A Broader View of Construction Risk Management

This post first appeared on Risk Management Magazine. Read the original article.

Risk is a constant in the construction
industry. From supply chain issues, unpredictable weather and labor shortages,
to severe cases such as global health and economic crises, the variables that
can disrupt construction projects are numerous.

Historically, the engineering and
construction industry’s ad hoc approach to risk management often
led to identifying these risks too late in the project lifecycle,
especially as it relates to project schedules and delivery timelines. According
to the Project Management Institute’s
2020 Pulse of the Profession survey
construction organizations waste an average of $127 million for every $1
billion spent on projects and programs, due to poor project performance.

Organizations managing construction
projects (or portfolios) are increasingly looking for ways to incorporate more robust risk management practices—at
multiple program levels—that minimize disruption to business processes. At the
same time, many are not sure where to begin. A few proven steps can set these
organizations on the right path toward an effective construction
project risk management

A Holistic Viewpoint

It is important for construction
organizations to first undertake an assessment of their risk profiles at both
the project and program levels. Projects can be defined as a one-off
initiative, bound by distinct cost, resource, budget, and/or time-constraints,
whereas programs are a group of interconnected projects that complement and
build on each other—often working toward a larger, long-term goal.

Some firms make the mistake of
only managing risks at the project level, which leads to an incomplete picture
of exposure and performance. It is important to implement a broader focus on assessing
risk that elevates visibility to the program level, allowing teams across
projects to optimize resources and adjust plans to strive toward successful

Five Steps to Better Construction
Schedule Risk Management

With that need in mind, here are
five proven steps to developing a robust risk management strategy in construction

1) Identify the risks: At
the beginning of a program or project, the management team should try to
identify potential risks. Could bad weather or uncertain site conditions threaten
to delay construction? Is there a risk that material costs could significantly
rise unexpectedly? Keep in mind that it is impossible to identify and manage
every possible risk. Therefore, the team should agree on those events most
likely to occur and have the greatest impact. These are the factors that they
will monitor and seek to manage.

2) Assess your exposure:
After identifying the most likely and impactful risks, the team should
determine each risk’s likelihood, as well as the potential impacts to costs and
schedules. Risks should then be ranked based on these factors. From here, teams
should prioritize how they will manage specific risks with the help of Monte
Carlo simulations and scenario planning tools, which allow users to create and
run various what-if scenarios by changing key variables.

While Monte Carlo analysis can be
conducted via a spreadsheet, this approach is not suited to manage large,
complex projects with thousands of data points that can change frequently,
including calendars, resources, and the relationships between them. It is also
not suited to conducting risk analysis across far-reaching programs. For these
types of complex scenarios, it is best to use a true risk management

3) Determine a response
Teams should plan the specific actions they will take to mitigate
high-impact risks. Scenario planning technology plays an important role here to
assess what-if scenarios and determine costs and benefits of each mitigation
strategy. While some risks cannot be avoided, such as building during unforeseen
inclement weather conditions, this step can lessen the impact on the project by
building in adequate schedule, labor and supply chain contingencies.

4) Communicate for visibility:
After assessing risks and defining mitigation strategies, the team should
communicate this information to the project sponsor or owner. This demonstrates
an effort to take a proactive approach to risk mitigation and allows
contractors an opportunity to discuss the risks, mitigation strategies, and
potential impact on the schedule and cost of the project with the project

5) Monitor, adapt and repeat: As
risks continue to evolve, program managers must build in regular assessments to
update risks and their mitigation strategies as conditions change. With more
information about each risk and the impact of various mitigation strategies,
project managers can make more informed decisions about the best path forward.

For example, if there is a strong
probability of a labor shortage in the near future, the team may determine that
the cost of overtime needed to keep the project on schedule is less than
penalties incurred if a project is not completed on time. These same decisions
can be made at the program level, where a manager may decide to pause a
specific project in the portfolio to allocate resources to another project that
presents higher risk and cost impact.

While risks cannot be completely
eliminated, a methodical and collaborative approach to forward-looking risk
management is key to mitigating potential negative impacts. Good risk
management strategies require the integration of dynamic and diverse sets of
information, including budget, cost, and schedule data, with technology and
tools that provide high visibility and centralized data management. With this
in mind, organizations managing construction projects will be well on their way
to shoring up their risk management practices.

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