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Managing Risk in Today’s Construction Environment

The construction industry has bounced back from the Great Recession and is currently one of the best performing sectors within the U.S. economy. Though contractors have strong backlogs and plenty of work, many are still struggling to find qualified workers, according to Ken Simonson, Associated General Contractors of America’s (AGC) chief economist. Such ripple effects of the recession – during which 1.5 million workers left the construction work force – continue to impact the construction industry as project costs continue to rise, skilled labor shortages persist, competition is fierce, and owners place increasing pressure on contractors.

AGC along with FMI conducted a study on contractor’s perceptions on risk and learn how risk is being managed in today’s business environment. The study findings are based on 83 responses from best-in-class companies that are active in AGC’s forum.

Their study sheds light on big-picture industry trends and reveals the following five key findings:

1. Today’ construction risk environment is drastically different that it was five years ago.

a. Good, bad or indifferent, all contractors are now operating in a new post-recession landscape, characterized by tighter margins with less room for error. Owner requirements are more stringent, the competition is tougher, and companies are facing acute skilled labor shortages.

2. Skilled craft labor shortages, contract language and subcontractor default are top risks in today’s construction industry.

a. With the total number of employed construction workers at almost 20% below the 2006 peak, the industry is struggling to find qualified labor.

b .Many study participants indicated that owners are putting more pressure on project costs and schedules while modifying contract terms to place greater risk on all contractor levels.

c. Study participants indicated that subcontractors in particular are struggling to execute on their existing workloads and are often undercapitalized and unable to bond, which poses a significant risk for all project stakeholders.

3. Construction firms are managing risk differently today.

a. The overwhelming majority (90%) of survey respondents stated that they’re managing risk differently today compared to five years ago. Of those who are managing risk differently, 82% are implementing new risk management tools and strategies, and 55% are providing risk management-specific training.

b. FMI has witnessed a growing interest in formal risk management programs at the enterprise level over the past few years. An enterprise approach to risk involves the collective identification, assessment and management of risk that a business faces. This global perspective can help leaders identify risk areas more clearly and serve as an important precursor to strategic planning.

4. Risk management effectiveness varies.

a. Although 90% of study participants indicated a shift in their risk management approach, results are mixed. 17% of respondents perceive their risk assessment process as effective. Almost 50% of survey respondents think their risk assessment process still requires improvement, and 35% consider it ineffective.

5. Mitigating and managing risk has become a strategic priority.

a. As you might expect, companies with dedicated risk managers rates the effectiveness of their risk assessment process higher compared to those without a dedicated risk manager.

Put simply, no company can afford to have the same business model as it did five years ago. By rebuilding, retooling and refitting firms are readying themselves to play the game on an entirely new field.

FMI has identified elements that can be included in a formal risk management strategy. By incorporating one or more of these elements and then taking a more holistic approach to risk management that goes beyond just insurance or safety programs, firms can begin to realize the positive impacts of their efforts.

Strategic Elements

An enterprise risk management approach involves collective identification, assessment and management of risks that a business faces. This occurs not only on a local level or within its business sector, but also on a global level in areas that may not correlate directly to the business.

As the industry has evolved, contractors have had to shift how they view risk management. Company leaders are starting to accept and manage appropriate risks that have the potential to add value to their businesses. This is a far cry from the past, when contractors had a fairly consistent knee-jerk reaction to risk, either refusing to accept it in the contract and/or immediately passing it on to others.

Structural Elements

Financial participation – The majority of today’s construction leaders lack a full understanding of their company’s risk tolerance. In other words, they may be exposing their businesses to more potential economic loss than they can tolerate, either reputationally or financially.

Risk management department – This role should not be relegated to an outside broker, de facto safety manager or someone else in the organization. Risk managers contribute significantly to the overall management of a construction business and should have a seat at the executive table, embedding risk management into the corporate strategy.

Insurance program – Understanding the need for protection, companies must ensure that the suit of insurance products sufficiently protects their balance sheet and earnings stream – should something undesirable occur.

Operational Elements

Project risk assessment – This process involves a team of internal experts with specialized experience who review key areas of project risk. Armed with an understanding of their enterprise risk tolerance as well as a strong project risk assessment, contractors are better-equipped to incorporate appropriate contingencies and margins on specific projects, which ultimately results in more accurate job costing

Safety program – Leading organizations aggressively track and manage claims – focusing on the process and the costs, including robust return-to-work programs – and understand that safe jobs tend to be profitable jobs.

Project execution – When a contractor’s operations involve subcontractors and vendors, that contractor still has both financial and reputational risks on the line – yet someone else is doing the work. With this dynamic in mind, it’s easy to understand why subcontractor management is a key focus for leading firms.

To read the entire study, click here.

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