Construction Risk Management Overview (With Best Practices)
By Indeed Editorial Team
Published May 6, 2022
The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.
Risk is inherent in almost all business undertakings, but the construction industry can present unique challenges due to the scope of the projects. Supervisors typically do a risk assessment in the planning stages of a project to anticipate future challenges. If you're interested in becoming a risk manager, learning more about common construction risks and how to address them can help you decide if this position is right for you.
In this article, we present an overview of construction risk management, discuss the types of risks you may find on construction projects, outline the risk management process, and discuss some characteristics that may help you excel in this role.
What is construction risk management?
Construction risk management is an essential aspect of construction planning. Because construction projects are enormous in scope and involve many parties, they are susceptible to various kinds of risk. Risk management involves analyzing what risks face a project, classifying them by urgency, and making tactical decisions on how to proceed.
The success of a construction project can depend on cooperation between suppliers, contractors, specialists, supervisors, crew members, inspectors, and even legislators. To anticipate potential risks, a risk manager considers how these dynamics work together in the project location and time frame. With this information, they can formulate a plan to address contingencies and reduce the likelihood of significant disruptions.
Common risks in construction
There are several common types of risks applicable to most construction projects. While every project is subject to different risk factors, a risk analysis usually considers common fundamental areas. The following is a summary of common risks:
Project risks can have universal consequences for the entire endeavour and can include anything that disrupts or affects the ability to complete the project as per its plans. For example, significant errors in quantity estimation for materials in the planning stage can result in a shortage at the production stage. This can lead to procurement problems and cause delays. Missing deadlines or mismanagement of resources can be similarly disruptive, making it essential to be comprehensive when performing a risk analysis.
Financial risks include any factors that may impact a construction company's finances and can be internal or external in origin. Inaccurate cost estimation, supply chain disruptions, fluctuating costs for materials, payment interruptions or delays, and changing specifications are all examples of factors that can financially disrupt a project. Misuse or underutilization of resources can exceed the allotted budget. Quality issues can result in re-doing parts of the project, which can also have a significant financial impact.
Construction projects often have extensive regulatory obligations to meet. Legal risks might include the necessity of assigning accountability in case of delays or quality issues. Creating detailed and thorough contracts with clients, labourers, and suppliers can help clarify these issues in case of discrepancies or conflicts. Different legal obligations also typically govern many other aspects of a construction project, including by-laws, insurance and zoning requirements, and certification and permit issues. A risk manager may synthesize information from different departments to determine whether a project's unique conditions likely pose significant legal risks.
Work on construction sites involves the cooperation of different crews, departments, and specialists. A well-designed system to distribute necessary information to all parties ensures that all crew members stay informed of changes to specifications or policy. Effective communication helps to reduce inefficiencies, identify redundancies or omissions, and ensure compliance with obligations, helping enable a smooth workflow.
Safety is paramount on a construction site due to many potential hazards. Planning for handling safety risks is essential for any risk management plan. Safety risks can include accidents or injuries to labourers, visitors, or the public. You may wish to consider factors like the skill level and training of labourers, the machinery and equipment used, and the specific details of the construction site to anticipate potential safety risks.
Unexpected environmental factors, like severe storms, floods, or drastic temperature changes, can cause serious disruption to a construction project. Heat and cold can affect equipment, machinery, or materials, while storms or flooding can render a site inaccessible. Planning for environmental risks considers the location, season, and type of project to minimize the chances of significant disruption.
Risk management process
Construction risk management of a site takes place in the planning phase. Considering these factors well in advance can help position you to respond flexibly to unanticipated circumstances before you begin any construction project. The following are some steps a risk manager may follow when performing a risk analysis:
1. Identification of potential risks
As a risk manager, you may consider the climate, weather conditions, local regulations, availability of necessary materials, local availability of labour, and other factors. While you may want to update your list of risks as the project advances, it's helpful to set a deadline for this process to ensure you stay on schedule. Once you create a list of potential risks, you can assess each one according to the following criteria:
Likelihood: This includes estimating how likely a risk is to occur. Risks that are very likely to occur require a more extensive plan to address them, and you may want to treat them more urgently than other items with a very low likelihood of occurrence.
Severity: You can also organize the list of potential risks according to severity. This means considering the degree of impact a risk might cause to the project if it occurs. By doing this, you can order the items in your list and rank them based on urgency. A risk with a severe potential impact and is also very likely to occur requires more comprehensive planning than a low-impact, unlikely risk.
2. Analysis of risks
At this stage, a risk manager may use modelling software, spreadsheets, or risk value calculations to quantify the impact a possible risk may have on the project. They may perform sensitivity or scenario analysis or present the information visually with graphs or charts to interpret the data. This stage determines whether potential risks outweigh benefits in a given scenario. This calculation is necessary because it lays the foundation for the rest of the construction process and can influence whether a project can proceed.
3. Responding to risks
As a risk manager, you may have several options to consider once you identify and analyze possible risks. You may choose to avoid a risk that is highly likely and has potential severe ramifications that threaten the entire project's success. In practice, this can mean declining a project altogether. You can accept risks that are less likely to be significantly disruptive or ones for which you have an effective contingency plan. You can also transfer risks to another party. An excellent example of this is purchasing liability insurance.
Mitigating risks entails building safeguards in the planning phase to minimize their potential impacts. You can address each item in order of its severity and likelihood to occur and design contingency plans for each. You may want to delegate responsibility for each item to a specific person or department so they can respond quickly in case of a setback. Using project management software to track these details can help you keep the project organized.
Working in construction risk management
Risk managers often have extensive supervisory or construction experience. The potential scope of responsibilities in this position can vary widely. Still, it can include providing training to employees, arranging the correct insurance for team members and equipment, visiting construction sites to perform inspections, ensuring compliance with regulatory and legal obligations, and collaborating with executives to implement risk mitigation strategies. They may collaborate with HR, legal, or health and safety departments to develop strategies to minimize risk in these areas.
Depending on the scale of the project, a risk manager may require a university degree in combination with supervisory experience in construction and familiarity with risk assessment best practices. Degrees are often available in technical subjects like engineering, and some universities offer risk management-specific degree programs. Personal characteristics that may benefit you in this role include diligence, exceptional organizational skills, attention to detail, technical knowledge, tactfulness, and an ability to see how minor details can impact the overall success of a large project.
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