Construction Risk Management: A Comprehensive Guide (2024)

Every professional industry has its risks. Working in construction though, does it ever feel like there’s too much risk and not enough business? In fact, the bigger the crew or the project, the greater and more varied the risks, all of which have to be managed. And while hard hats and steel-tipped boots are great, they only go so far. 

We build structures to resist the ravages of time, weather, and disasters. Shouldn’t we do the same with our business itself? Sure, like the houses and high rises, there will always be a chance of failure no matter how well we build it. But that doesn’t mean you can’t stack the odds in your favor through proper risk management.

Also read: Top Construction Project Management Software

What is construction risk management?

All businesses face risks, but not always the same ones. Healthcare professionals, manufacturing plants, logistics teams, and record labels all find themselves liable for a variety of things, and they all similarly threaten the ongoing success of the organization. 

The practice of addressing risk factors, especially when done methodically and systemically, is known as “risk management.” It is, in and of itself, a pretty broad field, with plenty of related and subordinate terms floating about on the internet. As a general rule, most of the definitions for these terms can be broken down to simply “risk management, but for X.”

Which brings us to construction risk management. It’s risk management, but for the construction industry.

How is construction risk management different?

You know how building a house, an office, or a factory all functionally follow the same process? Start with the foundation, gotta put a roof on there at some point, and end with the finish work? And the primary differences are all tied to the demands and expectations the structure will be subjected to?

It’s kind of like that. Risk management is largely the same methodology no matter where you apply it. What changes are the specifics, and what gets top priority. An ad agency doesn’t have to worry too much about workplace safety, but might have to contend regularly with issues related to copyrights and trademarks. 

Construction deals with a number of fairly common risk and liability concerns, such as:

• Workplace safety and OSHA compliance, like manufacturing and industrial organizations.
• Authorizing work, filing permits, and adhering to coding and licensing standards, much like healthcare and legal professionals.
• Shipping and supply chain problems, scheduling issues, and concerns with coordinating efforts, like logistic crews.

But they also regularly tackle issues that are rare outside their industry, including:

• Dealing with public infrastructure—interfering with local utilities, disrupting foot or street traffic, and preventing unauthorized public access.
• Setbacks and losses due to adverse weather conditions, unexpected geological conditions or events, and even the occasional human sabotage (such as an arsonist).
• Political and bureaucratic complications, such as conflicts over zoning, land rights, environmental impact, etc.

Beyond that, construction crews also have to account for elements of risk where their control or influence is limited:

• Work happens in a variety of environments and under a variety of conditions.
• Sub-contractors operate mostly independent of the crew itself.
• Teams aren’t always working at the same time or in the same places, making it oversight and supervision more of a challenge.

So, in a nutshell, construction risk management is different from its peers because the particular hurdles and pitfalls are different. And even where there’s some overlap, construction is its own unique cocktail of threats and possible disasters. 

Why is risk management important for construction teams?

First of all, risk management is always important, regardless of industry, profession, market, vertical, etc. Whatever the specifics of the circumstance, no amount of profit or success can outpace poorly managed risk profiles in the long run. Like a game of roulette, you may have a run of good luck for a while, but the odds are not in your favor, and the ball will land on red eventually.

Construction is a little unique in at least one way, however: finances. 

In construction, payment doesn’t usually happen up front, at least not in full. The details will vary from team to team based on a number of factors—team size, project scope and budget, and clientele, for starters. In general, though, contractors are often performing work prior to receiving payment. 

But unlike other organizations that deal with accounts receivable, construction projects tend to have significant up-front costs. So even a single missing or delayed payment can have a destabilizing impact on the whole company’s finances. 

Again, just like no building is fireproof, just fire-resistant, risk management won’t fully eliminate this or other problems. What it can do is minimize the impact of such “hiccups,” and help you withstand disasters when they happen.

Basically, it’s “measure twice, cut once,” but for the business side of the operation.

How to manage risk in your construction project

Now, we’ve already mentioned how “risk management” is the term used broadly when organizations try to keep their risk profile in check. The most structured and formalized version of this is known as Enterprise Risk Management (ERM). ERM is an approach with five core functions:

1. Identification
2. Assessment
3. Response
4. Monitoring
5. Evaluation and reporting

For many outfits, especially smaller teams, risk management efforts are less organized to some degree. Anyone looking to get serious about their risk management, however, can benefit from the five functions listed above. 

Everything starts with identification. Risk factors are surveyed and recorded across the project so they can be properly considered and addressed as needed. Think of it like a building inspection, but for your risk profile.

Once you’ve built your list, it’s time to assess the risks. Each one is evaluated based on qualities like importance, urgency, and severity, as well as details like how avoidable the risk is, how easy it is to mitigate, and the estimated impact of a loss. Then, decisions are made about what to do with a given risk: avoid it, mitigate it, transfer it, or accept it.

After these first two establish the game plan, it’s time to respond to risks accordingly. Making preparations, implementing policies, utilizing tools or services, and the like. 

Some risks will justify ongoing observation and oversight, potentially coupled with collecting data for review. Depending on the risk in question, this may help highlight successful responses or flag ineffective ones, allowing you to reassess and make adjustments as needed.

Which, incidentally, is the final step. Tracking levels of effectiveness in risk response strategies and reporting on that data provides the critical context necessary to make a wide variety of non-trivial business decisions. Without this last step, there’s not really any way to tell if your risk management is even working as intended. 

Obviously, those are some pretty broad strokes, but this article wasn’t meant to be a textbook (even if the word count is starting to suggest otherwise). Our goal here was to explain the process, describe some of the advantages, and point you toward some tools to help get you there. Now that we’ve covered the first, let’s hit the other two. 

Benefits of risk management in construction

Maybe you’ve read this far, and you’re thinking, “Sounds great and all, but that seems like an awful lot of work. Why would I ever want to add complexity to the way we get things done? There are enough moving parts to manage as it is.”

Well, at the risk of stating the obvious, effective risk management leads to better outcomes. 

Some of this is all nuts and bolts; risk management facilitates efforts to minimize and avoid losses, unnecessary costs, and problematic delays. That means fewer things cutting into your profits, so your company can actually reap the rewards of the work. 

Other things might sound a bit more “white collar”: major losses often impact brand image, and if they’re big enough, you may have to actually address things from a PR standpoint. On the other hand, the fewer goofs you have to bounce back from, the more reliable and dependable the company looks. That means better brand loyalty and better word-of-mouth, which means more business.

Oh, and yeah, keeping people safe. That one’s kind of important, at least if you want to avoid issues with OSHA. Or want to keep a solid team on staff. Or be a halfway decent human, if that’s something that carries any weight for you.

Remember, these are broad strokes, but the bottom line is the same. Preparation and process can be powerful tools in your efforts to reduce costs and avoid needless business concerns.

Why risk management matters

All businesses face risks, but not always the same ones. Healthcare professionals, manufacturing plants, logistics teams, and record labels all find themselves liable for a variety of things. Some overlap, and some do not. 

Construction projects can be incredibly risk-sensitive. They face many of the biggest concerns of other industries, such as:

• Workplace safety and OSHA compliance, like manufacturing and industrial organizations
• Authorizing work, filing permits, and adhering to coding and licensing standards, much like healthcare and legal professionals
• Shipping and supply chain problems, scheduling issues, and concerns with coordinating efforts, like logistic crews

They also face some issues that are less common outside of their line of work. For example: 

• Dealing with public infrastructure—interfering with local utilities, disrupting foot or street traffic, and preventing unauthorized public access
• Setbacks and losses due to adverse weather conditions, unexpected geological conditions or events, and even the occasional human sabotage (such as an arsonist)
• Political and bureaucratic complications, such as conflicts over zoning, land rights, environmental impact, etc.

Whatever the specifics of the circumstance, project, or industry, it’s important for every organization to understand at least one thing: No amount of profit or success can outpace poorly managed risk profiles in the long run.

What are the types of risks for construction projects?

Looking for more specifics on the kinds of risks you should be watching for, and trying to manage? You got it. There are a whole host of risks, from minute to monumental, that construction teams deal with (whether they know it or not). Most fall into a few categories, such as the ones listed below.

Logistics

Clients may not pay in full until the job is done, but crew members definitely expect to get a regular paycheck so they can keep paying their own bills. As mentioned above, finishing a job is a critical part of the process that leads to a payday. And the longer work takes, the more expensive a job becomes before the final invoice can be sent. Even the most conservative contractors can’t pay their teams indefinitely if the job can never be billed. This means that delays and setbacks are devastating to construction projects. 

The two worst problems a general contractor faces regularly are jobs that take too long to complete and jobs that grind to a halt and leave the team without work to do while they wait.  And a lot of things can lead to either problem. Supply chain issues, scheduling flubs with subcontractors, permits, and red tape are just a few.

Safety, injury, and OSHA violations

Let’s not forget those hard hats. Workplace safety is critical to construction jobs because on-the-job injuries aren’t mere papercuts or wrist cramps. The work being done and tools being used can quite literally cost crews an arm and a leg (or worse) if proper protocols aren’t in place. And, all sympathy and tragedy aside, workplace accidents are a major expense, which is enough of a reason on its own to try to prevent them.

Property/asset damage

While supply delays, wrong orders, or absent tradesmen can be predicted and planned for to a certain extent, other potential disasters cannot. Acts of god, political unrest, or even fires started by stray cigarette butts can upend an entire project with little to no warning. 

A would-be artist sneaking in and spray painting “Tonka” onto some of the heavy equipment on your job site might be funny, but the ramifications of such burglary and vandalism are less so. 

Legal and financial

Back in the ancient year of 2008, a large number of crews learned the hard way that speculating on future profits in this industry could be a serious mistake. No paycheck is guaranteed except for those that have already been cashed, and broader economic upheavals like housing crashes, pandemics, or lumber shortages due to forest fires in foreign nations can demolish any hope for future paydays practically overnight.

And let’s not forget that construction is a highly regulated industry. Those regulations aren’t universal, either, so different jobs will have certain variations on what compliance efforts have to be implemented. Negligence is no small matter, and it can lead to significant fines on its own.

Also read: 8 Common Risks in Project Management

Deeper dive: Financial risk in construction project management

Like a poor diet and lackluster exercise regimen lead to an increased risk of health concerns over a long enough lifetime, so too does a poorly managed risk appetite for businesses. Where this becomes a concern unique to the construction industry, however, is in how the financials work for most build teams.

Many projects are initially funded with business loans to get the work started on schedule, which leaves accounts receivable staff chasing forthcoming payments to stay ahead of debt liabilities. This means that teams are usually operating with the accounting equivalent of “lean manufacturing,” with cash flow functioning much like just-in-time inventory.

Under those conditions, it doesn’t take much of a delay, disruption, or loss to have a destabilizing impact. Even for teams that run the show with more of a cushion and less operating debt, income is still most often tied to a smaller number of large, expensive projects. If a single build falls through or takes a major loss, it can be devastating for the whole organization.

Proper risk management can minimize these losses. It can maximize profits, lead to more accurate financial forecasts, and improve the overall stability and longevity of business growth. 

Best of all, it’s not a job that has to be done entirely by hand. Like the power tools and heavy equipment used to make manual labor easier, the right software can simplify and streamline risk management, reducing the cost to achieve success in these efforts.

Also read: Top Construction CRM Software

Applying risk management to construction projects

Ok, so all of those things listed above sound like the opposite of “fun and profit.” What can be done about them? 

In a nutshell, risk management as a strategy revolves around taking an inventory of current and predicted future risks, comparing potential losses to potential gains, and then addressing risks accordingly. Some risks can be avoided altogether with the right preparation. Some can be mitigated significantly, but not removed. Some are too severe and merit turning down opportunities rather than accepting the potential for loss. 

Once an analysis is made and responses implemented, then it’s a matter of keeping an eye out so nothing potentially problematic goes unnoticed. 

Mind you, this description of risk management is very reductive, as the actual discipline is impressively deep and complex. And, as many businesses don’t actually have room in their budgets for dedicated risk professionals, it’s important to find another way to leverage it effectively. That’s where software comes in.

Also read: Construction Project Management: 5 Features to Consider

Implementing risk management without driving up costs

Look, we know that risk management isn’t likely your home court, and the same goes for software. Nobody expects the plumber to run the power cables, and no one expects the roofers to lay the floor tiles. That’s why, as a manager/general contractor/business owner, it’s important to know how to do it by knowing who or what can do it.

You buy cordless drills because they do the job more efficiently than it can be done by hand, and you hire cement trucks to spare yourself the labor and logistics. The right application for risk management is no different. The key here is that you don’t use a nail when you need a screw, so to speak. 

Different risk management platforms will be geared toward specific “use cases”— i.e., optimal applications. For instance, some are built to help manage vendor risk in particular, so you can minimize the amount of liability you deal with by partnering with other businesses during projects. Others are targeted toward financial risk, or information security, or similar.

Bottom line: Be sure to do your research and find the software vendor that targets the kind of work you do in particular. And don’t ever believe a claim of “one size fits all” universality. No software fits every use case, and even if it did, construction crews already know that multi-tools are always less adept at a given task than a dedicated tool for that job.

Preparing for risk

Risk is a complicated matter, and it’s not an easy one to address effectively. That doesn’t mean you should leave it unaccounted for, however. Don’t let unmanaged risk lead to otherwise preventable losses, and don’t let it be an onerous responsibility when the appropriate tool can make it a straightforward one.

Under those conditions, it doesn’t take much of a delay, disruption, or loss to have a destabilizing impact. Even for teams that run the show with more of a cushion and less operating debt, income is still most often tied to a smaller number of large, expensive projects. If a single build falls through or takes a major loss, it can be devastating for the whole organization.

Proper risk management can minimize these losses. It can maximize profits, lead to more accurate financial forecasts, and improve the overall stability and longevity of business growth. 

Best of all, it’s not a job that has to be done entirely by hand. Like the power tools and heavy equipment used to make manual labor easier, the right software can simplify and streamline risk management, reducing the cost to achieve success in these efforts.

Also read: Top Construction CRM Software

What can project managers do to address construction risk?

Project management is one of those professions where the job itself can be highly variable, even within a single industry. At one company, you might be serving as something between a dispatcher, a scheduler, and a traffic controller. At others, you may be more deeply involved in process decisions—helping determine the what, the how, the where, and the when. 

You’re not usually a team lead, though, and you’re not a production-level employee. So you’re pretty limited with regards to what levers you can pull to mitigate risks directly. Instead, you’re doing your best with objectives that others will be pursuing, and rules that others will be enforcing. 

Which might leave you wondering “Where does that leave me, as far as risk management?”

Good news, and bad news. Like we just mentioned, even your best efforts will still be at the mercy of other people, who are more directly dealing with the risk factors. The good news, though, is that the tools at your disposal are the same they’ve always been: process, documentation, and reporting.

Hear us out before you cry “Geez, not another SaaS product.” We, too, have felt the sting of an unruly and out-of-control tech stack, and that’s not what we’re trying to recommend here. Rather, think about the products and tools that you do rely on. The ones you can’t live without (even if, at first, they seemed like unnecessary additions to an already complex system). 

In fact, you’re probably already using a PM solution for that very reason. It’s been indispensable in your work. What you might not know, is that many PM solutions have begun supporting the functions needed to account for risk (as we’ve discussed above). 

After all, much of the work of risk management boils down to setting goals, measuring progress, and reporting results. It’s the same as performance indicators and business objectives (though, perhaps in the opposite direction). 

So here’s our advice. Use the tools you know best, just apply them to a new objective. Check to see if your PM software supports the kind of detailed risk tracking and reporting that you need. If not, don’t be afraid to shop around for a replacement. At worst, you’ll spend a little time on research, and get a sense for what might be out there (including PM tools that might work better for the other things you’re doing). 

At best, though, you may find the system you need to finally reign in the jobsite injuries, major financial losses, and logistical delays. It’s obviously not as simple as signing up for new software. But this is construction we’re talking about. Anyone who’s ever swung a hammer or held a cordless drill knows the difference the right tool makes on the job. 

FAQs

What is construction risk management?

Construction risk management is the identification, evaluation, and addressing of risks and liabilities specific to the construction industry to plan for, minimize, and prevent losses as effectively as possible. 

What are the types of risks for construction projects?

There are numerous risks applicable and relevant to construction projects, but they include financial risks, logistics risks, safety risks, legal risks, environmental and circumstantial risks, and more.

What are the five principles of risk management in construction?

Most experts, textbooks, and certifying bodies list five, with specific wording varying to some degree: identification, assessment, response, monitoring, and reporting.

What is the risk manager’s role in construction projects?

A risk manager’s role is largely comparable regardless of the industry. They’re a sort of counterpart to project managers—they identify risks, set objectives for minimizing/mitigating/avoiding risk, and then establish processes for pursuing those targets. Then, they measure progress and report to management to help determine what’s working and what needs adjustment.