Top 10 Construction Risks and their Solution. Construction is a risky business, and every construction project has its challenges and opportunities. For proper project management, risks must be properly identified, controlled, and supervised.
Risks are not just negative uncertainties. Proper risk management helps increase profits, maintain good customer relationships, and repeat projects. For example, in manufacturing projects, the risks are mostly focused on labor and supply shock, but in construction, the risks are dynamic and unpredictable.
DANGER VS. UNCERTAINTY VS. RISK
A hazard is a circumstance that poses a risk to life or a threat to the environment, property, or personal integrity. From a safety point of view, a problem that poses a danger to life or a physical impediment to people on a construction site is a hazard. Hazards are situations with the potential to become incidents or disasters.
Uncertainty is the probability that an event will occur with imperfect or scarce information. An uncertainty has more than one possible outcome that can occur.
On the other hand, a risk is the result of an event that is predicted based on statistical probability. In the case of risks, there is a high probability of failure. Any high-probability event that can impede project progress quality and cost is a risk. Dangers and uncertainties are situations that we must take care of, but we do not consider their risks.
COMMON RISKS (AND EXAMPLES OF SOLUTIONS)
As we have already mentioned, construction is a volatile business that carries many risks. Below are some of the more common hazards that can arise during the construction period.
Without a doubt, delays are the most common risks in construction. As much as contracts take deadlines and schedules into account, they seldom consider all variables. Delays are caused by poor project management, change orders, accidents, or improper scheduling.
The best way to curb delays is to prepare for them in advance. Additionally, communication must always be open between project stakeholders to minimize the cumulative effect of delays on a project.
2. INADEQUATE PAPERS
One characteristic of construction projects is the voluminous paperwork. It ranges from change orders, appraisals, licenses, and approvals. Some contractors mismanage their paperwork by keeping the documents on the dashboard of their trucks. Losing a receipt or piece of paper can be time-consuming and costly. The risks are different in every job. Thinking of large projects with many subcontractors, with different submission and compliance processes, paperwork can be a hassle. When it comes to licenses and insurance, if there is inadequate documentation, it can lead to legal problems.
The best way to avoid it is to be organized. Every contractor should have a document checklist that they check to make sure all the paperwork is in order.
3. PRICE OF MATERIALS AND PROFITABILITY
The price of materials and profitability are some of the most important risks of a contract. When a contractor signs a lump-sum contract, he is at the mercy of fluctuating material prices if he does not leave enough wiggle room to cover the new costs. Some issues that can drive up costs are natural disasters, increased demand for materials in an area, or labor problems.
A contractor can take price increases into account by increasing the profit margin to absorb an increase in prices.
4. LABOR SHORTAGE
Finding qualified labor is always a problem in the construction sector. Most contractors don’t have full-time staff, hiring people from one place to another based on the scope and complexity of the project. If a contractor comes to a project but doesn’t have enough manpower to finish it, the entire project will inevitably be delayed. Delaying deadlines negatively affects the profitability of a project. When unions are involved, solidarity among workers can cause the entire crew to walk out during a strike.
A contractor can curb labor shortages by developing community partnerships and rewarding employees with a fair wage package.
5. POOR PROJECT MANAGEMENT
Experienced subcontractors always have a problem when working with a new contractor. They do not know their type of work experience or their levels of the organization. A poorly organized contractor poses a risk to the success of the project.
Inadequate project management leads to miscommunication and conflict. This can cause side effects on other projects the contractor is managing, as well as scheduling issues. A contractor must put systems in place to ensure the project runs smoothly according to plan.
6. UNCLEAR SCOPE OF WORK
When the scope of work is poorly defined, it is a management problem that will affect the success of the project. It’s hard to stay on track on a project with a poorly defined scope.
One of the best ways to deal with an unclear scope of work is to enter into cost-plus contracts. It is dangerous to sign a lump sum contract when the scope of work is ambiguous. Lack of clarity in the scope of work will become a killer of profitability. This is due to rising material prices, site conditions, and other project variables.
Another way to improve profitability is to improve communication with project stakeholders at all levels. This helps you remain profitable.
7. CHANGE ORDERS
Change orders are inevitable in the construction industry. Improper change order management can hamper the success of a project by leading to missed opportunities and budget overruns.
When change orders come up, it is essential to write them down and sign them off. If they are not documented, a contractor may find himself doing work that the client does not approve of. This will inevitably lead to disputes over payment.
The best way to handle change orders is to keep all necessary documentation and submit changes to avoid payment disputes.
8. PAYMENT DISPUTES
Payment takes a long time to build. These litigations affect contractors since it takes a long time before they receive a paycheck. Loans and interest rates reduce profit margins and sometimes cripple some operations of a construction company. Over time, a contractor may find themselves in a position where they are barely breaking even on one project while relying on cash to take on other projects. Contractors can avoid payment disputes by issuing timely payment notices. A contract must also have a clearly defined payment schedule, and failure to comply with the schedule will be classified as a breach of contract.
9. HEALTH AND SAFETY RISKS
Construction sites are dynamic and conditions can change rapidly, leading to unprecedented health and safety risks. Serious accidents can cause severe deaths. The goal is to ensure that the project runs smoothly from start to finish.
In addition to the possible damage to workers, accidents cause a reduction in productivity on the project. This is due to the low morale of the workers on the project. Low productivity also causes project delays and consequently budget overruns.
The best way to curb health and safety risks is to train staff on how to avoid accidents and how to deal with them when they do happen. It is important to notify all personnel and subcontractors of your commitment to safety prior to the start of the project.
The rate of financial failure in construction projects is alarmingly high. Businesses find that the easiest way out of financial trouble is to file for bankruptcy. After filing for bankruptcy, some companies restructure and become more vital businesses, while others go under completely. In the event of bankruptcy, all progress on a project is frozen. Bankruptcy can lead to the repossession of on-site equipment or even material already financed. Bankruptcy is a rare event, but it is a risk in construction projects.
HOW TO IDENTIFY THE RISKS
Since we’ve already discussed common construction risks, we need to identify risks unique to a project. Risk identification should be done as early as possible in a project. The project team primarily identifies project risks during the preconstruction phase. Not identifying and managing risks in time means accepting the risk present in a project.
The best way to identify risks is by holding brainstorming sessions with project stakeholders. The goal is not to solve any problem, but rather to identify many possible scenarios and their impact on the project. During brainstorming, the project team reviews similar projects, their scope, their location, the risks being incurred, and the necessary measures taken to curb the risks.
In addition, the project team should hold regular meetings throughout the construction process. These meetings deal with all emerging and new issues that may arise in the foreseeable future.
HOW TO MANAGE CONSTRUCTION RISKS
Sometimes when a risk materializes into reality, it can potentially deal a blow to a project. Sometimes it is a set of small minimal risks that sink the project. For a company to have a good equity growth curve, it must invest in risk management. The best way is to establish good processes that help you make good decisions without problems. Here are the steps you need to take to manage construction risks.
AVOID THE RISK
Avoiding an accident is easier than coping with it. The first step in preventing risks is to make a list of all potential sources of risk. We classify risks as labor, financial, contractual, project-related, natural, or stakeholder. Next, these risks are ranked in order of probability of occurrence, and measures are put in place to avoid them. Sometimes avoiding risk may mean rejecting a project or renegotiating a contract, but if the risk-reward ratio is unfavorable, it’s wise to avoid it altogether.
TRANSFER THE RISK
Sometimes your company may not be able to take the risk of a project. One way to transfer risk is to use insurance policies. Insurance policies do not cover all risks, and you have to discuss with insurance providers the responsibilities they are willing to assume. Another form is contractual agreements between the general contractor and subcontractors or suppliers to take partial risks on a project. The best solution should be to discuss with those interested in the project and agree on the risks to be assumed by the various parties. The client and general contractor must also decide what risks each party is willing to take.
If the project team cannot eliminate the risk, they must employ measures to minimize it. Proper training and the use of safety equipment by workers greatly reduce the possibility of unwanted events. The team should break down risks into actionable items, and the contractor should not overcommit resources to manage multiple risks.
ACCEPT THE RISK
Sometimes we identify the risks but do not accept them. Accepting risk is not a decision we should take lightly. The person responsible for assuming a risk must evaluate the repercussions of assuming it. Low-impact risks are easy to accept, but high-probability, high-impact risks must be assessed through careful management, otherwise, they will be detrimental to the project and the party that supports them.
Below you will find answers to some of the most frequently asked questions in construction.
CAN YOU AVOID THE RISK OF CONSTRUCTION?
Construction risks are unavoidable. However, the risks caused by negligence are totally avoidable. Many risks are caused by negligence and poor planning.
Some of the most common risks in construction are health and safety hazards, payment disputes, change orders, project mismanagement, and labor shortages.
WHY ARE CONSTRUCTION PROJECTS RISKY?
Compared to other sectors, construction is very dynamic. Other sectors face predictable risks, but construction project risks are unpredictable, making construction a risky business.
Proper risk management requires a high level of planning and communication between project stakeholders. When everyone agrees, it’s easy to work and identify risks before they become problems. Risks can bear fruit if properly managed.