By Lynn Pearcey, MBA, Copywriter, AIA Contract Documents
September 14, 2023
Table of Contents
Introduction
Proper construction risk management doesn’t just happen. It involves a great deal of planning and a comprehensive risk management plan where every situation that could occur has a proper response noted. Construction risk management is a system that identifies risks and reduces them. Even the most minor construction project can be complicated, making this kind of system a must, as it allows the participants to manage the project smoothly and more efficiently.
The Four Risks
There are four generally agreed upon risks inherent in a construction project. Project managers and other site leadership team members must pay attention to each of them as they all play a vital role in the project’s success. What follows is a closer look at each of the common risks.
Financial Risks
When it comes to managing financial risks on a construction project, project managers and leaders must be able to get a handle on several things. First, there are cost overruns. A cost overrun is the difference between the original budget estimate and the completed project’s actual cost. Delays can also put the financials of a project in serious jeopardy. There’s a connection between cost overruns and delays, which makes managing the former necessary to prevent further financial damage. Disputes and litigation also put a strain on the finances of a project. The threat of these situations makes clear communication and contracts that spell out expectations for all parties a must.
Contractual Risks
Contractual risks are issues or risks from a contract that construction parties have entered into. There are many contractual risks, including scope, delay, and health and safety, to name a few. The scope becomes a challenge when the work that was agreed upon begins to exceed what the parties originally agreed upon. Delays are anything from weather to design changes or even labor disputes, which can cause the project to stall. Construction is a dangerous business at times, and injuries do take place. When an injury occurs, legal and, often, financial implications must be addressed by one of the parties.
Operational Risks
Operational risks are those that take place during the day-to-day operations on the site. There are many moving parts and pieces involved in the building and construction process. They’re complex environments, and with so many things moving simultaneously, there’s a strong likelihood of something going wrong. On one project, it could be a piece of heavy equipment going down and needing repair, leading to a delay. From a manpower perspective, it could be a labor shortage that causes the project to get off track. Any number of similar types of scenarios that relate to the operational aspect of the project falls under this risk heading.
Environmental Risks
There’s no getting around it. Every construction job, no matter how large or small the location or the type of structure being built, comes with an environmental risk. Pollutants from air conditioning, mold in existing structures, asbestos in vents, and particles from roof installations are all environmental risks to consider. Other environmental risks associated with construction include the potential of flooding. While owners and architects can choose locations outside flood zones, they can’t control the weather, making this a concern. Land issues are another concern. Unstable ground and contaminants lurking beneath aren’t as obvious to the naked eye, but they pose a risk, nonetheless. With that, leaders should perform due diligence to make sure the investment they’re making is a safe one.
Conclusion
The construction industry comes with risks and understanding them is crucial to the success of any operation. Understanding begins with a risk management plan that addresses potential challenges that may arise during a construction project. Having strong leadership in place is also part of the solution. Leadership includes trained project managers capable of managing the site and the risk management plan to remedy obstacles as they occur. Remember, proper construction management doesn’t just happen, but with sound practices, principles, and a plan in place, any project you begin can end with success.
AIA Contract Documents has provided this article for general informational purposes only. The information provided is not legal opinion or legal advice and does not create an attorney-client relationship of any kind. This article is also not intended to provide guidance as to how project parties should interpret their specific contracts or resolve contract disputes, as those decisions will need to be made in consultation with legal counsel, insurance counsel, and other professionals, and based upon a multitude of factors.