Running a business – especially a construction business – is no small feat. Whether your construction company builds new houses, repairs and installs roofs, or does other complex construction work, there are risks involved. Sometimes, these risks can lead to disasters which, worst-case scenario, may result in staggering financial losses our businesses cannot recover from.
In order to mitigate your company’s risks, adequate risk management is a must if you want to guarantee that your construction business can survive and continue to grow for years to come.
Risk management takes a look at your construction business and does an overview of all the exposures you may face while leading you in the right direction to mitigating your risks. Here are our 5 top tips to risk management for construction businesses.
1. Do an overview of your business and list all the potential exposures.
Before you even start managing your construction risks, it’s a good idea to take a long look at the business that you run and begin the process of identifying your potential exposures. Depending on the nature of the work you do, there can be many different areas where there is potential for loss. Try not to fret – while this process can certainly be overwhelming, it’s a great start to mitigating your risks overall and a step in the right direction to sustainable business and growth!
Consider the following areas that may pose as risk:
- Potential injury – or fatality – to workers, clients, or other third parties due to business methodologies, equipment, or behavior.
- Failure to complete – the consequences you may have to pay as a result of not meeting your end of a contract.
- Natural disasters – storms, high winds, fire, falling objects, earthquakes, floods, and other disasters that could damage the site of your construction or make work impossible.
- Competitor pressure – the loss of a potential project or hiring body to a competitor, pressure to meet similar prices/quality/terms of other construction businesses in your field, or even competition over resources.
- Communication error – difficulties with communication between employees, hiring bodies, etc. that involves a misunderstanding or insufficient information on the terms of a contract or payment.
- Lack of sales/financial losses – a rise in interest rates, increase in raw material cost, economy dips and sways, lack of income, a sudden spike in growth.
- Construction risk – error in the management of a job, poor company policies or inability to meet the standards of these policies, poor time management, poor resource management, budget, etc.
There is a lot to consider when it comes to running a construction company, and it’s hard not to worry about every little detail that could go wrong. The first step is understanding the kind of risks your business may face. The next step is to determine which risks are worth worrying about.
2. Organize your potential exposures in order of severity and impact.
If you worried about every possible thing that could go wrong, you would never get anything done. It’s important to reel yourself back and take a realistic look at your business and what risks are legitimately prevalent in your operations. Don’t limit your idea of what constitutes as a “risk” by looking over the exposures another business or the “average” construction business may face – your business is unique, and therefore faces unique risks.
Some risks are more prominent or more serious than others. It’s a good idea to evaluate and organize your risks based on the impact they may have on your business and the likelihood that they will actually result in a loss. If you can manage to calculate the dollar loss for the impact multiplied by the percentage for probability, you could then rank the results. Of course, that may not always be possible, so it’s a good idea to use estimates in this case. Whatever method you use, ranking your risks in order of severity and impact is a great way to give yourself a starting point when it comes to dealing with risk.
3. Transfer, mitigate, avoid, or accept each exposure.
There are four ways you can manage risk in the construction sphere: you can transfer, mitigate, avoid, or accept each risk. The most unavoidable risks are likely the ones you may have to accept, such as floods or earthquakes. Transferring risks involves acquiring insurance, or even hiring a subcontractor. Avoiding risks looks like the refusal to do any work in areas prone to flooding. Finally, mitigating risk looks like implementing proper safety protocol, ensuring your staff is properly trained and undergo adequate orientation, and using the right safety equipment for each job.
4. Consider the variety of resources available to you to help manage your exposures.
No matter the methods you use to manage your risk, there are different resources that can help. For one, training is a great resource to prevent the abuse of equipment and lessens your risk of project failure or error. Software is another, especially if you use any technology to handle financial data, accounting, etc. As malware is always a risk with technology, installing firewalls and implementing proper cybersecurity protocol is a good way to mitigate your chance of any losses.
Hiring a professional to offer legal advice when it comes to special contracts, litigation and finances is another resource that may be of benefit to you. Finally, insurance is a great way to manage your construction risk, as it can offer a backup plan if something manages to slip through the cracks and you need to make a claim.
5. Optimize your construction risk management with insurance.
Contractor liability insurance is one of the best ways to protect your construction business against construction risk. No matter the kind of construction work you do, insurance is highly recommended (and oftentimes a requirement!) as it can cover you and your business against any claims of property damage, injury, or worse as a result of your construction operates or unintentional actions at a construction site.
As these claims can ascend into the hundreds of thousands of dollars, insurance is a good way to ensure your business can get back on its feet and continue to develop and grow without suffering too serious a loss.