Are You Managing Your Construction Risk?
Every construction project poses unique challenges and risks. Managing these risks is vital for a construction company to survive and thrive. Hoping a risk does not become a reality or outright ignoring it is a recipe for financial disaster. However, businesses cannot begin to manage their risks without knowing the possible sources as well as how to handle them. Below is a breakdown of common threats within the construction industry and ways to keep those risks in check.
Sources of Construction Risk
Knowing what to expect is a major part of managing construction risk. Below are the various risk factors construction businesses face.
- Competitors: Rival companies are impossible to avoid. However, they can present a major risk to profitability. Business owners may feel pressure to match competitor prices or project completion guarantees, but this can result in slim profitability margins or create problems sourcing materials in time.
- Contractual risk: Continuing with the above, failing to deliver a project on time can result in fees and penalties. Contracts that demand unrealistic timelines are rife with risk.
- Cyber liability: A successful cyber attack can damage a construction company’s reputation as well as finances. As construction businesses digitize more and more of their data, they need the appropriate corresponding cyber liability coverage.
- Fiscal risk: Several elements are a threat to a construction company’s bottom line. For example, unchecked growth, increasing interest rates, decreasing sales, and the economy can all spell financial ruin for a construction company.
- Natural disasters: Earthquakes and floods are among the most common natural disasters that can jeopardize a construction business. Extreme weather can damage project sites or delay work.
- Project management risk: Failing to manage a project properly can result in injuries, damages, and delays—all of which affect a business’ bottom line. Poor project management includes inadequate guidelines and policies, failing to enforce said policies, and misjudging time and materials needed to complete a project.
- Work-related risk: Workers not taking the proper precautions on the jobsite, misusing equipment, and so on can result in job-related injuries and claims.
Managing Construction Risks
There are four schools of thought regarding managing construction risk. These are avoid, transfer, mitigate, or accept the risk.
- Avoid: Companies can avoid certain risks altogether. For example, if the company knows an area is prone to flooding, they may decline construction projects for that area.
- Transfer: Most companies transfer their risk by investing in various insurance policies.
- Mitigate: While some risks are unavoidable, construction companies can reduce their effect. For instance, creating and enforcing safety procedures can reduce safety hazards and incidents on job sites.
- Accept: Some risks are not controllable, such as unexpected weather conditions delaying a project. Most construction companies accept these risks, but there are ways to reduce the likelihood. For example, businesses can plan construction projects for when weather is usually mild.
Most construction companies determine which method of risk management they will take based on a reward to risk ratio. If a project will net a small profit, it is not worth taking on a high level of risk. However, if the profit margin is large, a company may choose to take on more risk. To learn more about construction risk management, contact The Reilly Company.