Risks and their Management in Construction Projects

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Why compile a list of top construction project risks? Because construction projects are risky by nature. Many things can go wrong, from weather-related delays to workers getting injured on the job. And then there are the financial risks: cost overruns, missed deadlines, and lawsuits.

To make matters worse, construction companies often expose themselves to even more risk by not taking adequate precautions. For example, they might not have adequate insurance coverage or choose cheaper but less reliable subcontractors. As a result, they can end up losing money in the event of a disaster.

In this guide, we will thoroughly discuss different types of risks and their management as well. So let’s move on!

What is Construction Risk?

Construction risk refers to the many dangers and potential problems that can occur during a construction project. Construction risks are potential problems that could occur during construction, resulting in financial loss, physical injury, or property damage.

These risks can include weather-related delays, workers getting injured on the job, cost overruns, and missed deadlines.

5 Different Types of Risks in Construction Projects

Five different types of risks are commonly found in construction projects:

  • Financial Risks
  • Productivity Risks
  • Environmental Risks
  • Legal, Documental, and Contract Risks
  • Safety Risks

1. Financial Risks

Financial risks are perhaps the most common type of risk in construction projects. They can include cost overruns, missed deadlines, and lawsuits.

Cost Overruns

Cost overruns occur when the final cost of a project is higher than the original estimate. This can happen for a variety of reasons, including unexpected repairs, materials shortages, and labor problems.

Missed Deadlines

Missed deadlines can also be costly. If a project is not completed on time, the contractor may have to pay penalties to the owner. In some cases, the contractor may even be sued.

Unexpected Increase in Material Costs

Another financial risk that contractors face is an unexpected increase in the cost of materials. This can happen if there is a sudden shortage of a particular material or if gas or oil prices rise.

Prices for raw materials are never set in stone, and certain market elements can’t be easily predicted, such as labor strikes when items are produced, delivery challenges/bottlenecks, trade tariffs, and more.

Damage or Theft to Equipment and Tools

Another financial risk that contractors face is damage or theft to their equipment and tools. This can happen if the job site is not secured correctly or if the equipment is not properly maintained.

2. Productivity Risks

Productivity risks refer to any factors that could adversely affect the construction process. They can include equipment failures and labor shortages.

Labour Shortages

One of the most common productivity risks is a labor shortage. This can happen if the contractor cannot find enough workers to do the job or if the available workers are not properly trained.

Construction cycles must be managed to avoid underutilization or a shortage of skilled labor.

Equipment Failures

Another productivity risk is equipment failure. This can happen if the equipment is not properly maintained or if it is not suitable for the job. It occurs at the time of startup when the contractor is trying to get the project off the ground.

Overcrowding or Trade Stacking

Trade stacking is another productivity risk that can occur on construction sites. This happens when too many workers work in the same area, which can lead to accidents and injuries.

Overcrowding can also lead to productivity problems. If too many workers are on the job site, they will get in each other’s way, and the work will slow down.

Material Availability

Material availability is one of the many risks inherent in construction. While some materials are readily available and can be sourced from multiple suppliers, others may be in short supply or only available from a single supplier. This can lead to project delays and cost overruns if the required materials are not available when needed.

3. Environmental Risks

Environmental risks are any factors that could adversely affect the environment.

Poor Weather Conditions

One of the most common environmental risks is terrible weather. This can include everything from heavy rains to severe winds. Bad weather can delay construction, damage equipment, and injure workers. Sometimes, bad weather can even force a project to be abandoned entirely.

Natural Disasters

Natural disasters are another type of environmental risk. They can include hurricanes, floods, and earthquakes. Natural disasters can damage equipment, injure workers, and destroy whole sections of a project.

4. Safety Risks

Safety risks are any factors that could adversely affect the safety of the workers or the general public. They can include accidents, injuries, and fatalities.

Accidents

Accidents are one of the most common safety risks in construction. They can happen for a variety of reasons, including poor training, bad weather, and defective equipment.

Injuries

Injuries are another type of safety risk. They can happen when workers are not adequately trained or when they are not using the proper safety equipment. In some cases, injuries can even be caused by defective equipment.

Fatalities

Fatalities are the most serious type of safety risk. They can happen when workers are not properly trained, when they are not using the proper safety equipment, or when they are working in hazardous conditions.

Unsecured construction sites can also lead to fatalities, as can natural disasters.

4. Legal, Documental, and Contract Risks

Many risks are associated with the legal, documental, and contractual aspects of construction projects. These risks can lead to delays, cost overruns, and even the project cancellation.

Zoning and Permit

One of the most common legal risks is zoning and permitting risk. This can happen if the contractor cannot obtain the necessary work permits. In some cases, this can delay construction or even stop it altogether.

Environmental Compliance Risk

Environmental compliance risk is another legal risk that can occur on construction projects. This happens when the contractor is not able to comply with environmental regulations. This can lead to fines, penalties, and even the project’s cancellation.

Contractual Risks

Contractual risks are any risks that arise from the contract between the contractor and the client. These risks can include everything from delays to cost overruns. In some cases, contractual disputes can lead to the project’s cancellation.

Change Order

Change order risk is a contractual risk that can occur when the client requests changes to the scope of work after the contract has been signed. This can lead to delays and cost overruns.

Payment Default Risk

Payment default risk happens when the client does not pay the contractor for work that has been completed. This can lead to cash flow problems and even bankruptcy for the contractor.

Litigation Risk

Litigation risk is the risk of being sued. This can happen for a variety of reasons, including breach of contract, personal injury, and wrongful death. Litigation can lead to delays, cost overruns, and even the cancellation of the project.

How to Manage Risk in Construction Projects?

There are several ways to manage risk in construction projects. Some of the most common methods include:

1. Risk Assessment

Risk assessment is the process of identifying, evaluating, and prioritizing risks. It is a key part of any risk management plan.

2. Risk Mitigation

Risk mitigation is the process of reducing the probability or impact of a risk. It can be accomplished through a variety of methods, such as insurance, bonding, and warranties.

3. Risk Transfer

Risk transfer is the process of shifting the financial burden of risk from one party to another. It can be accomplished through methods such as insurance, contracts, and letters of credit.

4. Risk Financing

Risk financing is the process of setting aside funds to pay for the costs associated with risk. It can be accomplished through methods such as savings accounts, loans, and lines of credit.

5. Risk Sharing

Risk sharing is the process of dividing the financial burden of risk between two or more parties. It can be accomplished through methods such as joint ventures, partnerships, and consortia.

6. Risk Avoidance

Risk avoidance is the process of eliminating risk. It can be accomplished through methods such as refusing to participate in a project or terminating a contract.

 

Mitigate your risk by working with Valet Works which has experience in your industry. Valet Works Construction is a turn-key construction company that can handle every aspect of your project from start to finish. We are bonded and insured, so you can rest assured that your project is in good hands. Our team has extensive knowledge of construction law and can help you navigate complex legal issues. We’ll work to protect your business from any potential liabilities. Contact us today for a free consultation!

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