Construction risk management is an important concept for those involved in the industry. Follow along as we discuss the benefits of risk management, especially as it pertains to the worlds of construction and insurance.
What Is Risk Management in Construction Management?
Managers in the construction industry can have a wide array of responsibilities, including but not limited to coordinating and supervising projects, hiring and managing workers, and overseeing large organizational goals related to deliverables and associated costs.
Additionally, they must be aware of the many possible issues and claims that could arise on projects, such as unsafe working conditions or underinsured workers. Even contractual risks come up in construction projects all the time. In order to avoid pitfalls and associated financial burdens, construction companies are increasingly turning to the proactive strategy of risk management.
Risk management refers to the practice of identifying, analyzing, and evaluating potential risks and utilizing various strategies and resources to mitigate loss. Understanding this concept is an essential part of working in construction, which is why the term ‘construction risk management,’ which highlights its importance in this industry in particular, has emerged.
What Is Construction Risk Management?
As you probably well know, many types of risks can occur throughout a construction project, some that workers may have control over and many that they do not. For example, commercial risks in construction, meaning those stemming from market uncertainties rather than tangible obstacles, are unfortunately common. Therefore, it has become incredibly important for construction companies to protect themselves, their workers, and their financial interests with construction risk management.
We’d define construction risk management as the continuous practice of identifying potential risks, evaluating their likelihood and associated severity of occurring and implementing strategies that adequately tackle the most likely challenges in order to ensure safety and project success.
What Is a Risk Management Process in Insurance?
Many industries implement risk management processes, including, of course, insurance. For insurers, potential risks are usually related to investing, underwriting, regulatory changes, or external factors like overall economic conditions. Additionally, insurance itself is a form of risk management.
For example, in industries where insurance is highly involved, such as construction and contracting, a risk that often looms is the likelihood of hiring uninsured workers, who bring high financial liability with them. Managers can verify their hires’ coverage, ensuring their compliance with contractual obligations and other requirements through documents called certificates of insurance (COIs).
The process for considering risks and how to address them in the insurance realm is similar to the process for doing so in construction, which we’ll outline below.
What Are the 5 Principles of Risk Management in Construction?
There are a few core principles of risk management in construction, also known as steps in the risk management process, that go as follows:
- Risk identification. The first step is to identify potential risks and pitfalls that could occur on a construction job, whether internal or external. Some construction risk examples include health hazards, poorly written contracts, and adverse weather conditions.
- Risk assessment. This involves considering how likely a risk is to occur and its potential impact on the whole project. Good questions to ask here include, “How severe would this risk be if it were to happen?” and “Who would be most affected in the case that this occurred?”
- Risk mitigation. Next up, it’s important to consider how to keep the high-probability risks from happening or at least reduce their likelihood of occurring. Generally, companies will implement pertinent quality controls, safety measures, and other risk mitigation strategies.
- Risk monitoring. Risks should be continuously monitored as construction projects continue. Accordingly, as new threats arise, new protective measures must be implemented, and relevant stakeholders must be kept informed.
- Review and process improvement. Even when a project is completed, a core principle of construction risk management is the goal of improvement over time. This means reviewing how effective a risk management plan was at each step mentioned above and identifying areas to target better in the future.
What Is the Risk Management Matrix for Construction Projects?
One framework used by many construction project managers and risk management professionals is the risk management matrix, which aims to provide a visual representation of a project’s various risks.
Also known as a probability and severity risk matrix, a risk management matrix is a visual risk analysis tool that provides a high-level view of a project’s likely obstacles. Typically, it is presented as a table, with probability being represented on the x-axis and severity being represented on the y-axis.
Together, this view provides a great visual to aid in prioritizing construction risk management efforts, with teams usually choosing to first address the highest-likelihood, highest-severity risks.
Learn More About Effective Risk Management From a Team of Experts
We understand the challenges and frustrations of ensuring compliance. We know that insurance requirements and risk exposure can be overwhelming, and we are here to help you navigate the complexities. At myCOI, protecting you and your partners is our life’s work.
Contact us today to learn more about protecting your construction business and workers.