The Ultimate Guide to Construction Risk Management
Learn how to create a risk management plan for your construction projects.
Table of Contents
Construction work is complex and often dangerous. From safety violations to legal issues, risks are a constant concern and construction companies need to employ effective strategies to manage them.
What is construction risk management?
In construction, risk management is a process used to identify and mitigate all types of risk factors within a construction project.
Construction companies approach risk management in several different ways during each phase of a construction project from the bidding stage through project completion. Specific strategies vary depending on the company's size and scope of services.
Medium and larger sized businesses often hire a full-time risk manager or establish a risk management team, while in smaller organizations these responsibilities may be shared by multiple stakeholders.
The American Society of Safety Professionals describes risk management as "a critical step in any organization's efforts to proactively mitigate risk before an injury or catastrophe occurs."
The Owner Builder Network elaborates, "An effective construction risk management plan should include detailed yet easy-to-follow processes to help you define the various risks and prevent or reduce their likelihood. It should also help you to make better decisions on how to best mitigate the effects of potential risks and avoid them in the future."
Risk management is a process used to identify and mitigate all types of risk factors within a construction project.
What does a construction risk manager do?
Construction risk managers spearhead risk management activities. They assess and develop strategies to mitigate risks on both a per-project basis and for the company as a whole.
For example, they'll likely review potential projects before the company makes a bid to determine whether or not the project is too risky to be profitable. As project work is completed, they'll continue to monitor progress and ensure all employees consistently observe best practices.
They'll also continuously assess general company processes, policies, and procedures to identify areas for improvement.
In short, a construction risk manager "identifies risks and comes up with methods for avoiding them," write the career experts at Indeed. "They consider the financial, legal, environmental and reputational risks that the organization and employees may face."
Types of construction risks
There are five main types of risks in the construction industry. They include:
- Safety risk
- Financial risk
- Legal risk
- Project risk
- Environmental risk
1. Safety risk
Employees are a construction company's most valuable resource, and it's imperative that businesses take all the necessary steps to ensure their workforce's safety on the jobsite.
According to the National Safety Council, construction is the most dangerous and deadly industry. Risk managers and other stakeholders need to enforce strict safety standards to avoid the risk of incidents and injuries.
Safety risk management primarily consists of identifying common hazards or potential violations and developing strategies to correct and prevent them from reoccurring.
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2. Financial risk
The main goal of any business is to maintain profitability, so financial risk assessment is also a major part of risk management for construction companies.
Examples of financial risk assessment include analyzing the monetary risks involved with taking on a certain project, reviewing the current economic state before making major business decisions, or calculating long-term costs when purchasing materials or equipment.
3. Legal risk
Construction projects are frequently plagued by litigation when contract terms aren't fulfilled or are misinterpreted. Risk managers will closely review bids and contracts-as well as the processes by which these types of documents are created-to help their company avoid legal issues.
They may also help to facilitate communications between the construction company and their clients.
4. Project risk
Risk managers will monitor work as it progresses and establish guidelines for helping field crews maintain safety and quality standards.
They also work with the project management team to implement risk management strategies that prevent unnecessary delays and miscommunications.
5. Environmental risk
Environmental risks like potential extreme weather can negatively affect project progress.
Risk managers will take environmental concerns into consideration when assessing the feasibility of a project.
How to manage construction risks
There are five distinct phases of construction risk management:
Below, we'll explain each of these phases in more detail.
1. Identify the risks
The first step of risk management is to identify the risks associated with current projects.
Before deciding to make a bid or submit a proposal for a new project, gather a group of stakeholders for a brainstorming session. Discuss all the potential issues that may affect safety or profitability, covering each phase of construction in detail.
As you work through your process, keep in mind frequent risks, errors, and miscommunications that commonly occur in construction work. Analyze risks that are unique to the current project, like weather related concerns or the business's current financial situation.
It helps exponentially to use historical production data from daily reports. Examples of delays, safety violations, and other negative outcomes from similar work you've completed in the past can help you better identify risks in the present.
If you are analyzing risk for your business in general, you can also take the list of the most common risks described above and apply it to your business operations. This can help you identify overarching risk management strategies.
2. Assess the risks
After identifying potential risks, it's time for critical assessment. Not all risks are equal, and you need to prioritize to determine what risk management strategies to implement-or whether or not you want to bid on a new project at all.
Ask yourself and your stakeholders these questions:
Determine the answers to assess the overall risk of the project. At this point, you may decide that that project is too risky for your business and decline it.
If you decide to move forward, organize your list of risks by priority and separate easy wins that can be addressed with minimal effort from more complicated risks that will take a significant amount of work to mitigate.
3. Implement a contingency plan to mitigate the risks
Next, draft a contingency plan to address each risk. Start with the high priority risks you identified through critical assessment.
Your strategies for addressing each risk will vary depending on the risk itself. You may need to mitigate the risk, accept the risk, or transfer the risk.
Whatever strategy you choose, describe how you will address all risks in detail in a risk management plan. Assign an owner to implement each strategy and create a communication plan if necessary to make sure all employees are aware of the risk management plan.
You will most likely develop strategies for mitigating risks, meaning you'll work to lessen risk and decrease the chances of negative outcomes from occurring. Mitigating risk is the most common risk management strategy.
For example, you may be working on a multiphase project, and the project owner may already have secured design plans from an architect. To mitigate risk, you may add a robust review phase to the project to catch design errors before construction begins.
Or, a project may involve significant safety risks. You may build time into the work schedule for daily toolbox talks and safety inspections.
Decide how to execute your contingency plans. You may use different tools like risk management software to help you manage implementation.
Mitigating risk is the most common risk management strategy.
There may be risks you decide to simply accept. In this case, the risk may be too difficult to mitigate or predict, or it may simply have a low probability of happening.
For example, you could be working in a service area that is prone to flooding. You can choose to accept that risk and build extra time into the schedule to accommodate potential weather concerns without trying to avoid them.
Occasionally, in specific legally acceptable situations, you may be able to shift or transfer the risk to another party in the construction contract.
For example,a subcontractor may take on responsibility for a part of the project they're in charge of managing. Or you may be able to transfer some financial risk to your insurance company.
4. Monitor the effectiveness of your plan
After you create your risk management plan, you'll need to monitor project progress to assess its effectiveness.
Digital reporting software can help you accurately track how your risk management strategies are applied in the field.
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You'll likely need to make some adjustments as certain issues are unavoidable. However, careful monitoring can help you catch issues early and prevent them from turning into major headaches.
The data you collect by monitoring your risk management plan in action can be used to help you prevent future risks from resulting in negative outcomes.
What does the production data from this project tell you? Were there less problems and delays, or did you experience similar issues as you have on previous projects?
If you find that your risk management plan was successful, continue to build on it and implement those same strategies for future projects.
If your strategies fail to effectively mitigate risks, do a deeper dive. Was there a risk you didn't identify? Did you prioritize the wrong risks? Were the strategies outlined in your contingency plan not communicated properly to the right team members?
Consider bringing in a third-party that specializes in risk management if you are having difficulty answering these questions.
Benefits of risk management in construction
Risk management isn't just a good idea in construction, it's an essential practice. Effectively managing risks helps your business increase profitability, avoid litigation, promote safety, improve quality, and improve client relationships.
Every one of the most common risks in construction can negatively affect profitability. Without risk management, your business stands to lose a significant amount of profits each year.
Risk management preserves profitability and gives businesses confidence that the projects they take on will result in success.
More than lost profits, a single legal issue can be catastrophic enough that businesses are forced to shut down.
When you practice good risk management, you thoroughly understand the risk of litigation. You consistently monitor your processes and prioritize good customer relationships.
Risk management protects your workforce. Continuously identifying and working to correct safety risks prevents incidents that lead to injury and death.
Because risk management involves maintaining quality standards to avoid rework and disputes, the quality of work your teams produce will increase organically.
Improve client relationships
Risk management improves customer relations. Initial bids and proposals are more accurate, and you'll have less project delays and better communication.
Construction risk management software
Construction risk management software is a valuable tool risk managers can incorporate into their strategies.
Risk management software may include the following functionalities:
Digital daily reporting and timesheets
Digital reporting is more accurate than traditional methods. Using digital templates with time-saving features like pre-filled fields and voice-to-text capture capabilities, field crews can quickly and easily record a high level of detail and share reports with risk managers in real-time. Likewise, digital time cards allow field contractors to track work hours much more consistently and conveniently than with pen and paper.
The more granular the data risk managers receive from the field, the better understanding they'll have of their team's capabilities. They can use these enhanced, detailed insights from digital reporting to better assess project risks and help draft more accurate bids and proposals.
Using software that automatically attributes actions to specific users, reporting is also easier to track. If they need to review information in the event of litigation, risk managers can quickly identify which employee submitted data and when exactly they submitted it.
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Safety and quality checklists
Using construction checklists is an easy way to empower field crews to meet safety and quality standards. Risk management software may include a library of risk assessment checklists that cover crucial inspection, hazard identification, and quality control tasks. You may even be able to customize your own checklist that perfectly fits your business's unique processes.
Like digital reports, digital checklists are much easier to complete and organize than pen and paper. Risk management software may automatically collect completed checklists and attach them to corresponding reports from that day.
Toolbox talks also empower your employees. Giving frequent toolbox talks that address relevant safety and quality concerns helps field crews keep project related risks top of mind.
Some digital tools will provide a library of toolbox talks that cover a wide variety of topics, help you schedule talks, and track attendance.
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Photo and video documentation
When you're capturing information from the field, using digital reporting methods makes it easier to attach visual data like photos and videos.
Photos and videos show risk managers and other stakeholders who may be offsite exactly what's happening in the field. They can more easily identify safety and quality issues. And, with automatic time and date stamping that show what the jobsite looked at specific intervals, visual data can help you quickly reach a resolution during disputes.
Automated production insights
One of the most beneficial aspects of using digital software to monitor risks is the amount of time it can save when organizing and analyzing data.
Risk management software can take data submitted via digital reports and checklists and automatically organize it into helpful insights. Instead of manually collecting and combining traditional data submitted in multiple formats, risk managers can review clear reports that show how a project is progressing in a digestible format. They can measure progress against estimates and quickly assess the cause of any delays or overspending without spending hours on calculations.
Documentation plays a major role in risk management. Digital documentation organized and stored on the cloud is easier to manage than physical files systems.
Cloud storage allows all stakeholders to access important documentation as soon as it's uploaded. Changes to any document can be tracked universally, so you have better version control.
If you need to find and access specific documents to plan a future project or resolve a dispute or legal issue, you can generally search for what you need using a search function.
Manage risks and protect profitability
Raken's construction safety management software helps field crews stay safe and keeps projects on track. Our easy-to-use digital daily reports and checklists reduce risk with clear, clean, detailed data.