Published on 20th January 2023
Risk management in construction is a must to achieve project objectives and avoid cost overruns. As construction is governed by complicated contracts and complex tiered relationships, it is possible to overlook or underestimate construction risk.
In an industry that experiences a high degree of uncertainty, managing risk using a systematic approach provides direction to a construction project team for implementing appropriate risk control strategies.
While risk avoidance and risk tolerance may vary, risk response and risk management prove to be the success factors when it comes to leading a construction project to successful completion.
Keep reading this post to learn more about construction risk management.
According to the Project Management Institute, the PMBOK® (Project Management Body of Knowledge) Guide describes a risk as “an uncertain event or condition, that if it occurs, has a positive or negative effect on a project’s objective.”
Risk management in construction projects refers to the systematic process of identifying, assessing, responding to, and monitoring project risks to maximize the occurrence and impact of positive events while minimizing the probability and impact of negative events.
Construction professionals deal with various risks while working on a construction site, including:
Environmental risks include earthquakes, floods, fires, and other challenges that present themselves as natural occurrences.
Before starting work on a construction site, it is recommended to survey the land for potential risks.
For example, a construction company can take precautions to protect its employees if the surrounding area has a history of tornados. In addition, businesses use identified risks to incorporate environmental impact clauses in a construction contract or negotiate special rates with insurance companies.
Going over a budget presents a large risk because businesses invest heavily in equipment, materials, and labor.
In addition, financial risks vary based on inflation, local currency rates, or taxes, which may cause material price fluctuations and affect the site’s insurance rates.
So, tracking spending and following a methodical approach to solving financial challenges are critical to reducing financial risks in construction.
Contracts often constitute the source of legal risks during a construction project.
For instance, overspending or project delays can lead to contract clauses—forcing companies to spend additional resources or money.
When starting a new construction project, it is necessary to examine contracts carefully with respect to the agreed-upon contract requirements. In addition, the risk management plan should be devised to accommodate potential legal risks and ways to navigate them if they occur.
Sometimes, it is a challenge to locate the right employees for construction work.
Additionally, overworked construction workers pose safety risks and may look for other employment opportunities.
Consequently, a lack of skilled labor or overworked employees can affect project progress and present personnel risks—resulting in project delays and extra resource requirements.
Poor project management results in project risks that cost companies money and cause delays.
For example, inadequate planning, resource allocation, or scheduling and inconsistent project management are major causes of project risks impacting financial, legal and personnel, and other risk factors.
Being aware of construction project risks and taking necessary precautions to avoid them is crucial when planning a project.
Some incidental risks related to poor project management include:
The risk level in construction provides the basis for prioritization and action—it can be low, moderate, or high based on the impact and likelihood ranking of the risk.
Construction work often involves safety risks because of the hazardous material and dangerous equipment used at construction sites.
A risk management plan helps develop safety regulations and effective responses to project accidents throughout a project’s duration.
For example, daily tool and equipment checks ensure the operability and safety of construction machinery and reduce on-site accidents and injuries.
Stakeholder risks arise because of a project’s stakeholders asking to change the designs.
Such risks may result in a possible delay or change the scope and schedule of the entire project.
In addition, stakeholder risks can occur due to ineffective communication about materials or project changes.
Some companies use contract clauses to ensure clear and consistent communication with clients and prevent sudden changes. Consequently, the companies can avoid or minimize stakeholder risks.
Other significant construction risks include:
Detailed identification and classification of risks prior to a comprehensive analysis form the foundation of a well-defined risk management process.
Here are the five key steps of the construction risk management process:
The first step identifies every possible issue after doing research, talking to crew, and exploring historical data from past construction projects. Furthermore, this identification list is always open to edits and updates.
As all risks are not equal, a construction risk assessment matrix helps in assessing the likelihood of each risk and the size of the impact on a project. Furthermore, it is important to understand diverse types and phases of risk.
A risk mitigation plan consists of a contingency plan to reduce the likelihood and impact of identified risks, with top priority given to risks defined as highly likely and having the greatest impact.
Monitoring the effectiveness of a risk mitigation plan is an on-going process involving relevant stakeholders and other leaders to help empower the project team for risk management.
Further consultations and updates may be required in the event of a risk moving to a different spot on the risk assessment matrix.
Reporting allows construction crew and stakeholders to evaluate the effectiveness of the contingency plan.
While a spreadsheet works well for creating such reports, construction project management software is a more efficient option to gather data automatically, create progress dashboards, and generate distributable reports.
Let us look at the major differences between qualitative risk analysis and quantitative risk analysis.
Qualitative Risk Analysis
Quantitative Risk Analysis
It considers all the risks identified in the risk identification process.
It only considers risks, which are marked for further analysis.
It does not analyze the risks mathematically to identify the likelihood and probability.
It uses probability distribution to characterize a risk’s probability and impact.
An individual risk is assigned a numeric ranking of probability and impact.
It predicts project outcomes in terms of money or time (based on combined effects of risks).
Techniques used include:
Techniques used include:
It is used in almost all the projects.
It is not used in simple and moderately complex projects.
A risk management plan is a document used to mitigate and manage potential risks throughout a project’s duration. After creating the first risk management plan, a company can adjust it for efficient future risk management.
Here are the major benefits of a construction risk management plan:
Having a risk management plan in place helps construction teams feel more confident in their work and trust their leaders or managers with their safety and wellbeing. Moreover, it makes a project stay on schedule.
Companies can complete projects successfully using well-defined risk management plans and attract more clients to improve customer outreach and increase overall revenue.
Planning for potential risks, such as those that cause destruction to the project or surrounding area, helps eliminate or reduce property damage and overall expenses and protect employees.
A construction site is susceptible to several occupational risks. Therefore, a risk management plan is crucial to reducing on-site accidents, thereby preventing employee injuries and project delays.
Tailored construction risk management services are available to minimize the risk of construction financing and investment.
Some of the well-known construction risk management services include:
Construction project risk management is essential to help a contractor or a construction company identify risks and potential threats to construction processes and operations.
Whatever the risk factor, understanding the severity and likelihood of risk occurrence makes it easier to track project milestones and maintain the project schedule.
It is difficult to maintain project progress without an effective risk management plan.
As such, architects, construction engineers, general contractors (including commercial general contractors), project managers, and other construction professionals rely on a comprehensive risk management process to control different types of risk and minimize negative impact on construction project performance.
Commonly used risk management (risk analysis) techniques include the Delphi technique, fly analysis, SWIFT analysis, decision tree analysis, Monte Carlo analysis, and sensitivity analysis.
Risk management in construction is not only necessary to ensure current project success but also be future ready for subsequent projects.