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Construction Risk 101: Understanding Risk Management

Construction is a risky industry where managing projects means managing risk. Construction risk can be defined as any threat to the progress and completion of a construction project that creates potential loss exposure. In the construction industry, risk is a part of every stage of the project lifecycle, from preconstruction to project closeout.

The complexity of construction projects of all types and sizes creates an ever-present environment of uncertainty and risk. Risks such as weather issues, safety concerns, budgetary concerns, and project delays, to name a few, can appear in any form at any stage of the construction process. These and many other risks adversely impact project performance, compromising quality, increasing costs, and delaying project completion. 

Risk is also expensive. Contractors will likely at some point deal with the controversy that erupts into litigation. Some of the biggest challenges for contractors in litigation include determining who said what and when and locating all the supporting documentation. The proliferation of smartphones and iPads and the many apps on these devices means that information could be buried in many places.

Sifting through these layers and layers of information to determine accountability makes the discovery process like a never-ending, expensive archaeological dig.

Construction disputes, claims, and litigation can quickly turn into a battle of “he-said, she-said,” ultimately eliminating the validity of each party’s claims. These disputes can turn into hundreds of thousands, if not millions, of dollars in litigation costs. A 2020 Global Construction Disputes Report by Arcadis revealed that the average value of disputes in North America rose from $16.3 million in 2018 to $18.8 million in 2019. The time to resolve construction disputes in the region also increased from 15.2 months in 2018 to 17.6 months in 2019. The report noted that poorly drafted or incomplete, and unsubstantiated claims became the top cause of construction disputes in 2019.

Construction risk is everywhere and is often found in:

In the construction industry, document formation is often an inconsistently managed, manual process that can expose contractors to risk.

There are thousands of activities and essential details associated with every construction project. The method GCs use to document all of these moving parts can make or break the successful delivery of projects. From daily logs to field reports to meeting minutes and change orders, everything needs to be documented. This is especially true of anything that could be
construed as a contract modification, any sort of schedule change, or anything that would affect the performance of the work.

Documentation, always important for managing risk in construction projects large and small in the best of times, is crucial in the worst of times when forces outside a GC’s control impact projects. With project delays, material shortages, increased costs, and other issues fueled by the pandemic, proper documentation is absolutely critical for accessing detailed reports on the impact of the virus on projects.

Communication breakdowns

Without centralizing communication workflows, GCs can lose track of their projects, resulting in costly delays and reduced productivity.

A report released by FMI and PlanGrid revealed that construction professionals spend 35% of their time on non-optimal activities like looking for project information and data, conflict resolution, and dealing with mistakes and rework. This non-optimal activity accounts for $177.5 billion in labor costs per year in the U.S. alone.

Rework, in particular, is one of the issues which has a major impact on project profitability. The same report estimated that $31.3 billion of rework in the U.S. in 2018 was caused by poor data and miscommunication.

Poor document tracking

Poor document tracking can result in excessive time searching through filing cabinets for information, misplaced and lost files, and elevated stress levels as project stakeholders struggle to find the data they need.

Without clear documentation, communication erodes, and risk rises. Consider that there could be hundreds of change orders, for each construction project, and each change could add hundreds of pages to a contract. Proper creation and management of documents help minimize the miscommunication and arguments that halt work and cause project delays.

Information silos

Lack of integration creates data silos that block the flow of critical information resulting in a productivity-killing lack of visibility for the project team. The distributed nature of construction projects often creates a fragmentation of information, leading to errors and inefficiencies that cause major headaches for contractors.

According to the Construction Industry Institute, there are as many as 107 top project risks. While the risks listed all have the potential to impact a project, the most common areas of risk that can derail construction projects include:

Financial risk

Anything that can affect construction companies’ finances can be classified as financial risk. Financial risks in construction include cost overruns, material waste, change orders, late payments from clients, and increased cost of materials. These risks can create cash flow problems that can halt or delay projects, which can lead to litigation and ultimately negatively impact the bottom line. Financial risks are often attributed to poor planning and coordination.

Project risk

Project risk includes any factor that impacts the effective management of construction projects. Delays, inadequate management oversight, communication issues, scheduling issues, and team conflict are all areas of project risk. According to a report by Dodge Data & Analytics and Triax Technologies, this risk area is an ongoing challenge for contractors, with 66% reporting challenges in conducting ongoing management of project risks, according to a report by Dodge Data & Analytics and Triax Technologies. Project risks can result in poor project performance, leading to costly delays, reduced productivity, and sometimes project failure.

Safety risk

The nature of construction work and the construction environment make safety risks, otherwise known as occupational risks, major risk exposure in the industry.

Safety risks can include injuries, fatalities, and illnesses. Some of the most common injuries that occur on the construction job include:

  • Overexertion
  • Sprains, strains, or muscle tears
  • Falls, slips, or trips
  • Cuts
  • Fractures
  • Accidents with objects or equipment

Safety is an ongoing area of risk for construction firms, with injuries and fatalities on the rise. The U.S. Bureau of Labor Statistics’ annual National Census of Fatal Occupational Injuries report for 2019 revealed that construction and extraction occupations fatal work injuries increased by 6% in 2019 to 1,066 – the highest figure since 2007.

Schedule risk

Schedule risk occurs when the construction schedule isn’t realistic, neglecting to factor in issues such as the client’s operations, project restrictions, and expected weather events for an area—poor scheduling cost risks and performance. Miscommunication and mistakes related to scheduling can set a schedule back by days, weeks, or months, significantly impacting construction project budgets.

Contractual/legal risk

This area of risk includes potential disputes and litigation arising from the fulfillment of contracts with clients. Legal risks can result when project delivery is late or payments are delayed, and a breach of contract occurs. Claims can also be triggered by a lack of detail in signed contracts or an inability to determine accountability for delays or quality issues. This risk exposure can delay projects and increase costs.

Environmental risk

Inclement weather conditions and natural phenomena are an ever-present risk area in construction. Environmental risks include earthquakes, flash floods, fires, tornadoes, and hurricanes that damage construction sites, make work inaccessible, and slow down project progress. Erratic changes in weather such as intense heat and cold are other environmental risks that potentially impact construction materials and machinery, disrupting operations and causing project delays.

Risk management is an important operational process across almost every industry but is particularly important in the construction industry. The dynamic and complex nature of construction projects and the associated wide-ranging risks make adopting a risk management culture critical to project success. Integrating risk management into every phase of the project lifecycle involves assessing risk exposure, planning for risk, and monitoring for risk.

Assess exposure to risk

According to the Construction Industry Institute (CII), project risk assessment is the process used to identify, assess, and manage risks on a project and is an effective method for determining the degree of project risk. Project risk assessment:

  • Identifies and describes critical issues related to a project, allowing the project team to focus on risk factors of potential concern 
  • Evaluates the project risk exposure and indicates its potential impact of risk during the project’s life cycle
  • Indicates which components of the project should be considered for risk mitigation as part of an overall risk management strategy
  • Focuses analysis on issues unique to each project 
  • Is flexible to meet the needs of almost any individual project

Plan for risk

This stage of managing risk involves developing plans to minimize high-impact risks. Running through “what if” scenarios, determining specific protocols and actions to mitigate risk, and assessing the costs and benefits of each mitigation strategy are all key elements of planning for risk. While some risks such as environmental risks can’t be avoided, proactively planning for risk response can reduce the project’s impact.

Monitor for risk

Risks evolve over the lifecycle of each project, making it critical to monitor for risk on a regular basis. Regularly assessing projects and scanning for risk surfaces the information needed to adapt strategies as conditions change and make more informed decisions on moving the project forward.

While risk is part of the DNA of construction projects, the good news is that this risk can be mitigated using construction management software. This technology is designed to provide operational transparency, improved documentation, and data collection that mitigates risk to bring more certainty to construction projects, improve project outcomes and increase profitability.

To effectively mitigate risk, contractors should leverage a comprehensive project management platform that:

Breaks down data silos

RedTeam’s cloud-based technology breaks down data silos by centralizing communication and providing real-time visibility into projects and instant access to project documentation. RedTeam organizes information in a unified environment that allows all project stakeholders to seamlessly review and respond to critical documents and transactions, tracking every step along the way.

The platform fundamentally changes the way construction professionals communicate and collaborate. Instead of waiting to get to an office to submit change orders, RFIs, submittals, and other important documents, RedTeam’s cloud-based mobile technology makes it possible to prepare, file, and instantly share critical documentation with members of both internal and external teams from anywhere.

Creates tracks, and manages documents

Documentation is an essential component of reducing risk in construction projects, large and small.

RedTeam’s robust document management features help construction firms track contracts, compliance, plans, specifications, and more. In addition to saving time and money, the technology makes information more accessible, fosters a collaborative environment that keeps internal and extended project teams updated on the latest versions of documents, and helps teams complete projects according to plan.

The mobile applications in RedTeam’s construction management platform also allow photos to be captured, organized by date, and attached to a project. This photo documentation allows field crews to confirm that a task was completed or provide a visual explanation of why something was not done. Photos and videos can document project status from the time the job starts through job completion, mitigating risk by providing a visual record that can help prove contractual processes were followed.

Construction management platforms like RedTeam also help firms mitigate risk associated with disputes and litigation by acting as a central repository for all project documents from preconstruction to project delivery. This technology provides operational transparency, improved documentation, and data collection to help contractors deliver more successful projects and avoid the settlement table.

Makes workflows seamless

With the functionality to digitally generate, share, approve and execute change orders, the project management, and document control systems in RedTeam’s construction management platform help construction firms establish consistent workflows that ensure the proper process is being followed for collecting vendor quotes, keeping drawings up to date, and ensuring that the appropriate negotiated unit prices and markups are charged for change orders.

Developed by contractors for contractors, RedTeam’s construction management platform contains built-in functionality that streamlines field and project workflows and decreases friction in communication between GCs and subcontractors. Using RedTeam’s TeamPlayer app, subcontractors can view the status of their contracts, change orders, credentials, lien waivers, submittals and punch items,, and share day-to-day performance updates in real-time and document field directives from the GC. Contractors can use the TeamPlayer app to connect to individual subcontract team members on everything from an RFQ to subcontracts, change orders, and payment applications. The result is improved collaboration, reduced risk, greater accountability, increased compliance, and improved contractor/subcontract relationship.

Enables robust reporting

Robust reporting features in RedTeam help contractors mitigate risk and manage the complexities of projects by tracking internal contractor changes and external customer changes, job costing, managing negotiated unit pricing rates and in-depth reporting that focuses on exposure areas for both contractors and owners.

RedTeam’s mobile app can also be used for time tracking, generating field reports, managing documents, and inventory, and reporting on project progress.

Improves Safety

Construction management platforms like RedTeam provide the ability to enter, store and share data from anywhere, enabling remote collaboration. During the pandemic, these platforms are shifting in-person tasks such as site inspections and job site visits to digital platforms, which helps keep workers socially distant and safe while continuing to move projects forward.

RedTeam’s cloud-based construction management technology connects all project stakeholders wherever they are and ensures real-time access to day-to-day project details and reports as well as information on pandemic-related safety and government updates. The accurate data sharing of equipment weight requirements, limitations and safe-use guidelines, and other critical information also improves safety.

Facilitates a data-driven approach to decision making

Construction management technology like RedTeam provides a connected, data-driven approach to mitigating project risk. The technology makes managing this area of risk easier by allowing construction firms to track all project resources, assets, and activities, which minimizes risk and protects the profitability of projects. The real-time information and insights provided by the technology allow for data-driven decision-making that is vital to avoiding cost overruns and schedule delays that negatively impact the bottom line.

Mobile technology integrated into RedTeam’s construction management platform makes jobsites more efficient and provides contractors with the field data they need to understand the status of projects and make more informed decisions for better project outcomes.

Using RedTeam’s construction management technology, GCs can also create detailed, accurate estimates that factor in the real costs associated with overhead, risk, and job costs. Actionable data and insights provided by the technology help minimize cost overruns, map out resources and allocate budget more effectively.

The technology also helps firms manage financial risk by simplifying estimating and integrating accounting into project management to more accurately assess how job progress and profitability stack up against real-time revenue recognition — the barometer for measuring job profitability, cash flow, and working capital efficiency.

Provides metadata tracking

Metadata is data that describes and gives information about other data — information artifacts that preserve an accurate timeline of what was done by whom and when. Recording essential metadata reduces risk by providing a clear understanding of the facts — factual evidence which can end disputes before they reach mediation or the courts.

RedTeam is built around robust contract formation and captures all the metadata associated with a construction firm’s day-to-day operations. With its collaborative console, RedTeam makes it easy for all project parties to work together on each document with complete transparency.

Because everything is captured online, general contractors and all other parties using the platform can use metadata to easily track issues like submittal workflow errors or even help avoid these errors completely. Not only does this technology allow project stakeholders to communicate more efficiently, it makes it easier to identify the source of a problem and reduce time and resources spent on resolving disputes and litigation.

Benefits of reducing risk

The right risk management processes and tools can help construction firms reduce risk which yields significant financial and operational benefits including:

  • Improving financial results
  • Increasing safety
  • Enhancing transparency, efficiency, and productivity
  • Streamlining and strengthening decision making
  • Elevating the quality of construction execution and project delivery
  • Avoiding costly claims, disputes, and litigation

Conclusion

Keeping risks under control can be challenging for contractors operating in an industry fraught with risk. Construction projects are becoming increasingly complex and disputes are multiplying, making it even more critical than ever for contractors to take steps to minimize their exposure to risk.

From project risks to financial risks, to safety risks and more, mitigating risk is a daily part of the job for general contractors (GCs). To reduce their exposure to risk and protect profitability, GCs can turn to RedTeam’s construction management platform.

Using RedTeam’s construction management platform GCs can inject seamless collaboration, streamlined workflows, document control, and accuracy of information into all of their projects to reduce risks, bring more certainty to construction projects, improve project outcomes and increase profitability.

While construction comes with its risks, having the right construction management platform can significantly mitigate them. By using RedTeam’s collaborative software, general contractors can equip themselves with the necessary tools to reduce risk, maintain control of construction projects, deliver projects on time and on budget and protect the bottom line.

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