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By: Sam Meenasian on June 16th, 2021

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How To Successfully Determine Your Risk Response Strategy In Construction

Operating Insights

The proper practice of managing risks is every construction contractor’s road to a successful business. Risks related to the construction industry are vast and varied given the industry’s inherent nature. As such, project success very much rests on how well construction contractors stay on top of the risk-managing game, particularly when it comes to crafting superb risk response strategies.

Iron-Clad Risk Management Practices Take Place in Every Phase of a Construction Project

No matter how well-rounded risk response strategies are, effective risk management should be a process that stretches from the start to the end of a project's duration. A construction project goes through a series of phases, depending on the procurement method that the investor has opted for, and risk management should essentially begin with contractors deciding to bid for projects.

Research has shown that sound project management practices help contractors achieve project deliverables. They are made up of a range of processes and sub-processes., and typically, a decision to sign off on a construction project is followed by a project charter. It is a short, concise document that outlines relevant project needs, stakeholders, high-level risks, and so forth, and it takes into consideration the organization’s risk appetite, risk tolerance, and risk threshold. 

Taking input from the project charter and other external and internal factors, a project management plan is produced. It contains various subsidiary plans, ranging from scope and schedule management, to cost and stakeholder management, to risk management. All these subsidiary plans dictate how subsequent planning activities are to be done, such as how to develop a schedule, ways to manage the stakeholders, strategies to estimate project costs, etc. 

All the planning activities we have touched on fall under the project planning phase, and then executing and monitoring phase kicks off once the planning is done and baselines are set. In this phase, almost all management activities are performed according to the project management plan; risk responses are implemented and monitored, risks are monitored, scope is controlled and validated, quality is managed, and so forth. Any necessary changes and updates, such as newly-identified risks to the project management plan and baselines are managed systematically. 

Avoid, Mitigate, Accept, or Transfer?

The four options of risk response strategies: Avoid, Mitigate, Accept, and Transfer are no stranger to construction contractors, but these strategies may do more harm than good if executed properly. To really work out which of the four risk response strategies to choose for a specific risk, the number-one measuring rod should be where the risk fits in among the three domains of risk appetite, risk tolerance, and risk threshold. 

The risk appetite of an organization broadly defines the type and degree of risk it is willing to accept. Risk threshold is given as a measurable unit, usually a percentage, and it reflects a range within which a specific risk can be accepted or avoided. Risk tolerance is similar to the risk threshold, but it is measured in a specified value, which can be in the number of days or a monetary value. 

The avoidance option, as the name suggests, means taking any necessary course of action to avoid the possibility that a risk may pose a threat to an organization. Generally, contractors only go for this option when dealing with health-threatening risks. That being said, for a company with a low-risk appetite, this option may seem to fit its strategic objectives. 

Contractors may opt for the mitigation option for risk events that exceed their corresponding risk thresholds. For instance, a risk that may cause a delay of greater than 10 days can be mitigated—if it surpasses the company’s relevant risk tolerance level—to bring down the risk impact below the acceptable level. 

On the other hand, risks can be accepted if the impacts are somewhere within the range of the company’s risk threshold. The transfer alternative shifts a risk to a third party, and this can involve signing up for a contractor liability insurance plan to transfer liability risks to the insurer. 

Many Factors Influence a Company’s Risk Appetite, Risk Tolerance, and Risk Threshold

The risk appetite, risk tolerance, and risk threshold of a company pivot on a range of factors, such as relevant historical data, level of competition within the market, company’s portfolio, and inputs from top management. Other considerations may include risk culture and norms of the organization. 

Contractors should at least know what their risk appetite, risk tolerance levels, and risk thresholds are. Organizations that put too much effort on avoiding risks can end up functioning well below their risk appetite, and this can actually throw away many opportunities that may help the organizations grow and achieve their business objectives.

Risks lurk beneath the surface of almost every business venture, and all the business decisions that we will have to make will rarely come without some sort of risk. It is the innate characteristics of construction projects that make this particular endeavor a very risky one to take on. Among all other construction project management disciplines, continuous risk management deserves a top priority on every contractor’s to-do list, and understanding your risk appetite, risk tolerance, and risk threshold will make you a high-performing contractor.  

Sam Meenasian is the Operations Director of USA Business Insurance and BISU Insurance and an expert in contractor liability insurance, among other commercial lines insurance products. With over 10 years of experience and knowledge in the commercial insurance industry, Meenasian contributes his level of expertise as a leader and an agent to educate and secure online business insurance for thousands of clients within the Insurance family.