A Guide to Construction Risk Management

Construction disasters can be massive. The problem-plagued City Center Las Vegas project in the late 2000s cost six construction workers their lives, leading to a strike for worker safety.

In 2006, a 10-ton construction platform plummeted to the streets of Boston, killing three people. And 51 workers died in 1978 when a cooling tower under construction collapsed in West Virginia.

Even if your project isn't at risk of a massive catastrophe, that's not the only risks a construction manager should be concerned about. Minor issues can throw your project off schedule and blow up your budget.

And even if you don’t think your workers are at risk, the managers of those projects probably didn’t think theirs were either -- the only way to know for sure is with proper risk management.

Creating a plan to handle risks is a key part of construction management -- particularly the construction planning and scheduling part. Here’s what you need to know about the process and how to do it right.

Overview: What is construction risk management?

Construction risk management refers to identifying potential factors that could disrupt a construction project or pose safety concerns for workers.

Risk management in the construction industry involves evaluating those factors and creating plans to either prevent them from occurring or to mitigate them if they impact the project. Risk management involves the creation of a document that identifies the risks and procedures for dealing with them.

The 4 types of risks in construction

Construction sites have many risks, but they usually fall into four main categories.

1. Safety

Safety risks are the hazards on the construction site that can injure or kill your workers. Mitigating these risks should be the first priority for any construction manager for obvious reasons.

Safety risks can involve catastrophic accidents, but they can also include gradual damage to a worker's body over time, such as back disorders from heavy lifting.

Here are three examples of safety risks:

• Excavation and trenches that may trap or even bury workers in a failure.
• Falling objects that may strike workers from above, sometimes fatally.
• Lack of safety harnesses or inconsistent usage that results in falls.

2. Budget

Budget risks are always at the forefront of construction managers’ minds. They may cause costs to increase, leading either to dissatisfied clients or a shrinking profit margin, or both. Construction managers must take proactive steps to avoid the many things that can affect the budget during a project.

Here are three examples of budget risks:

• Change orders, or modifications to the contract, which result in additional costs due to the extra work.
• Poor subcontractor performance that forces construction managers to either bring in another subcontractor at additional cost or pull workers from other tasks to do the work.
• Underfinancing is a big cause of budget overruns. Construction managers must accurately estimate the cost of a project before taking it on.

3. Schedule

Construction schedule risks are closely related to budget risks. Each impacts the other, and both often have similar causes. However, schedule risks don't necessarily result in budget issues and vice versa, so it deserves its own category.

Generally, unforeseen events are a big cause of schedule delays, but planning plays into it as well.

Here are three examples of schedule risks:

• Bad weather is factored into all construction projects, but sometimes Mother Nature may be worse than average for a stretch of the project, leading to delays.
• Unavailable resources leave workers without the tools to do the job, meaning the work has to wait until those resources become available.
• Mistakes by your team forces them to do work over again, holding up other essential tasks. Sometimes these are their fault, and sometimes it's yours for not doing proper planning or setting up a construction workflow to help them do their jobs.

4. Legal

Construction projects are big undertakings that involve a lot of money, safety regulations, permits, and city and county ordinances. Add these all together, and it means construction managers face tons of legal risks.

Risks posed by legal issues range from small fines or a temporary stop in work to massive lawsuits, or even the shutdown of a firm for significant violations.

Here are three examples of legal risks:

• Environmental regulations put construction firms at risk of big fines should workers accidentally contaminate the surrounding environment with, say, a fuel spill.
• Inspections may reveal that the building is not up to code, forcing work to grind to a halt.
• OSHA (Occupational Safety and Health Administration) violations can shut down a project or even a firm, so construction managers must ensure all safety regulations are met, which includes safety equipment and proper practices.

How to create and execute a construction risk management plan

A construction risk management plan doesn't have to be complicated, but make it thorough. Even small risks can throw your project off kilter. Take these steps to put a plan in place that will protect your project from disruption.

1. Brainstorm with your team

The first step is to list every construction risk on paper. Include each one you can think of, and then set up a meeting with everyone on your team. Brainstorm all potential risks, no matter how big or small, and write them all down so you can sort them out later.

Refer to past risk management plans, if you have them, to find other ideas. Also, examine past projects to determine what issues they encountered.

2. Break the risks into the four categories

With each risk identified, it's time to organize. Determine which category each risk belongs to -- safety, budget, schedule, or legal -- and organize them in a document that everyone can refer to. Put this document in a shared drive where it will be easy to share and access from anywhere.

3. Grade each risk

Not all risks are created equal, so organize the document further by grading each risk in two ways: first, describe the likelihood of it happening during the project (e.g., 10%) -- it's OK to guesstimate.

And second, lay out how much it would affect the project. Grade it on a scale of 1-10, and then describe what it would do to the project in your own words.

4. Create two plans for each risk

Come up with two construction risk solutions to handle each scenario. The first plan should describe what you will do to lower the chance of this risk occurring, such as replacing an aging piece of equipment before the project begins to avoid the chance of it breaking down mid-project. Assign this task to someone on your team.

The second plan describes what you will do if the issue happens in the middle of your project -- i.e., what mitigation measures you will take, such as having another subcontractor on call if your primary one is unavailable or unable to do the work.

5. Review and adjust

Keep accurate records of each risk. Did it happen? What did you do? What was the result? Examine your risk management plan when the project ends and determine if you did a good job or if more work is needed. More than likely, it's the latter, and that's OK. The more you adjust it, the better you'll get with each ensuing project.

Use construction software to draft a plan

Don’t try to manage the risk management process with spreadsheets -- construction management software has advanced features that will help you do it better, and The Ascent has reviewed the top platforms.

In addition to managing risk, software will help you create a schedule, draft a construction daily report, organize your finances, and deal with general construction project management. Try a few options and then settle on one to change your risk management procedures for the better.