Navigating Quantitative Risk Management and Decision Making in Construction

July 23, 2021 by Michael Gober & Denis Gritsiyenko

Does your risk management assessment method begin and end with allocating 10% of your budget and timeline for undefined contingencies?

No one likes to waste time on unnecessary steps.

That practice may save you time, but it will leave you vulnerable and unprepared for risks you could have prevented.

The good news, there’s a better approach to risk management that will save you time and money in the long run.

Continue reading to learn everything you need to know about risk management, including:

How to define and classify risks on your construction project.
The 5 steps and types of risk in a risk management process.
When to assess risk.
Tools you can use today in your risk management strategy.

Utilize Change Orders With CM Fusion to Stay on Top of Your Risk Management Strategy
How Is “Risk” Defined in Construction?
What Are the 5 Risk Management Processes?
How Are Risks Classified on a Construction Project?
Types of Risk Management in Construction Projects
What Is the Importance of Risk Management in Construction Projects?
How Do Construction Companies Manage Risk?
Manage Construction Documents and Change Orders With CM Fusion

Utilize Change Orders With CM Fusion to Stay on Top of Your Risk Management Strategy

Every experienced contractor is familiar with, if not buried in, change orders that modify the scope of a project and usually increase the price of the contract.

What if we told you you don’t have to be haunted by the stack of change orders piling up on your desk?

There’s a better way, an easier way.

With CM Fusion’s cloud-based construction management software, you can …

Create
Manage
Track, and
Approve

… change order forms digitally.

Added costs, delays, and disputes can be avoided when you have the power to create and manage project change orders in this real-time tracking and approval system.

Your daily duties are simplified with:

Standardized “click and go” templates, so you don’t have to go searching through dozens of word documents to create each new change order request.
A centralized location where you can manage change orders and send access to owners for changes, requests, and approvals at the touch of a finger.
Straight-forward summaries that give you an expert view of added time constraints, costs, paid versus owed values, and pending change orders.

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How Is “Risk” Defined in Construction?

You can probably forecast change orders that are likely to occur in the near future.

But the most dangerous risk is the one you never see coming that can do major damage to your project.

That's why it’s important to understand the types of risks your project may face to develop a simple, yet quantitative risk management strategy instead of allocating the arbitrary 10% risk contingency.

There are two very different types of risk:

Hazard risks refer to potential risks to safety on site. Safety management involves hazard risk assessments, practices, and guidelines that are governed by Occupational Safety and Health Administration.
Project risks refer to the probability of a future event with the potential of a negative or positive impact on the cost and schedule of a project. These are the risks referred to in the term risk management, which is used to denote changes to the cost and schedule in overall project management.

This guide will focus on the second type of risk and the term risk management that does not apply to safety.

What Are the 5 Risk Management Processes?

There are five steps to risk management that will help you create a practical and easy-to-follow risk management process:

Risk identification
Risk classification
Risk evaluation
Risk assessment and management
Monitor and review

Here we will take a deeper look at each step and detail the essential role it plays in the risk management process.

How Are Risks Classified on a Construction Project?

Steps one and two are all about identifying and analyzing before making any decisions on how to address the possible risks.

The standard way to begin identifying risks is by creating a risk log.

A risk log lists all possible risks that capture any potential impact on cost or schedule.

Once you have identified risks in your risk log, you can begin analyzing them by classifying each into one of three groups:

Organizational risks - This can include staff turnover or delivery delays.
Internal/External risks - For example, an external risk can be a difference of opinions among stakeholders on how to move forward with part of the project which causes construction delays.
Local risks - For example, a local risk can be that the inspector may not approve a part of the project and it must be addressed before moving forward.

Evaluating Risk Assessment and Management in Construction Projects

After you’ve identified, analyzed, and classified your risk log, it’s time to evaluate each risk in terms of probability and impact.

Probability is based on the likelihood that the risk will happen.

Probability is measured at three levels:

Low
Medium
High

Impact is evaluated based on what type of impact the risk will have on either the cost or the schedule.

Impact is measured at three levels:

Low
Moderate
Severe

Evaluating the risks in each category based on probability and impact will help create a clear picture of the risks that intersect the highest probability and most severe impact.

Focus on high probability and severe or moderate impact risks, followed by the medium probability and moderate or severe impact risks.

Low probability and severe impact will signify your secondary risks that could be costly, and you should keep your eye on them.

Risks that intersect high probability and low impact should rank lower on your list of concerns since the small impact can be dealt with — if and when it happens.

Now that you have assessed the most important risks, you can begin to develop risk control strategies to manage the effects of the risk.

For example:

You have a winter construction project in Michigan. You have identified and classified an external risk that a winter storm may come and freeze the pipes.

Due to the timing and location of the project, you forecast a high probability, and the potential impact to replace the pipes will be $9,000 and three days.

To mitigate this risk, you decide to invest $200 to insulate the pipes and avoid the possible risk that would cost you $9,000.

Types of Risk Management in Construction Projects

By now, you are able to recognize that risk management is all about assessing the risks that could affect the cost and schedule of your construction projects.

Here are a few examples of what may fall under risks to the cost and schedule, but as you know many potential situations can cost your construction project both time and money.

Cost

Managing cost risks addresses all financial factors that can affect your cash flow.

Cost risks can include things like:

Unexpected cost increases to labor or materials.
Matching estimates with competing firms.
Issues with the economy.
Lack of sales.

Schedule

Risks that may delay your schedule can often negatively affect your budget. That’s why it’s crucial to identify and manage risks that may create bigger problems down the road.

Some risks to the schedule may be:

Community opposition to construction.
City delays in approvals for permits.
Delays in financing.

What Is the Importance of Risk Management in Construction Projects?

Risk management is a vital aspect of successful construction projects.

Along with …

New industry trends
Projects growing in complexity, and
Rising costs

… comes an increase in risks that, if not managed, can prove detrimental to your project and your budget.

Risks that go unmonitored can quickly multiply into major complications that can impede the progress of your project.

That’s why the final step is just as imperative as the last.

Reviewing and monitoring critical risks that have been managed as well as those that pose a less substantial danger to cost and schedule allows you to stay on top of any hazards that could potentially throw a wrench in your plans.

Benefits of Risk Management in the Construction Industry

In addition to proactivity and prevention, other benefits of risk management include:

Identifying problem projects: Some projects that just seem destined for failure at the start. If you’re able to identify, evaluate, and plan how to manage these risks at the beginning, you will have a big-picture view of the overall project risk score.

The risk trajectory will allow you to address the red flags before they become troubled projects.
Decreased surprises: Some surprises are unavoidable, but an extensive risk management process can greatly reduce the number of surprises that can cost you big.
Improved data and budget accuracy: Remember that old 10% contingency fee? What exactly are those numbers based on anyway? A risk management strategy enables you to calculate the savings of being proactive versus reactive.

If you didn’t have the data before, you now have the opportunity to gather historical data that will shorten the time you spend creating your risk management strategy for the next project.
Improved communication: Communicating risks and management plans require an open line between all key players.

This line of communication keeps everyone informed in real-time. Owners see a logically laid-out plan of the risks and control contingencies, managing expectations and disappointments.

How Do Construction Companies Manage Risk?

Most construction companies don’t manage risks at all or apply the standard contingency fee to every project.

Some construction companies use risk management techniques that fall into four categories:

Avoidance: For example, some construction companies refuse to build projects with certain environmental risks.
Transfer: A common example is for construction companies to transfer risk to insurance.
Mitigate: Management plans go into effect to control the outcome of a possible risk.
Acceptance: Some uncontrolled risks like weather must be accepted and most construction companies develop ways to lessen the impact.

When Is Risk Management Usually Assessed?

Ideally, risk management is assessed at the beginning of a project and multiple times during the project’s timeline.

The beginning of the project is the best time to draft all forecasted risks and begin the risk management process.

Additional risks should be brainstormed, assessed, and monitored continually at monthly meetings to stay on top of new risks that may arise.

Manage Construction Documents and Change Orders With CM Fusion

Risk management doesn’t have to be a painstaking process.

With CM Fusion’s construction management software, you can tailor your risk management method and create your own standardized document template.

At the click of a button, you can pull historical data from previous risk management analysis, and publish your new risk management analysis to owners and stakeholders for easy access to track and approve change orders in real-time.

All of your construction project documents are organized in one convenient place, accessible from the cloud on your tablet, mobile, or computer.

CM Fusion makes managing construction documents, change orders, and project tasks simple and convenient.