The Importance of Risk Management for Construction Companies 
 
Construction companies often find risk management to be particularly challenging. The construction industry comes with multiple risks, especially when contractors are working on years-long projects. To create an effective risk management plan, you must consider risk factors that could arise before, during, and following the project. However, it is possible for you to forecast risks and costs by creating a risk management plan. Here are some of the things to consider when creating your company’s risk management plan. 
 
Understanding Risk Management for Construction Contractors 
 
Risk management in the construction industry involves identifying the risks to your business and evaluating how you can minimize their potential impact. For construction contractors, risk management will involve planning for risks, monitoring them, and controlling their effects if they arise. Creating a risk management plan helps you to conceptualize the risks and how you will address them.  
 
Common Types of Construction Risks  
 
While there are many risks in the construction industry, the following factors are the most common: 
 
• Safety risks – Potential for worksite accidents resulting in liability and workers’ comp claims 
• Supply chain risks – Issues that can cause delays in receiving materials and in performance 
• Economic risks – Issues with the economy, inflation, competition, and lack of sales 
• Natural disaster risks – Potential issues caused by hurricanes, earthquakes, floods, tornadoes, and others that could damage the project and make the site inaccessible 
• Legal risks – Potential issues leading to contract disputes 
 
Steps to Manage Risks for Your Projects 
 
You can manage risks by following the steps below. 
 
1. Figure Out Your Risks 
 
In addition to the risks identified above, you also need to determine the risks you face that are project specific. You should work to identify the risks before you begin work on your project so that you can figure out whether you are willing to accept the risks of working on a proposed project. All of the stakeholders should participate in the risk identification process to try to identify potential scenarios that could disrupt the project. Meeting regularly with your team can help you identify new risks and review how well your risk management plan is working so that you can make any needed modifications.  
 
2. Order Your Risks by Priority 
 
Each company faces different project-specific risks. Once you know our risks, you should then order them by priority based on their potential harm to your business and the likelihood of the risk arising. Handle those risks that could have the largest impact on your business and those that are the likeliest to occur.  
 
3. Figure Out How You Will Respond to Each Priority Risk 
 
Make sure you figure out how you will respond to all of your priority risks in case they arise. Some of the steps that you should take to mitigate your risks include the following: 
 
• Make sure you secure a construction bond if required for the project, including a performance bond, bid bond, and/or payment bond. 
• Secure a license if needed to operate legally. 
• Make sure you have sufficient liability insurance to protect against legal risks. 
• Review the proposed contract carefully to understand your obligations and the relevant deadlines. 
• Work with legal counsel to negotiate more favorable contract terms to protect your interests. 
• Obtain all necessary permits for the project. 
• Communicate with the project owner about any issues that arise. 
• Know the laws, including the safety guidelines, and make sure you follow them. 
 
After you have identified the risks, you can choose to avoid them by refusing a contract if the risks are too great. You can also choose to transfer the risks through liability insurance or indemnity agreements. If you are a subcontractor, making sure that the contractor has a payment bond can help to minimize your risks of nonpayment by the contractor for the work you perform.  
 
Make sure that you train all of your employees are fully trained so that you can mitigate safety risks. For example, you should ensure that they always use proper safety gear and are fully trained in the proper way to perform various jobs on the worksite to reduce the risks of accidents and downtime.  
 
You can also choose to accept certain risks to complete a project. For example, if you anticipate potential delays caused by cost increases, supply chain issues, or anticipated weather problems. You can accept those risks and address them in your contract so that you and the project owner understand how they should be handled if and when they arise.
 
How you might choose to respond will depend on how resilient your company is to the risks and the potential rewards your business could receive from working on the project. In some cases, you might determine that the potential rewards or benefits outweigh the risks. In others, you might determine the risks are too great to manage and decide against contracting for the project. 
 
Developing a strong risk management strategy for every project you consider is critical. If you don’t develop a plan or work to identify potential risks, you could end up entering into contracts your company can’t complete. This could result in potential liability, legal violations, and claims against your construction bond(s). If you have these types of issues, your contractor license could be at risk, and you might have trouble securing bonds for projects in the future. 
 
Risk management can help your business to be more successful by helping you to anticipate the risks and determine whether or not they are surmountable or if you should take steps to avoid them. If you believe the risks of a prospective project are too great, you can choose to forgo a contract and work to secure a contract for a project with lower risks and greater rewards.