10 min read
Innovations in Construction Project Risk Management
Published 27 Feb 2024
In the construction industry, every project will present its unique challenges which makes the ability to foresee, assess, and address potential problems a very important part of the project. With the right construction risk management plan a project manager will be able to prevent, react, and swiftly handle problematic situations or circumstances. It is also a good way to reassure stakeholders.
At FirstBit we understand that things having big financial impacts on the project can be overlooked. That is why we provide a software solution with some of the best features for risk management in construction.
Read on to learn more about different risk management strategies and how you can implement a construction risk management plan.
At FirstBit we understand that things having big financial impacts on the project can be overlooked. That is why we provide a software solution with some of the best features for risk management in construction.
Read on to learn more about different risk management strategies and how you can implement a construction risk management plan.
Contents
What Is Construction Risk Management and Why Does It Matter?
Construction risk management is the process of assessing and managing risks that come with construction projects and everything around them. By Identifying these scenarios before the start of a job you will be able to:
Prevent them from happening
React to the risks when they happen
This will help you reduce the financial impact and delays these events might cause!
Since there are different stages to construction projects, the project manager must make a risk management plan for each phase to avoid them from happening. It is also a good way to reassure stakeholders and investors that the project is in good and well-prepared hands.
A study by PBSRG has shown that on average more than 60% of all construction projects will exceed budget claims by more than 20% of the budget [?]. And more than 72% of all construction projects have delays throughout the different construction phases. This can be linked to poor project management and an incorrect way of dealing with risks.
Since there are different stages to construction projects, the project manager must make a risk management plan for each phase to avoid them from happening. It is also a good way to reassure stakeholders and investors that the project is in good and well-prepared hands.
A study by PBSRG has shown that on average more than 60% of all construction projects will exceed budget claims by more than 20% of the budget [?]. And more than 72% of all construction projects have delays throughout the different construction phases. This can be linked to poor project management and an incorrect way of dealing with risks.
What Are the Types of Risk in Construction?
Risks in construction vary, but the most common are:
Safety hazards for contractors, workers, and the environment
Delays in tasks and construction phases
Exceeding the budget limits for the project
Not meeting all the necessary legal requirements
Natural disasters such as floods or storms
To avoid these scenarios the project manager will have to do financial and general risk management in construction.
Steps of the Construction Risk Management Process
There is no single formula that will help you create the perfect plan to prevent problems from happening in construction. However, there are steps in the risk management process that you can follow, to lower the impact as much as possible.
Identifying risks
The first step will happen before any part of the construction has started. The project manager will have to identify risks that could hinder or cause delays in the construction project. In most cases, these can be identified by holding a brainstorming session with all involved parties to come up with different ways that the project could go wrong, be delayed, or go over budget.
Tips to Identify More Risks
Be pessimistic and assume anything can happen.
Split the project into small parts and find risks for each of them.
Do some research on problematic events that caused delays, extra costs, or hazards in previous and similar construction jobs.
Risk Assessment in Construction
After identifying all potential problems it is time to have a general assessment of how these situations could impact the project. When conducting a risk assessment it is important to find an answer to the following questions:
What are the consequences if you don’t take action to prevent the identified potential problems?
How likely is it that these consequences will take place?
With risk management in construction projects, there are two different types of risk assessment:
Quantitative risk management. Project managers will collect data on different types of construction projects. So when conducting a risk assessment, the project manager will be able to use this information to predict how much it will cost the client if the consequences of these were to occur.
Qualitative risk management. The construction project manager will have to make a list of risks that have a high chance of happening and the severity of the impact on the project if they were to occur. The scenarios listed on top of this list will have priority over others.
The conclusion that comes from these different assessment types, will help choose what strategies in construction will be used.
Mitigating Risks
After the assessment, it is time to find an answer to the question: “What can be done to control or prevent these scenarios from happening?”. This way you can take action and try to reduce the number of bad scenarios and prevent their consequences from taking place. When it comes to mitigating risks, there are a few strategies that can be used:
Avoiding. The first strategy will often be trying to avoid risks and consequences from happening. For example, if a subcontractor has a reputation of always being late with finishing work, you can avoid the potential problems by looking for a reliable subcontractor. Other ways to avoid these situations from happening are having clear communication on all levels and assigning responsibilities to each team member. Construction companies have a complex structure which means that people often assume that a task is not their responsibility.
Reducing. Another good strategy to mitigate risks is to reduce the amount of them or the impact should these occur and make the likelihood of it happening as small as possible. Digital solutions can help you manage the cause of the problem. For example, the First Bit ERP can help you with keeping track of the schedule and the progress of tasks. This way you can give certain tasks priority to make sure there are no delays or to keep the delay of the project as small as possible.
Accepting. When trying to prevent a risk from happening, there will be costs attached to the process. If the financial impact of the consequences is not bigger than the financial impact of preventing the problem from happening, it might be better to accept the situation and deal with the financial consequences after the event happens. If there are tasks that are delayed you could hire an extra team of workers to help you out. But if the costs of these extra workers are bigger than the financial impact of the delay, it is better to accept the delay.
Strategizing. With this strategy, the project manager will come up with a contingency plan on how to continue with the project that will be used as a reaction to the risk event happening. This will leave the manager with a backup plan that can be executed without causing too much delay in figuring out the next steps.
To make the mitigation process as successful as possible, it is best to use multiple strategies in combination with one another. For example, you prepare a backup plan and have it ready in case something does happen, but at the same time, you try to reduce the likelihood of it happening so that you won’t need this backup plan. This way you can allow your main scheme to be a bit more risky in the beginning but more beneficial if everything goes well in the end.
Implementing a Risk Management Plan
The main part of implementing a risk management construction plan is assigning tasks and responsibilities. The responsibilities and liabilities must be clearly defined and documented so that all parties know what to expect. You will have to document what equipment can be used for tasks and who is allowed to use them.
Tips for Implementing the Risk Management Plan
Define all responsibilities and liabilities and document them
Include the costs of resources and workers into the budget estimates
Set up communication channels for clear communication between parties
Allocate tasks and usable equipment to subcontractors, workers or other parties
Execute tasks according to the schedule
When all tasks are assigned and the budgets are approved it is time to execute the mitigation strategies that have been chosen for this construction risk management plan. Throughout the implementation of this plan, there has to be good communication between all parties, to ensure that the implementation will be as streamlined as possible.
Monitoring and Reviewing Risks
Since it is very difficult to completely eradicate all potential problems, the identified risks must be monitored. During different phases of a construction project, you must keep reviewing the registry of risks and the effectiveness of the measurements to prevent them from happening. The best way to do this is by keeping good documentation of the construction risk registry and keeping it up to date throughout the construction phases.
Tip. Use a Gantt chart to clearly outline tasks, their dependencies, responsible parties, and deadlines to document the schedule of the project.
Situations can change quite quickly so someone must keep an eye on the most important risks. Whenever something happens, the risk registry has to be updated to prioritize the risks with the highest impact or the ones that are suddenly more likely to happen. By doing this after certain milestones are hit or whenever certain events happen, the project manager will always have time to react with the least amount of delays and with the lowest financial impact.
Tip. Make a budget estimation for every phase of the construction project and document all costs related to a certain phase. If a phase is likely to go over budget, you can adjust the budget estimate of the next phase.
Other Risk Management Strategies in Construction
The risk management strategies that we have discussed were common strategies to mitigate risks. However, there are more options you can use to make the construction process go as seamless as possible. That is why we have listed some other examples of risk management strategies for construction.
Transferring Risks
A good strategy to manage problems, when both the accepting strategy and the avoiding strategy are impossible or will have too much of a financial impact, is transferring risks. By using this strategy you will transfer the responsibilities and liabilities to a third party that will incur the costs if a risk event is to happen. Getting insurance is an example of how this strategy would be implemented. This will often result in extra costs, but is worth it if the likelihood and the financial impact of events are very high.
Early Warning Systems
Another way to manage potential problems is by using digital tools that can detect these problems at an early stage and alert the project teams of their potential existence. With these types of management tools in construction, project teams have time to react before the problem occurs. Reacting to the warning and trying to prevent these risks from happening might still cost money and will have an impact on the budget. However, this monetary impact will often be a lot smaller than the financial impact of the risk event actually happening.
Risk Digitization
Because of technological advancements in the construction industry, there are multiple software solutions that can help with managing problems in projects. The digitization strategy will use these digital solutions to help identify, control, and reduce the potential problems of a certain project. FirstBit ERP is a company that offers some of the best software solutions that help with risk management in the construction industry.
How FirstBit ERP Can Help Project Managers with Risk Management
Track Your Project Performance with Automatic KPIs
With the digital solution of FirstBit ERP, you will be able to track important KPIs automatically. To get these automated calculations, you will have to provide the following information:
The project budgets
The project planning schedule, and the progress report
All types of actual project expenses
Project cost control in FirstBit ERP
With this type of data, the FirstBit Contracting ERP will provide the following indicators:
Cost Performance Index (CPI)
With the cost performance Index project managers can track if the costs are kept within budget. Keeping track of the expenses that have been made and comparing this with the estimated budgets, for that part of the project, is a great indicator to see if the project is going according to plan.
Schedule Performance Index (SPI)
Since in construction there are tasks that are dependent on other tasks being finished, delays can have a great financial impact. By using the schedule performance index, you can easily see if the project is delayed, on track, or ahead of schedule! If used correctly, project managers can adjust their risk registry during construction by prioritizing certain tasks.
Estimate at Completion Index (ECI)
Another indicator that our digital solutions can provide is an estimate at completion index. This indicator will show what the actual costs will be at the end of the project. This is only an estimate and will only showcase what would happen if the project progresses at the same pace and with the same productivity. This index can give an early calculation to show how much the budget will be exceeded after the delivery if there is no proper plan or structure in the project.
Follow Your Labor Costs With Daily Time Cards for Employees
The structure of construction companies can be quite complex, which makes it hard for project managers to keep track of the number of hours that the employees have worked on a certain project.
Time Card in FirstBit ERP
With First Bit every employee will have daily time cards which can be used to accurately track the labor costs for the whole project and for each individual.
Mitigate Legal Risks with Our ERP Solution
The First Bit ERP solution has different integrated features, such as reporting tools, that can help construction managers mitigate potential problems that have to do with Labour Law Compliance and UAE VAT regulations.
Key Takeaways
To keep your project on track and within budget, you have to be as prepared as possible. We suggest that you analyze what risk management strategies are the most effective in your case and how you can implement these in the actual construction job. However, since you are only human, you might overlook something that can have a big financial impact. That is why tools to manage problems in construction have become an essential part of the project manager’s toolkit. At FirstBit we know how important it is to hit certain financial goals and to reach milestones by certain dates. That is why we have developed a digital solution with different features to help you track these important KPIs.
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