The construction industry is no stranger to risk taking. But as the global economic belt tightens and shareholders demand more information on the risks behind a project, it is now more important than ever to understand all potential risks before entering into an agreement.
Risk management is a decision making process in which thought is given to the likelihood of a problem occurring. Taking risks is a fundamental part of business, but by managing them effectively an organisation will be in a far stronger position to deal with elements of uncertainty and change. This is never truer than in the construction industry where each new product or project differs from the last.
It is imperative that risk management happens when making decisions - and independently of contracts. Whilst some contracts such as the NEC include it, many traditional contracts do not.
Traditional contracts look to allot risk items to other parties – which stems from the historic opinion that the best solution to risk is to pass it onto others.
But this can often enlarge risks and reduce the effectiveness of any management, as the other party may not be in the best position to deal with that risk. The result can be inflated costs as the other party seeks to cover the risk, i.e. higher tenders and significant claims when works commence.
Risk management may seem like a costly addition to the contract process but the impact of practising it effectively far outweighs the costs involved.
The process of risk management will not only allow for greater risk-taking due to a better understanding of potential problems, but will also lead to better definition of strategies and greater confidence in budgets and estimates, improved insurance cover and programme schedules.
The key to successful risk management is ensuring that all issues and potential risks are identified, understood and agreed. It can be split into three stages: identification, analysis and monitoring.
All the project disciplines should attend a ‘risk workshop’ meeting to identify risk by sharing knowledge, experience and views. Held at different stages throughout the project, the workshop will also identify aspects of construction and design and widen participants’ knowledge and understanding.
The second stage evaluates the source of the risk in regards to the likelihood of an event happening and its potential impact. The approach will depend on the project size and type and the requirements of the involved parties. Risks can therefore be prioritised into categories to allow parties to concentrate on those with greater potential impact and a greater chance of occurring.
Finally, participants think about management of the risk and whether it can be reduced through clarity of information or further investigation, or offset to another party that is better suited to deal with it. Alternatively it may be eliminated altogether through the rejection of a particularly risky aspect of the work.
Risk management plays a fundamental role in determining how successful a business can be. It reduces the impact and likelihood of failure and should form part of any management process at some level.
If implemented and correctly administered, it is a proactive management approach which identifies and eliminates (or reduces) problems before they have an opportunity to occur, greatly reducing the likelihood of dispute.