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Last Updated on July 17, 2023
Written by Megan Ng
Effective risk management poses a particular challenge for construction companies. On one hand, various risk factors have to be considered before, during, and after the construction project. Construction places new demands on the contractor every time. While it seems impossible to create an exact risk or cost forecast, you can decentralize risk management with a construction risk management plan.
In this article, you will learn about the seven key elements of an effective risk plan. You will also discover what benefits your business can derive from a carefully constructed risk management plan.
There are two proven methodologies in risk analysis: qualitative and quantitative. The main difference between these methods is that quantitative analysis explores the quantities that can be measured in numbers. Qualitative analysis is descriptive and deals with factors that can be observed but not measured. Let’s take a deeper look at this method.
Qualitative risk analysis is done on all risks and for all projects. It measures both the possibility of a specific risk event happening during the project life cycle and the impact it will have on the overall schedule if it happens.
In general, qualitative risk analysis is more subjective. The benefit is that it allows you to estimate the probability and prioritize risk in an easily digestible way to present it to stakeholders. Another benefit is that it can be used to manage risk at any stage of the project.
In a nutshell, the risk management process is a sequence of steps that identify the risks for the successful completion of a project. Construction projects can pose many internal and external risks that may include:
One of the best ways to control risks is to understand the different types and take steps to best avoid these risks. Sadly, there is no way to entirely avoid risks since unknown factors will always emerge throughout a project. However, if you can recognize and classify risks before you begin a project, you can elevate your risk management and avoid potential losses.
When planning your construction project, you should spend some time creating a risk assessment matrix, a tool that was designed to analyze risk. By doing so, your construction organization can detect and prioritize various risks by estimating the probability of occurrence. A risk matrix is also known as Probability Matrix or Impact Matrix.
One of the questions that you should start with is, “What could go wrong?” Think about potential risks to avoid these events from happening, then follow these steps:
The risk assessment matrix should not be set in stone. Instead, consider revisiting it regularly so that you notice and detect the new and emerging risks.
Once you’ve identified and ranked the risks, it’s time to set up the role of a risk owner. This would be the person or a team that ensures that the risk will be managed properly. The risk owner will oversee any steps to manage each identified risk. In the construction industry, both the project owner and the contractor make efforts to control risk. It’s important to assign a risk owner because this helps ensure that a risk response plan is developed, maintained, and quickly acted upon.
Now that you’ve ranked the risks and identified the risk owner, it’s time to plan how you will manage each risk. There are several risk response strategies, each coming with specific actions to implement each strategy. These strategies include:
The risk response plan, also known as the risk register, should be written in every detail of actions that will be taken.
By nature, risks arise from uncertainties and are beyond anyone’s control. The best thing a project manager can do is to identify, analyze, and monitor risks. As environments, stakeholders, and even requirements change, the nature of risks and planned responses should change, too. Risk monitoring involves:
Here’s how to approach these risk monitoring tasks:
Continuously reassess project risks: As the project progresses, you find out that some of the risks are not relevant, or the probability or priorities of few risks can change. , and new risks are identified. This reassessment is usually done regularly as a team exercise while keeping stakeholders in the loop, and the results are added to the risk register.
Outside audit for risks: A team outside of the project team should examine how effectively risks have been managed, including the way root causes are analyzed, and corrective or preventive actions are taken.
Analyze risk trends: By looking at project performance over a period of time, you can study the trends of costs, project schedules, and scope changes, and then try to forecast if there is a risk of any derailment in the near future. If the trend shows that any of the risks can materialize, then plan and put in place the preventive actions.
Reserve budget: Use this reserve only when certain risks materialize and you need to deal with them. As the project progresses, a project manager needs to keep an eye on the cost reserves and schedule buffers, if needed.
Meetings are an important part of this process. Regular meetings ensure that all project team members are aware of what risks may come up, and so they will be equipped to look out for symptoms and come up with good risk responses.
Once the qualitative risk assessment has been done and recorded, it’s time to assign a numerical value to each of the risks. During quantitative risk management, the impact of risk on the project is converted into numerical terms. This information is used to determine the cost and time contingencies of the construction project.
Quantitative risk analysis is objective. For example, it can be calculated that risk A has a 60% chance of occurring, based on quantifiable data such as fluctuations in resource costs, average activity completion time, logistics, and more. As a result, risk A has a 15% chance of causing a delay of X number of days. The outcome depends upon the quantity and accuracy of your data.
High-risk industries such as mining, oil and gas, and construction rely heavily on quantitative risk analysis. In fact, it’s a legal requirement. For the best results, qualitative and quantitative risk analysis should be conducted in tandem. This approach will provide you with the best possible insight into the risks and their possible impact on the successful outcome of your project.
Lionel Galway, in the Quantitative Risk Analysis for Project Management paper, discusses three risk elements that project management should consider:
When these risks are quantified, the project team can develop effective mitigation strategies or add proper contingencies to the project estimate.
Contingency, or the funds added to the base cost estimate to cover any uncertainty or risk exposure, forms the material side of risk management. By adding contingency into total project cost, the project management team can cover risk exposure which in turn builds trust, improves transparency and project performance. For example, contingency funding can be used to purchase additional materials, labor, equipment due to minor errors that occur when the estimate is put together. Contingency can be calculated using:
Most often, deterministic methods are the easiest and most popular methods for establishing the cost contingency reserve fund. It’s important to note that contingency funding is not intended to be a blank check to hide mistakes that occurred during the execution of the project.
A schedule risk analysis helps to evaluate the possible impact of uncertainty on the project duration and cost. During this analysis, a project manager identifies the risks to the project plan and proposes measures to mitigate these risks in order to achieve a better outcome.
No one looks into a crystal ball when making estimates about activity time and costs. Project managers often tend to be too optimistic or reserved, which can lead to estimation errors. That’s why it’s important to follow all four steps of schedule risk analysis:
Certainty is a rare commodity in the uncertain world of construction and complex projects. The schedule risk analysis looks at the project activity durations with reasonable skepticism, trying to identify in advance the difficulties that may occur.
Project risk management is a challenging process that requires plenty of qualified resources and tools. One such tool is a construction risk management plan.
Merging both quantitative and qualitative elements of a construction risk management analysis, a risk management plan helps a business clearly define the risks, reduce their likelihood, and provide a system for better decision-making that helps avoid future risk. We’ve broken it down into the four most important reasons why risk management plans are essential for successful project completion. This makes the document a valuable effort for every construction organization.
Construction businesses that have risk management plans can be combat-ready financially when a problem arises. When a company plans for the risks and responds to them quickly and competently, this saves time, money, physical resources while also allowing your employees to spend more time working on value-added tasks instead of constantly fire fighting. Team members gain the knowledge and workflows that enable them to make decisions and avoid risk, which in turn improves the efficiency of your construction business. Your people have the right tool it needs to meet the budget and achieve targeted goals. Without well-defined risk management strategies recorded in a plan, your projects become weaker and more exposed to problems.
Once you know your risks, the budget for dealing with them, and have a clear path to mitigating them, you grow confident in the success of your project. You also build yourself an invaluable tool for reporting risk to the senior management as well as the project sponsor and team.
Another benefit of a risk management plan is its reusability. Using a clearly defined risk management plan, you utilize many opportunities to capitalize on your organizations’ strengths. The risk management plan not only helps you evaluate your current project’s success but also helps you build best practices for the future.
Risk management is all about identifying possible risks, problems, or disasters before they hit your project really hard. That’s why a risk management plan is indispensable. Not only it builds trust in your project but also ensures a safe and secure environment for your employees, visitors, and customers. Among other benefits, a good risk management plan:
When you invest time and effort to build a solid risk management plan, you mitigate the risk of spending thousands of dollars in legal and internal costs.
All construction businesses face the risk of unanticipated events, such as a natural disaster, loss of funds through theft, or injury to employees or visitors. Any of these events can cost your company money or even cause your business to close.
With a detailed and comprehensive risk management plan, you can plan for the unexpected which in turn minimizes extra costs before they happen. However, a well-constructed risk management plan contributes to higher profits in several other ways:
While a risk management plan increases the financial stability of your operations, it has yet another benefit. While working on your plan, you can define your insurance needs to save on excessive premiums. Insurance companies may view your organization more favorably if you can prove you have a stable risk management plan which can help reduce the impact of potential claims.
Of course, no risk management plan can ensure your business is completely “disaster-proof,” a good plan can definitely increase your chances of long-term profitability.
Risk assessments need more time, energy, and resources when implemented for the first time. The very first risk management plan you create will be the most resource-intensive since you need to revise your entire work process. Time after time, the process becomes more efficient and improved.
The Project Management Institute (PMI) shares these best practices in risk management:
Risk management plans are an effective method that can save you money, reduce the risk of a workplace injury, and protect your finances and other business resources. Thankfully, there are ways to take the pressure off creating and maintaining such plans.
How many times have you heard about a business that failed due to “unforeseen circumstances?” With Jonas Construction Software, you can take a holistic approach to risk management and risk reduction by leveraging all the data you need to perform an effective risk analysis from a single platform. Thanks to fully integrated construction and service management, you have everything you need to remain compliant, reduce risks and drive efficiencies. Regardless of the scope or complexity of your project, you have everything you need to make the best decisions for your construction business.
Megan is the Content & SEO Manager at Jonas Construction Software. She is fascinated with ConTech and is dedicated to providing educational content and stories to support the challenges and needs of construction and service businesses.
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