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Operational Excellence

A Guide to Risk Management in Construction Projects

Written By: Joe Demski
April 22, 2022
12 min read

Construction projects are inherently risky. Whether something new is being built, updates are being made to an existing structure, or work is being done to the environment, there will always be a need for risk management in construction projects.

Each construction project is full of many different moving pieces and each different set of activities will come with its own particular challenges and risks.

Understanding where the risks are coming from, what they entail, and how to mitigate those risks is crucial for success with any project.

What is Construction Project Risk Management?

Construction project risk management is the process through which risk for a project is defined, assessed, mitigated, and reported on.

The types of risks and their effects on a construction project can vary wildly, making construction risk management a difficult proposition.

Whether you’re working on a mega project that spans continents, or a smaller-scale one-site project, you will face numerous risk factors that could result in injuries, delays, or increased costs.

Risk management will be a part of the entire process of any project. You and your organization will need to consider various risks as you plan out the project, as the work is underway, and as you are wrapping up the project.

Sources of Construction Project Risk

Construction risk management is a broad topic. It would be easy if there was a standard list of risks that a project manager could tick off and not have to think twice about.

Unfortunately the world is a very complex place with risks that come from a hundred different directions. And if you aren’t aware of the many different sources of risk that exist for a project, you could run into big trouble.

Safety Risk

The number one priority on any construction site is safety. The health and wellbeing of the team members working on the project should be paramount for any organization.

With this in mind there are numerous safety considerations your organization should take into account for your construction project risk management process.

To mitigate safety risk it’s likely that your projects will have roles dedicated to managing the safety of the workplace, dealing with incidents, and ensuring compliance with regulations and protocols for every aspect of the project.

Managing safety risk will be one of your most important facts when planning your risk management processes for your project.

Financial Risk

Any construction project will carry a large amount of financial risks. This is due to the number of employees, contractors, sub-contractors, materials, and financing involved.

Projects can be very complex financial beasts. There may be different financial institutions, loans, and contracts that impact the overall project — each of them carrying their own set of financial risks.

What if a contractor defaults on a loan or is no longer able to pay their employees? How will that affect each step of the process from moving forward? Does the project manager have contingencies in place in case of a financial shortcoming?

Additionally, the scheduling of payments and shifting money around requires a set plan to ensure payments aren’t missed and suddenly the project comes grinding to a halt due to unforeseen financial risks.

Legal Risk

The legal risk for a construction project can encapsulate nearly every other type of risk you will face. If one of your other risk factors becomes a problem, there’s a good chance legal action can follow.

Do you want to know one of the fastest ways you can derail a project’s schedule and budget? By getting ensnared in lengthy and costly legal proceedings that could derail all of your work.

Mitigating legal risk requires upfront work to identify all the contracts and potential issues that could arise.

Take care to involve your legal team heavily throughout the length of your project to ensure you won’t experience any unexpected legal trouble.

Project Risk

Project risk is an interesting risk factor because it’s very inward looking.

This area of risk management requires a critical look at your own processes and project management operations.

Are the right resources acquired at the right time? Have you coordinated schedules to ensure work can begin on time? Are the right policies in place? Are you utilizing the right technology to increase operational efficiency?

Keeping a close eye on your project risks is critical through every step. You should implement systems that measure overall risk and can warn the correct stakeholders when a potential issue might arise.

Environmental Risk

When you’re interacting with the physical world—altering terrain, building structures into the environment, or handling different potentially hazardous materials — you need to take extreme care of the environmental risks your construction project carries.

Depending on where the project is happening, there will be different environmental factors to consider—such as how your work will affect the soil, or the local wildlife.

Before your project begins you will need to conduct numerous environmental studies that will provide you with an overall understanding of your projects environmental risks.

It’s likely that you’ll have a person dedicated to managing the environmental impact of your project or you may contract with a company that specializes in the field.

How to Manage Construction Risk

Managing risk is an ongoing process and you will need to be acutely aware of your current risk tolerance at all times.

Now that we’ve identified many of the types of risks you might face during your project, let’s take a look at how you’ll be able to manage all of these different risk factors.

Identify Potential Risks

We laid out some of the various risk factors you may face above, but each project is unique and will have its own various high probability risks.

As an expert in your company’s business and previous projects, you will have a strong understanding of potential risks, and hopefully previous experiences to rely on.

Additionally, you should rely on stakeholders across the project and organization to foster a strong risk management team, and we’ll touch on that in the next step.

Determine Risk Stakeholders

There will be too many different potential risks to your project for any one person to handle.

It will be necessary to identify who is responsible for identifying, assessing, and mitigating risk for each area you might be facing risk from.

Who from your project team will be responsible for handling financial risk? Or who will handle legal risk (hopefully someone with a background in law!)?

Gathering your project team together and determining who will be responsible for which areas will provide you with:

  • A defined group that is constantly monitoring risk

  • An understanding of the different risk tolerances for each risk factor

  • A cross-functional team that can help assess and mitigate all of your different risks

Determining stakeholders will help keep risk at the top of everyone’s mind as they move throughout each stage of the project.

Perform a Risk Assessment

A risk assessment will be a narrowed down version of your earlier step of identifying risks.

Now that you know where you might face risk, you can assess what is at stake when something does go wrong.

The U.S. government defines risk assessment as: "A risk assessment is a process to identify potential hazards and analyze what could happen if a hazard occurs."

There are existing templates and workflows that your teams can follow to perform an assessment and identify what areas of your business would be impacted by particular risks.

Create a Risk Management Plan

When you've established your team of risk stakeholders and performed a risk assessment it's time to create a risk management plan to outline all of the steps and processes your team will follow. This step is one of the overall pillars of project management, as well.

The construction risk management plan will help your team manage risks and help your project management team understand overall risks. The previous steps will all be rolled together to create this plan.

Here are some of the areas you will cover with you risk management plan.

Risk Identification

Not every project will have the same risks. Construction companies face a number of different risks from different vectors with every project. Effective risk management starts by identifying which project risks you will face.

Risk identification will narrow down the potential threats your project faces and allow you to focus on the real risks.

The step of risk identification will be an important part of your risk management plan, and give your team a defined boundary of where to look for risk.

Risk Analysis

Now that you've identified the risks that apply to your project, it's time to perform a risk analysis and understand the overall impact each risk factor can have.

Because you've identified stakeholders they should each be able to bring a level of expertise to the risk analysis and give detailed thoughts on what situations could arise, their impact, and what needs to be done to prevent a problem.

Risk Acceptance

Life is full of risks, and your risk management plan needs to account for the fact the a certain level of risk acceptance is required for every project.

Your risk management process will need to account for a tolerance toward risk, and as a team come to an understanding on what will be acceptable to move forward with the project.

Define Response Plans

The goal for your risk management plan, of course, is to avoid any kind of incidents or accidents. But, life doesn’t always go according to plan, and situations will inevitably arise.

If you don’t set up response plans ahead of time then you risk being caught flat-footed if something does happen. Time is of the essence when a situation occurs and you need to have a plan in place before something goes wrong.

After you’ve determined stakeholders and roles for each area of risk you might face on your construction project, you will be able to create response plans tailored to each individual area.

When you’re creating your response plans think about the following:

  • Who is directly responsible for handling alerts should a situation occur?

  • How will the rest of the project team be notified?

  • Will other risk factors be affected?

  • When is a risk considered mitigated and work safe to continue?

Audit Your Risk Management Technologies

To properly identify, assess, manage, and mitigate the risks of your project you’ll need more than just one Excel spreadsheet that tracks everything.

For projects that have many moving parts, workers in the office and on the job site, and potentially spanning multiple time zones, you’ll need technology that can support your entire team.

Each of your projects is unique, and the risks you face are also constantly evolving. To properly manage your risk it’s important to leverage technology that can be custom-fit to your organization.

When you are facing an ever-changing slate of risks it’s necessary to be sure you can be flexible with your risk management process and technology.

The Benefits of Risk Management in Construction Projects

Keeping a close eye on the risk you face while working on a project comes with numerous benefits. A dollar saved is a dollar earned, and that is extremely true for mitigating risk in your projects.

Here are the ways you can benefit from closely monitoring risk.

Reduce Delays

When a plan is in place to identify, assess, and mitigate risk you will avoid delays that can spiral out of control should a risk become reality.

With a strong plan in place your teams will be able to follow the plan and properly contain the risk rather than struggling and potentially delaying the whole project.

Create a Safer Work Environment

Safe job sites are acutely aware of the risks that are posed to their employees, and put plans in place to mitigate the risks they might face.

The benefits of creating a risk management project plan mean that you will be prepared to prevent any accidents or safety hazards that might occur.

Give your workers the peace of mind to know that they will remain safe while they work the project.

Save Money

Unanticipated situations will cause your projects to go over budget and not deliver on time.

Whether you're facing legal risks, financial risks, environmental risks, or any of the other types of risk, these all can come with costs that will reduce the bottom line of your project.

Additionally, if you run projects that are very attuned to risks and efficient at preventing risky situations, your bids will be able to reflect this and give you a better standing in your industry.

For any project your organization takes on, risk management should be one of your top priorities. Preventing risky situations from developing into full-blown problems can save your business money and time.

FAQs

What is risk management in construction projects?

Risk management in construction projects is the process through with risks to the project are identified, assessed, measured, and mitigated.

What are the five areas of risk management?

The five areas of construction risk management are legal risk, financial risk, safety risk, environmental risk, and project risk.

What is a risk management process?

A risk management process helps your project team identify risk, manage risk, and perform risk mitigation.

Written By: Joe Demski

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