Risk Management is defined as the process of assessing, identifying, and controlling potential threats to an organization or a project it has undertaken. Threats could come in different forms, such as legal liabilities, spiraling financial losses, a significant increase in the prices of materials within a short space of time, management errors, or even natural disasters. To counter the negative effects of risk, managers use risk management as the first line of defense.
They identify the potential threat then put measures in place to resolve them even before they occur. Risk Management is like a contingency plan or an anti-disaster plan that helps construction organizations to minimize the impact of threats should they occur.
Why is Risk Management so important in Construction Business?
Risk Management is invaluable because construction companies operate in a highly volatile industry that is susceptible to external shocks (influences from other industries or government policies). Having a robust risk management policy in place can help firms save money by identifying risky investments to avoid. Or, in some cases, from financial misfortune caused by accidents or natural disasters. The ability to understand and control negative influences in the micro or macro-environment is a guiding principle all construction organizations should follow.
Historical reasons why Risk Management is so important in the Construction industry
Risk Management standards have long been expected by government authorities, citizen advocate groups, and stakeholders in the industry for so many reasons. Let us review some of them.
Difficulty at completing projects on time
Construction projects tend to have timelines attached to them for many reasons. Two major reasons are; yearly change of seasons and frequent changes in the cost of building materials. These changes may affect the ability of managers and workers to complete the project at an agreed time. Delays lead to an increase in cost, among other negative effects. Labor markets can also be constrained in times of natural disasters.
Disputes and litigation
If you study legal section and publications, you will notice that a lot of them are physical asset related. Failure to get a permit from the right agency to detect a structure could invite sanctions. A contractor who fails to deliver on quality may face litigation from the client. Contract violations lead to disputes between parties. To avoid costly litigation, construction organizations take risk management seriously.
Intense competition in the industry
The building and construction industry is a highly competitive market place. Organizations compete with each other at a feverish pace to land contracts. Only firms that adhere to the best industry standards get the deals on offer.
Profit risk
Not every constitution firm is profitable. In fact, keen observers who are not even professionals will tell you that construction companies close down by the dozen because they fail to become profitable. To avoid making a loss or fewer profits on contracts awarded to them, companies must do their due diligence and risk analysis so as to achieve profitability for the projects that they execute.
Meeting the health and safety demands of society
Firms do not operate in a vacuum but are a part of society. A lot is expected of construction firms, particularly as it affects worker’s welfare. The occupational hazards in the industry are one of the highest in the world, so society at large and government in particular places significant demands on construction workers.
This is to ensure that workers are safe when on site. The safety of the lives and property of residents is also taken into account when safety legislation is drawn up by government authorities. Failure to adhere to safety standards attract very tough penalties that may affect the continued existence of the organization as a corporate entity.
Benefits of Risk Management
Risk Management offers firms several immediate and future benefits. Risk Management
- Ensures that work crews and members of the general staff are safe both onsite and offsite
- Ensures operational stability
- Decreases legal liability caused by accidents at construction sites
- Acts as a safety buffer against internal and external threats that could negatively impact the fortunes of the company
- Prepares firms well in advance for inevitable losses should they occur
Risk Management acts as a safeguard for threats that may affect the performance and productivity of firms. Operating in the construction industry carries a certain type of risk. However, managers can continue to thrive even in volatile environments by predicting threats and proactively responding to them before they get out of hand.
Click here to learn more about the Risk Management process.
Have something to add to this discussion? Let us know in the comments section below!
