What is risk management in the construction industry?

By Indeed Editorial Team

Published 5 July 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Construction companies have a unique set of risks that they face daily. Many things can happen, from accidents at the workplace to weather-related hold-ups. It's important that construction companies implement appropriate risk management strategies for assessment, monitoring and review. In this article, we discuss the answer to 'What is risk management in the construction industry?', learn the main risks, review the risk management process and provide some useful tools for managing risk, including where to go for support.

What is risk management in the construction industry?

To answer 'What is risk management in the construction industry?', it's identifying, assessing and mitigating risks to ensure a project completes on time, within budget and with minimal disturbance. In the construction industry, effective risk management is important to the success of any project. By identifying potential risks early on, project managers can develop contingency plans to mitigate or avoid them.

Common risks in construction projects include weather hold-ups, equipment challenges and material shortages. By planning for these risks in advance, construction companies can avoid costly hold-ups and disturbances. A well-executed risk management plan can help ensure the project's success.

Related: How to become a risk manager and boost your career

What are the main risks in the construction industry?

Risks are an inherent part of any construction project. Hold-ups and cost overruns can hinder a project, so it's important to understand the sources of risk and how to manage them. By understanding where these risks are likely to occur, you can develop a better risk management strategy. They include:

Safety

Construction staff expose themselves to various potential hazards while working. Injuries and fatalities can occur due to falls, electrical shocks, vehicle collisions and exposure to harmful chemicals. To help reduce the risks of these hazards, ensure construction crews are diligent about identifying potential dangers and taking steps to mitigate them.

Environmental

Weather can cause challenges on construction projects, causing hold-ups or stoppages. Heavy rains can cause delays in the construction process, while extreme heat can make working conditions challenging for crews. Environmental risks can stall projects, causing financial or schedule pressures.

Financial

Construction projects are expensive, and there is always the potential for cost overruns. Construction companies can carefully track their spending to stay within their budget and avoid financial issues. Unexpected costs can quickly reduce profits, so preparing for unforeseen expenses with a contingency allocation or other insurances can help support a project.

Related: What is financial risk?

Management

Cost overruns, schedule delays and safety concerns can result from project management challenges. To avoid these risks, construction companies have a clear plan and ensure that everyone understands their role in the project. A dedicated project manager or team responsible for keeping the project on schedule creates the best chance for success.

Legal

Construction projects are subject to a variety of laws and regulations. Failure to comply with these laws can result in financial costs, delays or even the cancellation of a project. To avoid legal issues, it's advisable for construction companies to know the applicable laws and regulations and ensure that their projects comply.

Public relations

Construction projects can have a significant impact on the surrounding community. Noise, traffic and dust can all disturb local residents and businesses. It's advisable for construction companies to be sensitive to the community's needs and take steps to minimise the impact of their projects to avoid unwanted publicity.

How to perform risk management

Risk management is a key process for any organisation to ensure the successful execution of a project. The construction industry requires more attention to some types of risks than others, so it's important to be thorough in the planning stages to minimise risks to the project. By identifying potential risks and implementing strategies to mitigate them, organisations can reduce the likelihood of adverse events occurring and minimise the impact of those that do.

The steps in the risk management process include:

1. Risk identification

Risk identification is the first step in the process and involves identifying all potential risks that could affect the project or the company. You can identify risks through ideas sessions with employees, reviewing past incidents or analysing trends in the industry. Remember that risks can come from various sources, including suppliers, subcontractors, the weather and even employees.

2. Risk assessment

After identifying all potential risks, you then assess the likelihood of these occurring and the potential impact on the project. This helps you prioritise the risks that need addressing first. For example, some risks may be more likely to occur than others but may have a lower impact if they do.

3. Risk mitigation

The next step is to develop strategies to mitigate the identified risks. This may involve changes to the project plan, additional safety measures or financial contingency planning. The goal is to reduce the likelihood of a risk occurring or minimise the impact if it does.

4. Risk monitoring and review

It's important to monitor risks during the project's life cycle and regularly review the risk management plan. As the project progresses, new risks may emerge, and the strategies for mitigating them may need updating. By regularly monitoring risks and reviewing the risk management plan, you can ensure that your project stays on time and avoids unexpected occurrences.

5. Risk reporting

Finally, it's important to document and communicate the risk management process results to all stakeholders. This includes a list of all identified risks, the assessment of each risk and the mitigation strategies in place. Ensure you complete risk reports regularly to keep everyone informed of the status of risks and allow for timely changes to the risk management plan if necessary.

Related: How to perform a risk analysis (with tips)

Risk assessment outcomes

As a risk manager, it's important to quickly assess risks and determine an appropriate course of action. This can be a challenge, as risks vary widely in severity and likelihood. By understanding the different types of risks and where they fit on your priority list, you can develop a streamlined process for making decisions about what to do, including:

Avoid the risk

This is the best-case scenario and involves taking steps to avoid the risk entirely. For example, if you're concerned about a potential safety issue, you may decide to redesign the project to eliminate it. This method is most effective when employed in the planning stage and may not be suitable for processes that are already functioning.

Mitigate the risk

If it's impossible to avoid risk, set up steps to mitigate it instead. This may involve implementing safety measures, increasing insurance coverage or setting aside contingency funds. It could also be an option to provide special training or hire dedicated specialist staff to address specific risks.

Accept the risk

It may not be possible or practical to avoid or mitigate risk in some cases. In these cases, you accept the risk and plan how to deal with it if it occurs. For example, you may decide to purchase weather insurance for a construction project in an area with a history of severe weather.

Transfer the risk

Some projects may offer the ability to transfer the risk to another party. For example, you may purchase earthquake insurance from a provider and then transfer the risk of damage from an earthquake to the insurance company. You could also transfer the risk to a subcontracted crewmember or supplier, though the project contract may specify restrictions.

Related: What is a risk management framework? A comprehensive guide

Tools for managing risk

Risk managers can use various tools and techniques to manage risk in the construction industry. Some of the most common include:

  • Risk registers: A risk register is a document that lists all potential risks to a project alongside the mitigation strategies in place. Risk registers require regular updates and for all stakeholders to review them.

  • Risk matrix: A risk matrix is a tool for assessing the likelihood and impact of risks. It's a helpful way to prioritise which risks to address first.

  • SWOT analysis: SWOT stands for strengths, weaknesses, opportunities and threats. It's a tool that can identify internal and external factors that could affect a project.

  • PESTEL analysis: PESTEL stands for political, economic, social, technological, environmental and legal. It's a method for determining the external variables that might influence a project.

  • Project management software: Project management software can track risks, create risk registers and develop mitigation strategies. Businesses can also use it to communicate risk information to all stakeholders.

Who is responsible for risk management?

While risk managers play a vital role in identifying and managing risk, it's important to remember that risk management is everyone's responsibility. Ensure all project team members are aware of the risks associated with their work and are proactive about mitigating them. By working together, you can create a safe and successful construction project.

If the project needs support, consider reaching out to consultancies in the construction industry, insurance specialists, legal firms with construction contract experience or government agencies that offer risk management resources. These organisations can help you develop a comprehensive risk management plan and provide guidance on implementing it.

Related: 12 risk management careers (plus duties and salaries)

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