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Risk Management of Construction

Construction Risk Management or What Could Possibly Go Wrong?

Mitigating risks reduces potential for construction disputes

If you’re a professional builder, you don’t need this article. Or at least you think you don’t. But if you’re an owner, or wondering about this particular aspect of how to be a construction project manager, or thinking about making your dream project happen and curious about the parameters of risk and construction management requirements, we’re here to give you a broad overview. 

Risk is part of being alive. Remember the family legend wherein a tornado lifted the house of your Aunt Beryl’s cousin twice removed off its foundation and plunked it down in a cornfield miles away? When risk turns into good news, it’s called chance or luck. Like your co-worker’s babysitter’s brother who picked all the right numbers in Powerball (with his eyes closed). One basic definition of risk in building is “the effect of uncertainty on predetermined objectives.”

Risk management is an essential factor in construction program management. The more elaborate the project, the more that could potentially go wrong. That’s risk. For a building project, what does a seasoned construction project manager do to offset risk? In brief, they 1) analyze and assess risks and 2) manage them.

In simple terms, a crucial component of construction program management is to:

  • identify risks,
  • determine which of these risks may impact the ability to deliver the project on time, at cost, and as designed,
  • assess the risks’ likelihood and impact,
  • identify which actions may reduce the given risks,
  • map out how damage can be controlled if something goes awry,
  • determine who is responsible for which risks—who owns the risks—before they happen,
  • determine what options are available to insure against risks and implement them according to the owners’ priorities.

When you work with a solid construction project management company like Stonemark, risks due to lack of expertise are mitigated from the outset. But even Stonemark can’t promise that the general contractor won’t catch the flu, that the ship carrying your Italian marble won’t be attacked by pirates or the roads leading to your building site won’t be flooded.

Risks may be financial, legal, safety-related or related to the actual process of planning and building. There can be geological surprises, technological glitches, resource shortages. There could be a revolution. Risk can also be related to potential personality conflicts and disagreements. Here’s how we usually categorize risk into three broad categories:

  1. Program risk. What is the Owner trying to accomplish? Are the clients’ expectations reasonable? Do they make decisions quickly? What resources do they bring? Funding capability? (Yes, I’m talking about you, Client). In short what is the Clients’ overall risk tolerance?
  2. Building risk. What are we building? The risk profile of a ground-up big box retail outlet in the middle of a flat field for a commercial client who builds hundreds a year is very different than a renovation of a dramatic historical hillside residential estate for clients who build one in their lifetime. It is important to define the potential for the unknown, as contractor’s love to produce change orders for “unforeseen conditions.”
  3. Controls risk. How are we going to manage and report on budget? Schedule? What is the strength of the project team? Communication? Funding? Contracts? Insurance? The list goes on.

Mapping it all out comes under the heading of construction document management. Nowadays there’s construction management software that greatly facilitates the job, if you know how to use it.

In terms of construction risk management, options include avoiding risk (changing directions), mitigating risk, planning for risk, accepting risk and insuring for risk. Since it’s a given, risk must be factored into any balanced budget and is a fundamental element in any well-conceived, elaborate construction project. As stated in our more detailed sister article, “the higher the risk, the more important it is to consult a construction manager.” He or she will work with you to create a risk management plan that all parties agree on, monitor project progress and re-evaluate risk as construction advances. An experienced construction project manager is going to be your key resource when it comes to managing risk.
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