Risk Management in the Construction Industry

Thoughtware Article Published: Oct 29, 2012
Audit, Accounting and Assurance Practice

Companies in all industries are looking to improve business efficiencies, meet regulatory requirements and increase their profitability, and the construction industry is not exempt. A construction project is complex, has many moving parts and is especially dependent upon third parties to meet their contractual obligations. No two projects are alike. The most significant day-to-day risks facing the industry relate to changes in schedule, scope creep and technology constraints, which often result in budget and cost overruns. Unlike the economy or the weather, these particular risk factors are within a company’s direct control to varying degrees.

Employing an ongoing and effective risk assessment process is essential to proactively addressing risks. Most companies have implemented some form of risk assessment but have failed to go one step further in developing and implementing an effective mitigation strategy. As a result, associates are always one step behind and are reactionary to unexpected surprises. Adopting an effective mitigation program will shift operations from reactive to proactive.

How do you get started? Cost benefits should drive adoption, but it starts with the tone at the top. A commitment from top management to act as internal champions and drive a culture of risk awareness is essential to a successful mitigation program, which should be implemented in all phases of a construction project lifecycle. 

It’s critical to address and plan for risk factors associated with changes in schedule and scope creep early in a project. A clear project scope, agreed-upon expectations between firms and third-party providers and a realistic schedule are all keys to a successful project. In gauging the level of risk inherent in a particular project, clear measures have to be assigned and communicated. Accurate, timely and complete information about the status of a project will allow a risk management team to assess and respond appropriately when needed.

A project’s schedule and budget can be directly affected by third-party subcontractors that can’t meet labor demands, lack the experience in the type of work assumed or are not financially sound. Ongoing due diligence in the selection business partners and subcontractors is a first step. Contracts often provide scope of work, expectations around quality and timelines but often fail to include enough detail for performance to be adequately measured against key performance indicators. In addition, contracts should contain wording around enforcement and penalties if expectations are not met.

Good risk management involves more than using simple checklists. A risk management advisor can assist your company by conducting a thorough risk assessment or review your current methodology against best practices. An advisor also can also assist in third-party vendor audits to determine if only permissible costs were absorbed by a projects budget.

For more information about risk management efforts in your construction organization, contact your BKD advisor.

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