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By: Eric Weisbrot on August 26, 2022

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What Contractors Need to Know About Risk Management in Construction

Operating Insights

Construction Risk Management: What Contractors Should Know

As a construction contractor, you likely contend with multiple risks each day. Every project on which you perform work is unique and likely involves both risks and potential benefits. To be more successful, you must understand how to identify and manage risks on construction projects to help avoid potentially detrimental issues.

Effective risk management might also help you evaluate potential projects and determine when a project might involve more risk than you are willing to take on. Avoiding disaster involves the proper identification, assessment, control, and monitoring of risks and instituting plans for addressing them. When you effectively manage project risks, it can result in improved client relationships and increased projects, helping lead to new projects in the future. On the other hand, failing to properly manage risks can lead to project failures and could seriously harm your business.

Common Risks in Construction Projects

To properly manage risk on construction projects, you first need to know the common types of risks to look for. Some of the most common risks a project might involve include the following:

  • Internal or external thefts of tools and equipment
  • Poorly drafted contracts
  • Safety hazards
  • Labor shortages
  • Poorly defined project scope
  • Subcontractor/supplier issues
  • Incomplete drawings/plans
  • Increased costs due to economic changes
  • Supply chain issues
  • Unavailability of supplies
  • Natural disasters

If project risks become reality, they can seriously impact your performance, schedule, and costs and negatively affect your ability to perform as promised. Project risks can result in disputes and delays. Fortunately, however, you can mitigate most project risks through proper project management strategies.

Identifying Unique Project Risks

You should work to identify the unique risks of a project as early as possible before you begin work. If you don't identify a potential risk associated with a project, this means that you have accepted it if it arises during the project.

To identify the potential risks of your project, meet with your team and all stakeholders involved in the project to identify potential scenarios that could arise and threaten the project. You can look at similar projects you have performed in the past to help identify the risks a current project might involve. You should continue to meet with the stakeholders and your team regularly throughout the project to review your risk management strategies and identify other issues that might arise in the future. Through regular meetings, you can identify which strategies are working and which might need some improvement. 

Process of Managing Risks on Construction Projects

After you have identified all of the potential project risks, you will then need to assess the probability of each risk occurring and the impact it will have if it happens. You should rank the probability and impact of each risk and address those with the greatest probability and impact first. Calculate how much work, money, and time it will take to manage each risk, and move down your list in order of priority.

For each identified risk, you will need to determine whether it can be eliminated, avoided, transferred, reduced, or accepted.

Avoiding or eliminating a risk might involve negotiating the contract to remove the risk or choosing to turn the project down. If a major risk can't be avoided and outweighs the potential benefits of the project, it might make sense to walk away.

Some risks might be transferred to others. For example, the project owner, suppliers, and subcontractors might require a construction bond as a risk-transfer mechanism to shift the risks they face to you of your failure to perform or failure to pay. You might also transfer certain risks by securing various types of liability insurance to protect you against risks. Talk to all of the involved stakeholders to determine which party is best positioned to assume the risks and how they will be transferred accordingly. Talk to the project owner about the risks the owner will assume and those for which you will assume the responsibility of managing. Speak with your bond company and insurance provider to determine whether your current bonds and insurance policies are sufficient or if you will need additional options to gain more protection.

Make sure you break each of the project's risks down into actionable steps so that they can be effectively managed. You might need to rent more equipment or hire additional workers to mitigate the risks without committing too much of your resources.

Some low-impact risks that have a low probability of occurring can be accepted. However, you shouldn't make this decision lightly. You should take care to avoid accepting a potentially high-impact risk that has a substantial likelihood of occurring because doing so could harm both the project and your company's profits.

Risk Management Strategies

Once you have identified the risks and the strategies that can be used to manage them effectively, you will need to ensure that you have all of the strategies in place to mitigate them. Some of the types of strategies you should adopt to reduce or eliminate major risks include the following:

  • Require safety training for all workers before they begin work in compliance with Occupational Safety and Health Administration guidelines.
  • Provide safety equipment for all workers and have policies in place to ensure their compliance.
  • Purchase and/or require bonds for your company and the subcontractors that will work on the project.
  • Purchase adequate liability insurance and workers' compensation insurance to protect against losses caused by worksite accidents.
  • Draft policies for securing equipment and accessing the site to reduce potential thefts.
  • Have potential contracts reviewed by legal counsel, and negotiate the terms to make them more favorable to you.
  • Hold regular stakeholder meetings so everyone is apprised of changes and issues as they occur.

To effectively manage risks on construction projects, you will need to work closely with all of the involved parties. Everyone should be kept up to date on what is occurring on the project. When you collaborate with others, you can identify and manage risks before they arise and reduce their impact if they do.

Eric Weisbrot is the Chief Marketing Officer of JW Surety Bonds. With years of experience in the surety industry, he is also a contributing author to the surety bond blog. He has held a range of different roles within the surety industry, from agent assistant to bond issuer, which gives him a unique insider perspective on surety-related topics.