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A Guide to Risk Management in Construction

February 16, 2022

Every construction project is complex and unique, and none are risk free. A risk is any uncertain condition or event that may affect your project. Even a thoughtfully planned project can run into unexpected problems. This, however, doesn’t mean that you are helpless against risks. The key is to use risk planning to pinpoint possible issues and determine the right course of action to prevent, handle and minimize the risks that may appear.

The ability of firms to manage project risks is what the success of construction projects depends on. That’s where consulting companies come into play. Reliable construction consultants in the United States, Canada, and Mexico can propose strategic risk management and advisory solutions to ensure the best results from your project. Here’s what you need to know about management concepts and risks in construction.

What are the types of risk in construction?

Though threats can be difficult to eliminate, they’re easier to control and mitigate once the risks are identified. The optimal time to do this is early on, preferably during the pre-construction phase.

There are 3 major areas of construction risk:

1. External Risks

External risks include factors well outside the control of you and your construction team, such as increased supply prices, labor shortages, and competition, as well as events such as earthquakes, floods or other weather conditions that can impact your construction site or schedule. By performing business strategy exercises such as PESTLE analysis, your team can identify some of the macro-level external risks, such as economic risks and environmental risks.

2. Internal Risks

Identifying internal construction risks involves looking at the construction team and stakeholders’ qualifications, management styles and what risks they carry. For instance, the general contractor’s resources may already be stretched thin, or the design team may have inadequate experience in this particular type of project. Another thing to consider are possible conflicts between the involved parties. 

3. Project Risks

Closely related to internal risks, these construction risks are related to the unique factors of the project. For instance, if the construction site is located in a remote location or is limited by space, the project may run into logistical problems. Another project risk is when the construction team encounters an issue with the site that wasn’t found during due diligence process. Analyzing the contract for risks for each stakeholder is vital. A few problem clauses that go unchecked can greatly impact the project workflow and cause delays.

Risk analysis

The next step is to rank key construction risks for your real estate venture in order of importance. Each risk should be analyzed and evaluated based on the likelihood and impact on your project. For instance, an increase in the prices of building materials can hurt your profit margins.

Depending on the scope of the project, type of risk, specific requirements and criteria, the project team and construction consultants may use a qualitative or quantitative approach to determine the probability and impact of the identified risks.

How do you manage risks in construction?

After risks have been identified, assessed and prioritized, your team should establish a plan of action to minimize the impact of an unexpected event. There are four main management strategies: risk avoidance/prevention, sharing or transfer, reduction/mitigation, and retention.

  1. Risk avoidance usually involves developing an alternative strategy with a high probability of success. You can decide to avoid or stop a certain activity or use an entirely different approach.
  2. You can also transfer the risk to those who have a greater capacity or capability to manage it. In construction, there are two common methods of transferring risk – purchasing insurance policies and working with other stakeholders to carry out the transfer via contractual clauses.
  3. Risk reduction means taking steps to decrease the chances of unwanted outcomes. This is a common strategy because it is appropriate for a vast range of risks. It enables you to continue with the activity while implementing measures to minimize the chances of indecent. For example, hiring third party quality assurance reduces the risk of construction mistakes being made that can lead to defect litigation. Keep in mind that if your control strategy turns out to be ineffective, you are likely to face the unwanted event.
  4. Risk retention. When a risk cannot be avoided or transferred, the best solution is to accept it and work around it to minimize its impact. Sometimes a stakeholder chooses to retain a risk is when the costs of avoiding, reducing or transferring exceed the benefits; this is usually the case when the impact of the unwanted outcome is low. Managing retained risks often involve a mitigation plan.

A process to monitor and manage risks

You may think that the work is done after you put measures in place. There’s one more step in the risk management process: supervision. Regardless of what phase of real estate development you are in, the situation will evolve over time, requiring you to update and adjust your risk management plan.

As a construction project owner, lender or stakeholder, continuous monitoring of the project progress is crucial for keeping track of anticipated risks and identifying new potential risks. If you are not well versed in construction, it’s strongly advised that you enlist the services of an expert risk assessment consultant.

Optimize risk management with the #1 construction consulting company

Reach out to VERTEX, an established construction consulting company in the United States, Mexico, Canada, and across the globe that offers custom service solutions to match your needs and goals. Maximize the efficiency of risk management with the help of our diverse team of knowledgeable and experienced consultants from all construction-related fields, including quality assurance and construction loss control consulting.

To learn more about VERTEX’s Construction Consulting services or to speak with a Construction Expert, call 888.298.5162 or submit an inquiry.

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