A comprehensive guide to construction risk management

A comprehensive guide to construction risk management

The term “construction risk management” describes various activities associated with proactively combating logistical, financial, safety, and other challenges associated with operating a construction company.

Keep reading to learn more about risk management in construction, what activities it entails, and how you can create a comprehensive construction risk management plan.

What is construction risk management?

At a high level, risk management in construction entails:

  • identifying relevant risks
  • assessing the potential impacts of those risks on your company and/or a specific project
  • creating and implementing mitigation plans to proactively address the risks
  • monitoring the results of your mitigation strategies and course-correcting as needed

We’ll explore each step in greater detail shortly. First, let’s take a closer look at the types of risks construction companies typically face, both broadly (i.e. at the organization level) and acutely (i.e. project-specific).

Common types of risks in construction

Safety risks

Safety is a critical concern of any construction manager given how devastating (personally, financially, and logistically) physical injuries on job sites can be. Safety risks must be addressed both on a very granular level (i.e. specific to each job site and the type of equipment being used there) and at a high level (i.e. ensuring the right protocols are in place for responding to incidents and that regulations are being followed).

Legal risks

Construction projects both large and small often involve contracts. Running afoul of a contract’s terms can carry severe legal consequences. Risk management in this area entails assessing the potential legal challenges associated with contracts and ensuring measures are in place to remain compliant.

Environmental risks

Many construction projects come with environmental risks (i.e. accidentally polluting waterways or causing landslides). Environmental risk management decreases the likelihood of these outcomes and ensures there are rapid response strategies in place in case they do occur.

Resource risks

From labor to money, materials, and equipment, most resources construction companies work with are finite. Mismanaging resources can have severe consequences, which is a risk that needs to be addressed.

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Steps involved in construction risk management

1. Identify the relevant risks

Before you create a construction risk management plan, you of course need to understand what risks you’ll be addressing. There are a variety of strategies construction managers use to achieve this, including conducting market research and gathering feedback from stakeholders.

At the end of this step, you should have a clear understanding of what risks you’ll be managing in subsequent stages.

2. Assess the potential impact of each risk and rank them accordingly

Not all risks need to be addressed with equal urgency. During this stage, you’ll need to assess each risk you previously identified and rank them all in order of importance.

This can be tricky since impacts can’t always be compared in an apples-to-apples fashion. It’s important to get feedback from many stakeholders at this stage to ensure you fully understand how risks are perceived by various business units.

3. Determine the ideal response for each risk

Construction managers typically take one of the following approaches when addressing a given risk.

Avoiding the risk entirely

If a risk would be catastrophic to your construction company, it may be wise to avoid it entirely. For example, if you know construction projects beyond a certain size are likely to drain your company’s resources and result in poor profitability, avoiding the risk would entail simply not bidding for or accepting those projects.

Transferring the risk

If your company isn’t well-suited to take on a particular risk, offloading it to a different party may make sense.

You could do this contractually by explicitly declaring who is responsible for a particular risk (and under what circumstances) in legal documentation. You could also transfer risk by purchasing insurance (which may even be a regulatory requirement for certain risks).

Actively mitigating the risk

There will be some risks your company has the resources to mitigate on its own. Strategies you might use to do that include:

  • implementing processes for assessing and responding to situational risks
  • training workers on proper risk mitigation strategies
  • conducting audits regularly to ensure compliance with processes and training
  • making strategic investments (i.e. equipment, tools, personnel) that will mitigate the risk

Accepting the risk

Not all risks are worth spending time and money to mitigate. For example, some risks are simply unavoidable. Others are very unlikely to impact your business. Others still would cost more to mitigate than simply pay to clean up when impacts do happen.

In these circumstances, accepting the risk may be the right business decision as long as you aren’t overlooking any regulatory obligations your company has.

4. Implement the response you’ve identified as being ideal

While planning is important, the most crucial component of risk management in construction projects is actually implementing the measures you’ve identified as being important.

Following your planning sessions in the previous steps, you should carefully allocate various parts of the chosen response to each stakeholder based on who will be most appropriately held responsible for outcomes (positive or negative).

As part of implementing this plan, you may find it helpful to utilize resource management software that can keep everyone centralized and serve as a single source of truth for information pertaining to various parts of your business.

It may also make sense at this stage to set expectations regarding audits and regular check-ins on compliance.

5. Monitor your risk mitigation strategies and course-correct periodically

Construction risk management isn’t a set-it-and-forget-it concept. Rather, you’ll need to monitor the effectiveness of your strategies and periodically course-correct as needed.

Sometimes, that may entail changing your response to a perceived risk (i.e. going from actively mitigating risk to accepting it if it becomes impractical to avoid). Other times, it may entail adjusting your auditing process (i.e. paying more or less attention to risks as the level of damage they could do to your business varies).

Bridgit Bench is the leading resource management software for construction companies

Bridgit Bench is North America’s leading construction resource management software. It helps construction companies mitigate risks that arise from the mismanagement of resources. Features of Bridgit Bench include:

  • resource demand forecasting, which can help you manage the risk associated with poorly optimized resource allocation
  • labor scheduling, which can help you avoid mistakes such as improperly scheduling workers
  • human resource and project database management, which will help you audit your organization’s information at the click of a button

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Brandon-Richard Austin

Brandon-Richard Austin is a writer and content strategist focused on the construction sector. He’s passionate about educating readers on construction management techniques and best practices.