Industry Insights

How are You Managing Risk on Your Construction Projects?

Kristen Frisa
July 31, 2023
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Contracts have long been the standard for construction risk management for both owners and contractors on construction projects. However, construction contracts, and the risks they're meant to cover, are changing. How can construction companies tailor their risk management process to continue protecting their interests during a building project?

Construction is a risky business in more ways than one. The risks often associated with building jobs are those associated with workers’ physical safety hazards on a construction site. While safety compliance and training for construction workers present huge concerns for business owners, other construction risks involve those to project viability and the business's longevity. As economic pressures grow and the skilled labor shortage continues, these logistical risks can feel huge, particularly for small and medium-sized contractors.

Let’s take a look at the most prominent risks currently facing contractors on their building jobs, and then consider how those construction project risks could be managed.

Risk awareness

Health & safety

Safety risks are nothing new in the construction industry, but a focus on total worker safety and well-being has changed how contracting companies monitor, assess, and deal with safety risks, and the rules they must follow.

For example, standards are changing for how the construction industry recognizes and handles mental health in the workplace. The Total Worker Health program by National Institute for Occupational Safety and Health (NIOSH) recognizes the personal and business impacts of mental health issues on construction companies and offers training on how to change work environments to improve mental health.

Standards for handling more traditionally recognized safety risks on construction sites are changing too. The Center for Construction Research and Training (CPWR) and the American Society of Safety Professionals (ASSP) conducted a survey about falls from heights this past summer, and the results may impact the safety standards contractors use in the future.

The COVID-19 pandemic changed the way we look at safety forever, as workforce tracing upped the ante on record-keeping and compliance and gave us a broader scope of worker safety to consider.

Contractors must think strategically, using carefully analyzed data to develop a well-organized construction risk management process.

Project schedule

The construction industry is well-known for delayed project deadlines. A recent survey from the National Multifamily Housing Council found that 90% of contractors are experiencing project delays.

Recent years and months have made slowed schedules even more common. Ongoing supply chain challenges are just one of the elements that can delay a construction project. Political pressures, labor shortages, and climate-related weather volatility can also result in slowed schedules, which ultimately cost money and can jeopardize successful project completion.

Financial risk management

Inflation, materials procurement difficulties, and labor shortages can increase a construction company's business costs. Managing financial risk on each project has become a priority for many business owners.

Within construction contracts, it's common for contractors to take on more risk than project owners. While price guarantees have traditionally protected owners, contractors take on the uncertainty of financial and project risks, adjusting their bid prices to reflect the risk level they take.

Modern contracts are changing that by including clauses that allow contractors to transfer some of the risks to owners through price adjustment clauses. Industry standards are changing, but owners aren't always on board to accept materials and labor escalation clauses, leaving contractors on the hook for the bulk of financial risk.

How to manage risks

Standard protocol for a construction risk management plan involves three key elements:

Risk analysis

Finding risks involves a deep risk analysis and knowledge of the project and the client you're about to work with. They include assessing the proposed project's environment, scope, and construction site conditions, as well as the behaviours and financial well-being of the project's owner.

Risk assessment

Pin down the likelihood of the risk occurring and its impact if it should come to fruition. Compare it to other identified dangers using similar metrics, so you can prioritize action on each.

Risk mitigation

Now that you've figured out the most prominent potential risks on a project, you can figure out how to avoid, transfer, or accept each one.

The above-mentioned risks are difficult to avoid as they appear on nearly every project a builder begins. However, contractors can plan and execute an organized strategy for mitigating them so they become more manageable.

Leverage new solutions

Technology can help with risk identification and assessing risk factors to projects by tracking current behaviors and analyzing how often each one presents itself, then establishing a risk management plan to reduce either the likelihood or impact of that risk.

For example, construction technology software can help contractors assess the likelihood of falls on a project given the environment and tasks the workers must do, then offer risk management techniques like harnesses (to reduce incidents) and self-rescue training (to reduce impact) of falls.

As mentioned, contractors can reduce financial risks involved in a project by using contract clauses to transfer the risks to other stakeholders, including the owner. Likewise, strategic bidding can transfer the potential risks to owners.

To handle any remaining uncertainty, contractors should create financial buffers to protect steady cash flow to keep projects on track.

Digital solutions can help by making payments more secure and fast, by:

  • Allowing managers to tailor user permissions and spend controls for individual staff members
  • Providing anti-fraud monitoring for your transactions, and requiring Two Factor Authentication on every login
  • Streamlining request for approval workflows to pay suppliers faster
  • Making it easier to send and receive payments

Truss helps contractors get a handle on their spending, speed up payables and receivables processes, and make payments more secure to improve cash flow throughout a project's lifecycle, helping to mitigate financial risk on a project.

By using digital solutions to better recognize and manage risks involved in construction projects, contractors can weather current challenges and stay to build another day.

Ready to get your cash flow in order to better handle financial risk? Try Truss for free - no monthly cost, no transfer fees, no commitment.

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