Risk in construction is a four-letter word that promises great things or devastation. On the one hand, construction risk offers opportunities for contractors to build the unimaginable and take their craft to new levels of excellence. But risk also encompasses missed budgets, late completions, and calamities of all types. If construction project risk has you running for cover, you have to first understand it and then know how to manage it.
Types of Construction Project Risks
The historic construction project risks are limitless, but there are seven types guaranteed to show up on every project.
Personnel Performance and Quality Risks
The way people perform on a job determines the job quality. But people are notoriously unpredictable. It’s always baffling when you find out that a fully trained worker missed a quality requirement at the heart of a task. Then, you have the human variables like a carpenter with a headache or a careless electrician. Such risks create problems for the schedule and often lead to rework.
Taking calculated risks, however, can turn them in your favor as it can create novel ways to manage, solve problems, and build. A wise builder sees each risk arising from the human factor, from both its potential rewards and detriments.
Environmental Construction Risk
The environment provides resources needed for building. We regulate it to balance industrial needs with human needs. You can’t just ignore pollution leftover from previous land use. You also face big risks if you destroy habitat or pollute water yourself. So, environmental risks emerge from both the history of a place and the construction process itself.
Other environmental risks arise from weather, climate, and geology. Every time you sink a pylon into the ground or raise a wall, you risk it all falling apart from an earthquake or other natural disaster. Within your own microclimate, you face the ravages of storms, lightning, freezing air, extreme heat, and flooding. All these are literally unmanageable once they begin.
Health and Safety Risks in Construction Projects
By most accounts, construction is a hazardous occupation. Construction workers face musculoskeletal injuries, respiratory damage, eye injuries, hearing loss, head injuries, lacerations, infections, and death. These health and safety risks not only cause pain, suffering, and loss, but they also deliver delays, productivity losses, rework, missed deadlines, and litigation.
Project Scope and Schedule Risks
Many factors pose risks to the project scope and the schedule. Most start very early in the project, as early as during the design phase. A poorly scoped project will either outrun its budget or underperform on completion. A poorly designed project will spin off side risks like rework, dangerous working conditions, and structural failures. Unfortunately, all these risks are hard-baked into the project and take incredible effort to correct.
Believe it or not, people create bad schedules, and many have issues managing schedules properly. Schedules also pick up risks from poor design and poor scope as changes flood into the construction process.
Economic Construction Project Risks
If there is anything for sure, it’s that nothing stays the same for long in economics. Two of the biggest factors of economic risks are inflation and regulatory changes.
Inflation
Inflation happens when the cost of goods rises faster than the purchasing power of the currency. The U.S. and the world undergo cyclical inflation events, and it adds risk to projects because they wind up costing more.
Regulatory Changes
Regulations have both positive and negative effects on construction risks. On the upside, they help keep the playing field level so construction services customers can make their choice.
On the downside, regulations add to costs, and they sometimes end up reducing options. These risks have a silver lining in that they seldom show up unexpectedly.
Job Site Security Risks
Every job site has security risks arising from technology, theft, sabotage, disputes, and vandalism. More extreme security risks can include terrorism, bomb threats, and active shooters.
Political Risks in Construction Projects
Politics plays a big role in economics, which can then affect construction projects. However, political risks also arise from corruption, nepotism, and cronyism at all political levels. As zoning and land use regulations start in the political sphere, this is another way politics can shape construction project risks.
Construction Risk Mitigation
Construction project risk mitigation must begin long before you break ground and start construction. Ideally, you should begin planning for and mitigating risk the moment you begin estimating and bidding.
Identify Relevant Types of Risks in Construction Projects
Each portion of a construction project poses its own risks, so breaking the project into phases and assessing risk for each phase usually works well. Start with the contract risks and work your way through the project, analyzing what risks could arise and why.
Construction Project Risk Mitigation Options
You have at least four methods for managing risk.
Elimination
This method allows you to create plans of action for risks you have the confidence of eliminating. For instance, if you determine that a particular subcontractor has an unacceptably high accident rate, you might decide not to include them in your roster of partners. Sometimes, you will only need one method of elimination. In other cases, you might need both a Plan A and a Plan B.
Construction Risk Transference
You have at least two options here for moving the risk to others.
Insurance
For many risks, insurance is the de facto way to transfer risk. Your general liability policy and auto policies cover a wide range of risks. By requiring partners to insure against the risks they bring to the project, you extend insurance protections across many more risks.
Contractual Risk Transference
You can transfer risks using contracts. Use contract wording that places responsibilities for risks with particular parties. The goal is to assign risk to those who have the greatest control over it.
Construction Risk Avoidance
Avoiding risk in construction projects is like waiting until the traffic has cleared at an intersection before crossing the street. You eliminate the risk by reducing the possibility it will happen to you. To do this, you must first understand the risks and their probability.
Software
Risk management software puts a method to your risk avoidance madness. By creating a process for cataloging and assigning risks, it shows you risks you can avoid and how to do that.
Risk Estimation
When you use risk estimation, you calculate the costs of risks based on their duration, intensity, magnitude, and reach should they come to pass. Then you chart paths to avoid them.
Monte Carlo Simulation
In this risk avoidance scheme, you use mathematical algorithms. It is based on models where you continually substitute values to get a range of outcomes and their probability of occurring. Monte Carlo Simulations allow you to see the variables that influence risks the most. Sometimes, you can manipulate the variables to avoid them.
Last Resort: Risk Acceptance
Construction companies accept risks when they are unlikely to affect the project. A company building in Wisconsin doesn’t give a second thought to the risk of a hurricane, yet those storms have drenched portions of that state over the years. Another company might accept a contract carrying more risk than usual so it could get the experience working on a new project delivery type. It’s important to know exactly why you are accepting a risk.
Construction Risk: Conclusion
Risk management in the construction industry is more challenging than in most other industries. But, a clear view of the risks with an eye to manage or take advantage of them, keeps their consequences in check while offering new opportunities.
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