A Broader View of Construction Risk Management

Frank Malangone


December 14, 2020

Risk is a constant in the construction industry. From supply chain issues, unpredictable weather and labor shortages, to severe cases such as global health and economic crises, the variables that can disrupt construction projects are numerous.

Historically, the engineering and construction industry’s ad hoc approach to risk management often led to identifying these risks too late in the project lifecycle, especially as it relates to project schedules and delivery timelines. According to the Project Management Institute’s 2020 Pulse of the Profession survey, construction organizations waste an average of $127 million for every $1 billion spent on projects and programs, due to poor project performance.

Organizations managing construction projects (or portfolios) are increasingly looking for ways to incorporate more robust risk management practices—at multiple program levels—that minimize disruption to business processes. At the same time, many are not sure where to begin. A few proven steps can set these organizations on the right path toward an effective construction project risk management strategy.

A Holistic Viewpoint

It is important for construction organizations to first undertake an assessment of their risk profiles at both the project and program levels. Projects can be defined as a one-off initiative, bound by distinct cost, resource, budget, and/or time-constraints, whereas programs are a group of interconnected projects that complement and build on each other—often working toward a larger, long-term goal.

Some firms make the mistake of only managing risks at the project level, which leads to an incomplete picture of exposure and performance. It is important to implement a broader focus on assessing risk that elevates visibility to the program level, allowing teams across projects to optimize resources and adjust plans to strive toward successful outcomes.

Five Steps to Better Construction Schedule Risk Management

With that need in mind, here are five proven steps to developing a robust risk management strategy in construction scheduling:

1) Identify the risks: At the beginning of a program or project, the management team should try to identify potential risks. Could bad weather or uncertain site conditions threaten to delay construction? Is there a risk that material costs could significantly rise unexpectedly? Keep in mind that it is impossible to identify and manage every possible risk. Therefore, the team should agree on those events most likely to occur and have the greatest impact. These are the factors that they will monitor and seek to manage.

2) Assess your exposure: After identifying the most likely and impactful risks, the team should determine each risk’s likelihood, as well as the potential impacts to costs and schedules. Risks should then be ranked based on these factors. From here, teams should prioritize how they will manage specific risks with the help of Monte Carlo simulations and scenario planning tools, which allow users to create and run various what-if scenarios by changing key variables.

While Monte Carlo analysis can be conducted via a spreadsheet, this approach is not suited to manage large, complex projects with thousands of data points that can change frequently, including calendars, resources, and the relationships between them. It is also not suited to conducting risk analysis across far-reaching programs. For these types of complex scenarios, it is best to use a true risk management application.

3) Determine a response strategy: Teams should plan the specific actions they will take to mitigate high-impact risks. Scenario planning technology plays an important role here to assess what-if scenarios and determine costs and benefits of each mitigation strategy. While some risks cannot be avoided, such as building during unforeseen inclement weather conditions, this step can lessen the impact on the project by building in adequate schedule, labor and supply chain contingencies.

4) Communicate for visibility: After assessing risks and defining mitigation strategies, the team should communicate this information to the project sponsor or owner. This demonstrates an effort to take a proactive approach to risk mitigation and allows contractors an opportunity to discuss the risks, mitigation strategies, and potential impact on the schedule and cost of the project with the project owner.

5) Monitor, adapt and repeat: As risks continue to evolve, program managers must build in regular assessments to update risks and their mitigation strategies as conditions change. With more information about each risk and the impact of various mitigation strategies, project managers can make more informed decisions about the best path forward.

For example, if there is a strong probability of a labor shortage in the near future, the team may determine that the cost of overtime needed to keep the project on schedule is less than penalties incurred if a project is not completed on time. These same decisions can be made at the program level, where a manager may decide to pause a specific project in the portfolio to allocate resources to another project that presents higher risk and cost impact.

While risks cannot be completely eliminated, a methodical and collaborative approach to forward-looking risk management is key to mitigating potential negative impacts. Good risk management strategies require the integration of dynamic and diverse sets of information, including budget, cost, and schedule data, with technology and tools that provide high visibility and centralized data management. With this in mind, organizations managing construction projects will be well on their way to shoring up their risk management practices.

Frank Malangone is senior director for product and industry strategy at Oracle Construction and Engineering.