Construction projects are complex endeavors with many moving parts. As any project manager knows, things rarely go 100% according to plan. That’s why risk management is so critical in construction. When done right, it can mean the difference between a successful project and a complete disaster.
In this guide, we’ll break down the key principles and best practices around construction risk management. You’ll learn what the major risk types are, how to identify and assess risks, and effective strategies to control them. Our aim is to give you the tools to proactively manage risk on your next construction project. Let’s get started!
The biggest risks in construction projects
Construction projects face various types of risks that must be managed. Here are some of the most common ones:
Safety hazards put workers at risk
The nature of construction work means safety risks are ubiquitous. Potential safety hazards like working at heights, electrical hazards, or trench collapses can seriously injure or kill workers if not properly controlled.
According to OSHA, 20% of worker fatalities in private industry in 2020 were in construction. And the leading causes were falls, electrocution, being struck by an object, and getting caught in between objects.
Managing safety risks should always be the top priority. Sites with strong safety cultures have significantly lower incident rates.
Cost overruns blow up budgets
It’s no secret that construction projects often go over budget. One study by McKinsey found that large projects typically run 45% over budget and take 20% longer than expected.
The main drivers of cost overruns in construction are inadequate planning, schedule delays, poor cost estimating, scope changes, and unexpected conditions on site.
Going too far over budget can spell disaster for a project, so keeping a handle on finances is key.
Permit issues and contract disputes create legal risks
Navigating the legal and regulatory requirements is another challenge. Problems like permit delays, noncompliance with building codes, or contractual disputes can bring construction to a grinding halt.
Legal risks like these add costs through fines, litigation, or delays. Careful contract drafting and review of all rules and permits is essential to avoid them.
Resource and scheduling problems disrupt projects
Even with the best preparations, things rarely go 100% to plan during execution. Typical project management issues like inadequate materials, equipment breakdowns, or lagging behind schedule can impede progress.
Managing resources efficiently and adjusting plans when needed is crucial. Falling too far behind schedule leads to budget overruns down the line.
Bad weather can wreak havoc
Storms, floods, wildfires and other environmental factors are impossible to predict. But they can completely derail construction schedules and damage work in place.
Accounting for potential weather delays and having emergency response plans for extreme events can help minimize disruptions when mother nature strikes.
Now that you know the major risk areas, let’s go over how to manage them effectively.
Identifying and assessing risks is the first step
The starting point for controlling risks is to systematically identify anything that could negatively impact your project.
A few techniques that can help with risk identification are:
- Brainstorming with the project team
- Checking lessons learned records from past projects
- Using risk breakdown structure checklists
- Examining the project plan for vulnerable areas
- Consulting experts on likely issues
Once risks are identified, the next step is to analyze and evaluate them to determine priority.
Risk analysis considers the likelihood of the risk occurring and the potential impact if it does. These factors help categorize risks from minor to severe.
A risk matrix is a useful tool to map risks based on their likelihood and impact ratings. This makes it easy to visualize the most serious risks needing attention.
Developing responses for key risks
With priority risks identified, smart risk response strategies can be developed. There are four basic options:
- Avoid the risk by eliminating the cause
- Transfer the risk through insurance or contracts
- Mitigate the risk by reducing likelihood or impact
- Accept the risk and budget for impact
The best strategies depend on factors like risk likelihood, potential impact, and resources available.
For high priority risks, specific risk owners should be assigned responsibility for managing that risk with the chosen strategy.
Let’s look at effective response strategies for major construction risk areas.
Keeping workers safe
For safety risks, the preferred approach is to eliminate or control hazards through proper design, equipment, and operating procedures.
Critical elements of an effective construction safety plan include:
- Comprehensive safety training for all workers
- Providing proper protective equipment
- Inspecting sites routinely for hazards
- Correcting unsafe conditions immediately
A strong safety culture where all levels take responsibility for identifying and reporting unsafe conditions is key. This helps proactively identify issues before incidents occur.
Controlling costs with good estimating and monitoring
Managing financial risks starts with realistic cost estimates reflecting all necessary contingency and escalation allowances.
During execution, techniques like earned value management help assess if the project is on budget. Steps can then be taken to correct overruns before they grow.
For large variances, a formal change control process is recommended. This ensures changes are approved and tied to specific budget allocations before proceeding.
Ongoing cashflow monitoring is also vital to avoid problems paying for labor and materials.
Avoiding disputes through proper contracts and permits
The best way to mitigate legal risks is to engage legal expertise early when drafting contracts and agreements. Ensuring appropriate insurance coverage is also key.
During execution, staying current on permits and compliance obligations prevents regulatory issues. A permit compliance matrix helps track requirements and deadlines.
If disputes arise, quick resolution should be sought through negotiation where possible before pursuing formal claims.
Optimizing resources and adjusting schedules
There are several ways to reduce project management risks related to resources and scheduling:
- Detailed project planning with resource leveling
- Building in schedule contingency for uncertainties
- Monitoring progress closely to stay on track
- Having alternate vendors/staffing plans for critical resources
- Updating schedules quickly as changes occur
The focus should be on being agile – catching delays early and adjusting plans before they compound.
Preparing for weather impacts
While you can’t control the weather, you can minimize disruptions through good preparation.
- Evaluate historical weather data for the location
- Account for likely delays in project schedules
- Have contingency plans for likely scenarios
- Watch the forecasts closely for advance warning
Also ensure proper emergency response plans are in place to secure sites and equipment in case of extreme weather events.
The bottom line – hope for the best but plan for the worst when it comes to weather.
Staying on top of risks through monitoring and control
Identifying and planning responses for priority risks is only half the battle. To manage risks effectively over the project lifecycle you need to:
- Track identified risks in a register including status and response plans
- Monitor leading indicators that may trigger risks
- Execute response plans for risks as they occur
- Control secondary impacts of risks
- Update risk register with new risks or changes
This allows you to stay proactive. The key is frequent monitoring so new issues can be flagged early before they spiral out of control.
Risk owners are accountable for managing specific risks end-to-end. But everyone should be looking out for new risks.
Regular risk reporting to stakeholders is also important to ensure transparency.
Leveraging technology for better risk management
Advanced tools provide a huge assist in managing construction risks.
Building information modeling (BIM), for example, allows for advanced clash detection and visualization. This reduces errors and safety hazards.
Project management software centralizes information for better visibility. Features like Gantt charts, dashboards, and automated alerts help control issues proactively.
Risk management applications provide capabilities like risk register tracking, response planning, quantitative analysis, and reporting.
And on site, mobile apps allow instant access to project data and collaboration. Real-time information improves decision making and response coordination.
Let’s wrap it up
Dealing with risk is an inevitable part of construction projects. But armed with the right knowledge and discipline, project teams can minimize negative impacts through proactive risk management.
We covered a ton of ground here on key principles like:
- Identifying and prioritizing major project risks
- Developing smart responses to control priority risks
- Using monitoring and control to stay on top of issues
- Leveraging technology to enable better risk management
The bottom line is that effective risk management takes work. But the payoff is avoiding major headaches down the road – keeping your project on-track for success.
Hopefully this gave you some useful insights on managing risk in your construction projects. Stay safe out there and watch out for each other!