Construction Risk Management: The Definitive Guide

Due Diligence Reports: The Complete Guide
15 June, 2021

Construction Risk Management is a crucial aspect of the building process. If neglected, risks revolving around either health and safety or unplanned financial costs can rise. Therefore, it’s of the utmost important for project managers to detect and find solutions for any risks related to a construction project, including health and safety, as well as project funding.

There are two main components to construction risk management, being risk sources, followed by risk management. We go through each below.

Risk Sources

A good understanding of where in a construction project risk may come from is required, in order to be able to predict and minimise overall risk. Risk sources can be divided into the following areas:

  • Safety Risks: health and safety risks related to the workforce present at the construction site
  • Environmental Risks: natural risks, such as storms, earthquakes, floods that can jeopardise your project
  • Legal Risks: legal issues and conflicts, such as lack of contract fulfilment
  • Financial Risks: various financial factors that can endanger the financial flow-costs increase, lack of sales, competitors lowering prices
  • Project Risks: 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 sources have the potential to cause severe damage to a construction process. Thus, we trust that you are understand why being able to foresee these risks is important.

Now, let’s just into managing these risks.

Risk Management

Developing a proper risk management plan is fundamental for appropriate and successfully dealing with risk sources. This complex process can be divided into six major steps, being:

  • Risk identification
  • Risk ranking in order of importance
  • Handle every risk individually
  • Choose the right support to aid you with management of your risks
  • Team involvement
  • Create back-up plans & Revise

Now, we will explain each of these step in more details.

Step 1: Risk identification

Above, we classified the risk types. Now, it is your task to figure out, 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.

Bringing together multiple members of your team in a brainstorming session can be a useful practice. Each team member can contribute with their experience and expertise.

Step 2: Risk ranking in order of importance

Ranking all emerging risks and prioritising them is crucial when it comes to 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 to your business, and the probability of risk actually emerging. Appropriate risk ranking is a crucial process in 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: Handle every risk individually

There are four simple ways to deal with such a complex issue such as construction risks:

  1. 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 the areas prone to earthquakes or floods is a good example of this practice.
  2. Delegation: Obtaining an insurance policy or creating a suitable contract with your subcontractors is a proper way to minimise  potential financial risks.
  3. 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.
  4. 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: Choose the right support to aid you with management of your risks

No matter which of these four methods you opt for when handling your 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 Consultants

Step 5: Team involvement

If you want effective risk management for your construction project, involve all of your staff member. Updates or risk reviews should be transmitted to all your team members no matter their position. Informing your stake holders about risks is an important step in the overall process. Your message should be communicated in a clear and easy to understand manner.

Step 6: Create back-up plans & revise

Creating a backup plan or alternative approaches is important in order to stay on track with project timelines if danger actually appears. Creating contingencies of backup plans is also important, as sometimes both first and second plan can fail. This practice will shorten delays and will help bring your project to an end quicker.

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.