.
Wrapping up
To sum up, construction risk management plans will boost the confidence of your teammates and encourage them to follow safety measurements. Valuable assets such as time and resources will be saved, as well as your precious company’s finances. On the other hand, if you decide to take on some unsupervised risks, have in mind that they might hurt your business and your company’s profit.
If you need help in assessing the major project risk and creating a functioning and feasible construction risk management plan, we can help you. With more than 20 years of experience in this industry, we have helped numerous companies with their building projects, mitigating their project risks.
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