Construction is a risky endeavor, with every construction project having its challenges and opportunities. One of the most important aspects of a construction project is identifying opportunities and risks and managing them accordingly. If improperly handled, a risk can spell doom for a construction project. For proper project management, we need to identify, control and monitor risks properly.
Risks are not only negative uncertainties. Proper risk management leads to increased profits, good relationships with clients, and repeat projects. Risk management in the construction industry is more complex than in other sectors. For instance, in manufacturing projects, the risks are mainly centered around labor and supply shock, but in construction, the risks are dynamic and unpredictable.
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Hazard vs. uncertainty vs. risk
A hazard is a circumstance that poses a life-threatening situation or threat to the environment, property, or personal integrity. From a safety perspective, a problem that poses a danger to life or physical impairment to people on a construction site is a hazard. Hazards are situations with the potential to cascade into incidents or disasters.
Uncertainty is the likelihood of an event with imperfect or little information occurring. An uncertainty has more than one possible outcome likely to occur.
On the other hand, a risk is the outcome of an event predicted based on statistical probability. With risks, there is high predictability of failure. Any high probability event that is likely to impede the project's progress quality and the cost is a risk. Hazards and uncertainties are situations we need to be wary of, but we do not consider them as risks.
Common Risks (and example solutions)
As earlier discussed, construction is a volatile business coupled with a lot of risks. Most of these risks are repeat offenders, as we will discuss. Below are some of the common dangers likely to crop up during the construction period.
Undoubtedly, delays are the most common construction risks. As much as contracts account for timelines and schedules, they rarely consider all variables. This, in turn, creates delays that affect almost everyone involved. Delays come about due to poor project management, change orders, accidents, or improper scheduling.
The best way to curb delays is to prepare for them beforehand. Communication should also always be open among the project's stakeholders to minimize the cumulative effect of delays on a project.
2. Improper paperwork
One characteristic of construction projects is the voluminous paperwork. It ranges from change orders, appraisals, licenses, and approvals. Some contractors mismanage their paperwork by storing their documents on the dashboard of their pickup trucks. Losing one receipt or paper can be time-consuming and costly. Risks are different in each job. When we consider big projects with many subcontractors, with varying processes of submission and compliances, paperwork can be a hassle. When it comes to licensing and insurance, if there is improper documentation, it can lead to legal issues.
The best way to avoid such is by being organized. Every contractor should have a document checklist that they countercheck to ensure all paperwork is in order.
3. Material Pricing and Profitability
Material pricing and profitability are some of the most significant risks in a contract. When a contractor enters a lumpsum contract, they are at the mercy of fluctuating material prices if they do not leave enough wiggle room to cover emerging costs. Some issues that may drive up costs are natural disasters, increased demand for materials in an area, or labor issues.
A contractor can factor in spikes in prices by increasing the mark up to absorb an increase in prices.
4. Shortages in labor
Finding qualified labor is always an issue in the construction industry. Most contractors do not have full-time staff, and they hire people back and forth depending on project scope and complexity. If a contractor lands on a project but does not have enough workforce to finish the project, it will inevitably slow down everyone in the project. Pushing out the timeline negatively affects the profitability of a project. When unions are involved, solidarity among the workforce can cause the entire crew to walk away during a strike.
A contractor can curb labor shortages by developing community partnerships and awarding employees with a fair wage package.
5. Poor project management
Seasoned subcontractors always have a problem when working with a new contractor. They do not know his type of work experience and his organization levels. A poorly organized contractor poses a risk to the project's success.
Improper project management leads to miscommunication and conflicts. This can cause ripple effects across other projects that a contractor is managing as well as scheduling problems. A contractor ought to put systems in place that will ensure the project runs seamlessly according to plan.
6. Unclear scope of work
When the scope of work is poorly defined, it is a management issue that will cause that will affect a project's success. It is hard for one to stay on track on a project with a poorly defined scope.
One of the best ways to deal with an unclear scope of work is entering into cost-plus contracts. It is dangerous to enter into a lumpsum contract when your area of work is ambiguous. The unclear scope of work will prove to be a profitability killer. This is because of the increase in material pricing, site conditions, and other project variables.
Another way to improve profitability is by enhancing communication with project stakeholders on every level. This helps you stay profitable.
7. Change orders
Change orders are unavoidable in the construction industry. Improperly managing change orders can hamper a project's success as it means missed opportunities and budget overruns.
When change orders crop up, it is essential to write them down and sign. If not documented, a contractor can find themselves completing work that the client disapproved of. Inevitably, this will lead to payment disputes.
The best way to manage change orders is to keep all the necessary documentation and submit changes to avoid payment disputes.
8. Payment disputes
Payment takes a long time in construction. These disputes affect contractors as they take a long time before contractors receive a paycheck. The loans and interest rates cut into profit margins and sometimes cripples some operations of a construction company. With time a contractor might be in a position where they barely break even on a project while relying on the cash to front other projects. Contractors can avoid payment disputes by issuing payment notices on time. A contract should also have a clearly defined payment schedule, and a breach of the program will be termed a breach of contract.
9. Health and safety hazards
Construction sites are dynamic, and conditions can change rapidly, leading to unprecedented health and safety hazards. Major accidents can lead to severe fatalities. The goal is to ensure that the project runs accident-free from inception to closeout.
In addition to potential harm towards the workers, accidents lead to reduced productivity in the project. This is due to the low morale of the workers in the project. The low productivity also leads to delays in the project and, subsequently, budget overruns.
The best way to curb health and safety hazards is to train the staff on how to avoid accidents and deal with them when they occur. It is important to notify all the staff and subcontractors of their commitment to safety before project kickoff.
The financial failure rate in construction projects is alarmingly high. Companies find the easiest way to get out of economic problems is by filing for bankruptcy. After filing for bankruptcy, some companies restructure and come back as more vital companies, whereas others go entirely underwater. In the event bankruptcy occurs, it freezes all the progress on a project. Bankruptcy can lead to repossession of equipment on-site or even already financed material. Bankruptcy is a rare occurrence, but it is a risk on construction projects.
How to identify risks
As we have already discussed the common construction risks, we should identify the risks unique to a project. Identifying risks should be done as early as possible in a project. The project team mainly identifies project risks during the preconstruction stage. Failure to identify and manage risk on time inherently means accepting the risk present in a project.
The best way to identify risks is by holding brainstorming sessions with the project stakeholders. The goal is not to solve any problem but to identify many possible scenarios and their impact on the project. During brainstorming, the project team reviews similar projects, their scope, location, risks incurred, and necessary measures undertaken to curb the risks.
In addition to this, the project team should hold regular meetings throughout the construction process. Holding these meetings handles all emerging issues and new issues that might emerge in the foreseeable future.
How to manage construction risks
Sometimes when a risk materializes to reality, it can deal a potential blow to a project. Sometimes it is a collection of small minimal risks that plummet the project. For a company to have a good growth equity curve, it must invest in risk management. So what are the best ways to manage construction risks? The best way is to set up good processes that help you seamlessly make good decisions. Below are the steps you should take to manage construction risks.
Avoid the risk
Avoiding an accident is easier than dealing with one. The first step in preventing risks is listing all the potential sources of risks. We classify risks as occupational, financial, contractual, project-related, natural, or stakeholder risks. These risks are then ranked in order of probability of occurrence, and steps are put in place to avoid them. Sometimes avoiding risks might mean turning down a project or renegotiating a contract, but if the risk-reward ratio is unfavorable, it is prudent to avoid it altogether.
Transfer the risk
Sometimes, your company might not be able to bear a project-related risk. One way of transferring the risk is by using insurance policies. Insurance policies do not cover all risks, and you need to discuss the liabilities they are willing to bear with your insurance providers. Another way is contractual agreements between the general contractor and subcontractors or suppliers to take partial risks on a project. The best solution should be to discuss with the project stakeholders and agree on the dangers different parties need to bear. The client and general contractor also need to decide on the risks each party is willing to carry.
Minimize the risk
If the project team cannot eliminate the risk, they should employ measures to minimize the risks. Proper training and wearing of safety equipment by the workers considerably lowers the possibility of unwanted occurrences. The team should subdivide risks into actionable items, and the contractor should not overcommit resources in handling multiple risks.
Accept the risk
Sometimes we identify risks but do not accept the risks. Accepting risk is not a decision we should take lightly. The one responsible for carrying a risk should assess the repercussions for bearing the risk. It is easy to accept low impact risks, but high probability and high impact risks should be assessed through careful management, or else they would be detrimental to the project and the party bearing the burden.
Below are answers to some of the frequently asked questions in construction.
Is construction risk avoidable?
Construction risks are inevitable. However, the risks brought about by negligence are entirely avoidable. Many risks occur due to neglect and poor planning.
What are the critical risks in a construction project?
Some common risks in construction are health and safety hazards, payment disputes, change orders, project mismanagement, and labor shortages.
Why are construction projects risky?
Compared to other industries, the construction industry is very dynamic. Other industries deal with predictable risks, but construction projects' risks are unpredictable, making construction a risky endeavor.
Proper risk management requires a high level of planning and communication among project stakeholders. When everyone is on the same page, it is easy to work and identify risks before turning into problems. Risks can yield rewards if adequately managed.