Author, Daniel Frazee, Executive Vice President, Rancho Mesa Insurance Services, Inc.
As a business or firm, you are most likely aware of many risks that come with construction projects. Whether it is meeting the terms of a contract, maintaining employee safety on the job site, or dealing with natural disasters, every project has its own set of hazards. If not managed, these risks can compromise your projects and prove fatal to your bottom line. Thus, construction risk management is a must-have for any company, but an effective plan must have easy-to-follow, yet detailed processes to help you control the risks, make decisions on how to deal with them, and turn them around to uplift your company. With the presence of rising material costs, more complex projects and increased safety concerns, having a risk management plan is more crucial than ever.
What is Construction Risk Management?
Risk management is the process of determining the risks present in your business and evaluating the procedures to minimize their impact. In the construction world, the process involves planning, monitoring and controlling instances of risk. At the center of this process is your risk management plan, a formal document that details the risks and your processes for addressing them.
Sources of construction risks may include:
Safety Risk - any risks or hazards that can lead to worker accidents at a construction site;
Financial Risk - internal and external factors like sales, problems with the economy, unexpected cost increases and competition from other firms;
Legal Risk - disputes in the fulfillment of contracts with clients;
Project Risk - hazards such as poor management of resources, miscalculation of time, lack of proper policies, etc.; and
Environmental Risk - natural phenomena that damage construction sites like floods and earthquakes.
How to Manage Risks
Before you can manage risk, companies must develop a risk management plan. This process can be broken down into six steps.
Identify the Risks
Risk identification should take place during the preconstruction phase of a project to allow ample time to manage any potential risks before accepting them. One effective way is to hold brainstorming sessions with your project team with an emphasis on identifying all the possible scenarios that could impact the project at hand. Once the brainstorm is complete, hold regular meetings to continually identify new risks that develop.Prioritize Risks in Order of Importance
High-probability risks should be handled first while low-impact, low probability risks should be addressed last. As an example, an unexpected price increase in the materials for your project can severely hurt your profit margins and might be considered a high priority.Determine your Response Strategy
Once you have evaluated the priority of risks, your team must decide a response strategy for each hazard. You can avoid the risk altogether, mitigate the risk, transfer the risk if possible via insurance and/or performance bonds, or accept the risk.Execute the Plan
Much like a sports team on game day, your company now has to execute the plan after you have developed your strategy. Your plan must detail crucial information for each team member and provide specific solutions to mitigate, transfer, or accept risks.Involve Members of the Team
Great plans are developed with multiple opinions, involving contribution from all team members typically including the ownership group, the financial officers, and the field team. Members are managing cash flows, schedules, inspections, project logs, contracts and regulatory documents.Create Contingencies and Revise
Strong risk management programs have contingency plans. That is, alternative methods for finishing a project despite accepting the risk. Consistent monitoring and revisions to your plan will help increase resilience against any possible risk and ensure that your “document” evolves and changes over time.
Benefits of Risk Management in Construction
Along with the actual building process, risk management should be seen as one of the most critical steps of a construction project. Identifying, assessing, controlling and monitoring risks strengthen awareness and teamwork among those key members of your organization. Working in step with your insurance broker for resources, templates, and feedback can be key to integrating your plan with the company’s safety initiatives. Request a sample Accident Prevention Template to start your Construction Risk Management plan. And, in turn, communicating an effective and tested plan to the insurance marketplace can position you and your broker to leverage the most competitive terms and pricing within your renewal cycle.
For more information or questions related to this article, please contact me at 619-937-0172 or via email dfrazee@ranchomesa.com.