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By: Kendall Jones on August 22nd, 2018

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4 Common Risk Factors on Construction Projects

Blog Posts | Operating Insights

All construction projects carry some level of risk. Being able to identify and manage risks requires skill, careful planning, and being able to make good decisions quickly. When risks become reality, they can be detrimental to the successful completion of your project. Properly managed risks can lead to higher profits, stronger relationships with clients and the ability to grow and expand your business.

Here are four common risk factors to watch out for on construction projects along with tips on how to properly manage them and prevent them from derailing your project.

Labor Shortages & Productivity Issues

Not having enough workers available to complete a project or hit productivity goals is a huge risk when taking on new projects. Without the manpower to perform the work, the project can suffer from longer construction schedules and potential delays in delivering the project on time to the owner.

Issues with labor shortages have been plaguing the construction industry since recovery from the last recession began. Many of the skilled workers that were let go or left the industry during the recession either retired or found other careers. Construction companies have been struggling to fill positions to keep up with the growing demand for their services.

Even though the construction industry has added 170,000 so far in 2018, the number of job openings has steadily increased over the past several months. According to the latest Job Openings and Labor Turnover Summary (JOLTS) report from the Bureau of Labor Statistics, there were 263,000 openings in construction in June.

To fill vacancies, many construction firms have been taking on employees with little or no previous construction experience. This isn’t necessarily a bad thing, but there are additional risks that come with having a less experienced crew. These workers won’t have the same skillsets as experienced workers, meaning they will be less productive and will probably need closer supervision when they are first starting out.

Safety is also a risk factor to consider when working with new employees. They lack the training and experience to know all the rules or be able to identify hazardous situations on the jobsite. Safety training is just as, if not more, important as skills training and should be a top priority with new hires.

To combat labor shortages, offer competitive wages and benefits and develop a strong company culture that values employees and rewards hard work and dedication. This requires time and money to invest in training and development of your workforce.

To retain workers, provide opportunities for training, mentoring, and continuing education courses available to both your new and existing employees. Establish advancement opportunities and career paths for workers to move up within your organization.

Health & Safety Hazards

Keeping workers safe should be the top priority on every jobsite. Site conditions can change rapidly, and unexpected hazards can crop up at any time. Major accidents can result in serious injuries or fatalities to your employees. Your goal on every project should be to be accident-free and ensure every worker goes home safe to their family.

In addition to the potential harm to workers, a serious accident can cause work to be stopped or delayed and lead to a decrease in productivity due to low morale among your workers. This can put your project, and your company, in huge financial risk due to all the costs associated with dealing with an accident.

It’s far cheaper to invest in training, engineering controls, and PPE to prevent accidents than it is to deal with the aftermath when one occurs. Make sure your subcontractors understand your commitment to safety and provide training to their employees before beginning work.

Before starting a project, hold a kickoff safety meeting with your employees and subcontractors. Cover the risks and hazards that will be present throughout each stage of construction. Make sure everyone has reviewed and understands the safety plan you’ve developed for the project.

Topics covered in a kickoff safety meeting should include safe work practices for the various activities and tasks being performed, the selection and proper use of personal protective equipment (PPE) and basic first aid practices. Discuss the engineering safety measures that will be in place on the jobsite.

Hold toolbox talks on a daily or weekly basis to reinforce your commitment to job safety. Focus on high-risk scenarios inform workers about changes to the jobsite or working conditions. These can be broken out by trade to cover the work being done each day with an emphasis on potential hazards and how to safely complete each task.

Subcontractor Default

Dealing with a subcontractor that fails to perform on a project is a major risk factor for general contractors. A defaulting subcontractor that isn’t meeting its contractual obligations can completely wreck your project schedule and destroy your profit margin. Schedule delays can also impact other subcontractors and can result in costly rework.

No subcontractor starts a job with the intention of defaulting on the work. Subcontractors must front a substantial portion of the costs on a project before they start getting paid. This can quickly lead to cash flow problems if they overextend themselves by taking on too much work or payments on other projects are being delayed.

Be proactive in monitoring your subcontractors if you suspect things might be getting off track. Common signs to watch for include a sudden decrease in the subconstractor's workforce on the jobsite, delayed materials deliveries, and failure to pay their subcontractors or suppliers on time.

Replacing a terminated subcontractor or supplementing their uncompleted work can kill a project and hurt your company’s reputation. You might be better off working with them to solve any issues to complete the project rather than letting them go.

If a subcontractor is experiencing difficulties, they might not be upfront with you about the problem. Address any red flags with your subcontractor regardless of their performance. If you wait too long to confront a struggling subcontractor, you might not be able to recover.

Prequalifying your subcontractors is important to ensure they can complete the work, both physically and financially. Review your prequalified subcontractors to determine which ones can handle the project before inviting them to bid on your project.

Change Orders

Change orders are an inevitable part of construction and can be a major risk factor when not managed properly. A change order is simply an addendum or amendment to the original construction contract or the scope of work. They can be initiated by the owner, general contractor, or subcontractors. They typically require performing additional work for reasons such as omissions or errors in the original scope of work or ambiguous construction drawings.

Increased project costs, delays in hitting contract milestones, interruptions of workflow, and not completing a project on time are some of the issues caused by poorly handled change orders. Managing change orders takes preparation, understanding, and lots of communication with all parties involved with the project.

Disagreements over what warrants a change order are common since they affect the different parties involved in different ways. Clarify any discrepancies or vague items in the scope of work or plans and specs. Make sure your subcontractors are clear on the work they’ve been contracted to complete. This can eliminate the need for change orders down the road.

Some contracts may include conflicting language or clauses regarding change orders. A clause might state that change work can’t begin without having a written and approved change order while also including language allowing the owner to request additional work without an agreement in place. Address these issues before executing a contract with your client.

There are times when a change order won’t impact the cost or schedule of a project, but that’s not always the case. Advise your client that work may need to be stopped to address changes and discuss any delays or schedule changes that need to be made. Make sure that all labor, material, and equipment needs are covered in the change order.

Remember to consider how each change order will impact your subcontractors on the project. Work with your subs to evaluate any changes to their costs and schedule and determine how their contracted work will be affected by the change order.

Other risk factors common on construction projects include incomplete drawings and poorly defined scope, design errors, unknown site conditions, poorly written contracts, unexpected increases in material costs, and poor project management. Properly identifying and managing construction risks are key to completing successful and profitable projects.