Risk management in construction projects

April 2022  |  FEATURE | RISK MANAGEMENT

Financier Worldwide Magazine

April 2022 Issue

Investment in any new project invariably carries risk, and the construction industry has more than its fair share. When a risk turns into reality it can disrupt or even derail a project. Identifying and managing construction risks is tricky, but not impossible with careful planning and execution. To avoid disaster, construction companies must be able to properly assess, control and monitor risks once they have been identified.

Risks within the construction space come in many different forms, from project and business risks to environmental and external change risks. According to the Construction Industry Institute, there are around 107 separate construction risks that companies should consider when managing a project.

While many of the risks faced by construction companies today have been around for many years, such as employee health and safety, new challenges are always emerging. The convergence of technology, demographics and globalisation have disrupted the space, requiring companies to adjust their working practices and adapt to new and evolving risks.

Perhaps the most obvious recent example of unforeseen risk is the sudden onset of the coronavirus (COVID-19) pandemic, which had a devastating impact on the construction sector. According to a CHAS survey in the UK, the majority of construction businesses have been hit hard. Many of those surveyed were affected by trade, travel and transport restrictions, increased operating costs and a drop in demand. Seventy-two percent of respondents said they experienced a decrease in turnover, with nearly 20 percent of those experiencing a decrease of more than 50 percent. Only 21 percent of respondents said that the pandemic had not affected their turnover at all, and 6 percent said they had actually experienced an increase. Furthermore, 68 percent of respondents had to cease operations during the pandemic.

With different jurisdictions introducing varying rules on whether and what construction activities were deemed ‘essential’, the industry was affected in virtually every country. The severity of the public health crisis, the strictness of social distancing and the duration of lockdown measures took their toll across locations and project types.

Ignoring risk in construction projects could lead to increased costs, loss or reduction in profit, damage to brand and reputation, and even potentially the insolvency of the business.

Today, risk analysis and management are core features of project management in construction. Companies need effective plans to deal with unexpected events and successfully complete projects.

Construction companies should employ risk management strategies to, initially, identify potential risks and assess the probability and impact of each risk. They should then devise actions that may prevent that risk from materialising, or to ameliorate its impact if it does transpire, or to set out a response to deal with accepted consequences. Next, they will need to actively implement and monitor those actions that are cost effective and necessary for the successful delivery of project objectives. Finally, they should reflect on their experiences to learn and improve the risk management function for future projects, and to train and develop project managers.

Since construction places unique demands on contractors every time a new project is undertaken, it may seem impossible to create an exact risk or cost forecast. A construction risk management plan seeks to provide a framework for weighing possibilities and making decisions against the backdrop of this uncertainty.  

Technology also has an important role to play in supporting risk management. Though it may not directly predict risks, technology helps companies to monitor them over the course of a project, triggering swift mitigating action when problems arise. It provides additional data and faster methods of communication, improving risk identification, assessment and response. Companies are increasingly using data analytics and machine learning to collect and analyse vast amounts of data, to spot risks early and manage them in real time through the internet of things, 5G technology and the cloud.

Technology can also improve productivity and site conditions, protect worker health and safety, and enhance the economic outcome of construction projects. Robotic process automation (RPA) is augmenting companies’ regulatory compliance efforts.

Investment in technology can be game changing for construction companies. Innovations offer increased transparency, improved quality and a more efficient process for organising complex projects, especially those that rely on partners across multiple jurisdictions.

But as reliance on technology in the construction sector grows, so does the need to address cyber security. As in other sectors, construction companies hold valuable data, such as customer records, employee files and sensitive financial information, as well as project-specific contracts, designs, blueprints and correspondence. A successful cyber attack could lead to considerable financial cost. This ongoing risk must be managed accordingly.

By embracing technology and actively minimising the risks attached to construction projects, companies can make long-term improvements to their operating processes and delivery objectives. In this endeavour, risk management planning and project controls are essential.

© Financier Worldwide

BY

Richard Summerfield