Construction is a high-risk business, from the types of work being done to the financial uncertainty of payments and potential for lawsuits. Insurers and surety companies view risk in terms of exposure to possible losses. Some losses have a higher probability of occurring than others and some will have greater consequences for your business.
What are the risk categories to consider?
When identifying and analyzing risk, it’s helpful to see how risks fit into categories. Here are some you should consider as you begin to identify your own project risks. Use this checklist to look at your construction business through a risk liability lens.
- Technical risks – poor design, insufficient site investigation, inadequate specifications or the unavailability of specified materials
- Logistical risks – the lack of proper equipment, sufficient spare parts, fuel, labor or transportation
- Construction risks – uncertainty of supplies, worksite injuries and accidents, negligence, construction defects and weather or seasonal uncertainty
- Contractual risks – legal or regulatory issues and contract and labor disputes
- Financial risks – cost escalation, delays in payment, rising interest rates, lack of sales or unmanaged growth
- Project risks – lack of proper management, inadequate allocation of resources, and unrealistic schedules or schedule changes
- Political risks – zoning disputes, lack of funding for a public project or political unrest
- Competitive risks – pressure to underbid a competitor, lack of profitability, or being overextended
- Ethical risk – pressure to engage in political games or win bids using questionable tactics that could put current and future contract engagements at risk
Categories and sub-categories of risk
Now that you’ve made notes on the categories of risk for your construction business, take the next step. Write down your risk areas and organize them. This checklist will help you to get deeper into identifying liabilities.
- Write a description of each risk.
- What’s the likelihood that the risk will occur (low, medium, high)?
- What’s the potential impact on your business (low, medium, high)?
- How would the risk affect your workers or subcontractors?
- Would it affect scheduling?
- How would it affect the quality of materials?
- What about the safety of the job site?
- Are there actions that can be taken to mitigate the risk (options to correct or transfer the risk elsewhere)?
- What are the early-warning signs of liability (several recurring accidents, invoices rarely go out on time, contracts are incorrect)?
- What methods would be used to communicate the risk, once recognized?
- Who owns the risk category and what methods are used to handle risks previously reported to the owner?
- Are there contingency plans or written guides in place?
- How are you communicating the steps of the written plan (formal training)?
Consider how critical each of these areas is to the success of the job. You may find it helpful to create a table that lists each project area and its relative importance (low, medium, high).
Sample risk exposure and business impact assessment
|Risk area||Liability exposure||Business impact||Easy to correct?||Action plan|
|No formal employee training||Workplace injury resulting in higher workers’ comp premiums or risk pools||High||Yes – employee training is controllable||Establish training program|
|Tornadoes at certain worksites||Tornadoes are seasonal – we have protocols in place and commercial property insurance coverage||Low||No – weather is uncontrollable||Transfer risk to insurance|
Once you’ve figured out the risks, liabilities and potential business impact, move on to assembling a risk management team to figure out the details of your risk management plan. Use a risk management team checklist to help you and your team develop your business risk management plan.