Properly managing risk in the construction industry can have a major impact on project cost, schedule and resource use, potentially offering significant savings, according to a new Dodge Data & Analytics study. Produced in partnership with Alliant and supported by e-Builder and Procore, the Managing Risk in the Construction Industry SmartMarket Report reveals the top construction risks, their impact on the industry and the benefits associated with using specific risk evaluation and mitigation strategies. One clear finding that emerges from this data is that the industry’s growing focus on collaboration may be an important step toward reducing construction risk.
The report reveals that building owners, general contractors and trade con-tractors in North America all experience a high impact from the risks they face, with three quarters reporting that they have experienced a dispute or claim in the last five years. The claims faced vary between the three players: about one third of owners find that claims arising from construction defects are both the most frequent and the costliest; just under half of general contractors report that subcontractor default, termination or failure claims have the highest frequency and cost for their organizations; and over one third of trade contractors report that they frequently experience warranty issues, but only about a quarter report that they are the costliest claims they face. Roughly the same percentage see claims arising from construction defects as having the highest cost impact.
These vastly different experiences suggest that while risk takes a toll on the industry as a whole, the top issues and the best measures to control them are very different for owners, general contractors and trade contractors.
Top Construction Risks
The study examined the variety of risks encountered in the construction industry. For example, owners are most concerned about operational risks, such as planning or scope changes, schedule changes and cost escalation. Contractors are more focused on risks associated with contract term and procurement of labour, especially in the tightening job market.
The increased tendency for owners to shift project risk to contractors is the top driver for increased use of risk management practices by over half (59 per cent) of contractors. That trend is also noted by three surety experts from Ace Surety, Zurich and Liberty Mutual Safety who were interviewed for the report. Importantly, these experts also agree that this increased risk can be mitigated by construction firms who understand and implement controls for risk. This risk management knowledge is likely to become increasingly important in gaining a competitive advantage in the future, as the trend of shifting risk and seeking one source of accountability is likely to continue to grow.
Most Effective Evaluation and Mitigation Practices
General contractors and trade contractors agree that formal brainstorming with the project team, and expert input from internal resources, are the two most effective risk evaluation strategies. They further report that a regular meeting with the full project team, focused on developing a plan to manage risk is among the top risk mitigation strategies.
There is wide agreement among the survey participants that these evaluation strategies help to increase reliability in overall project performance. General contractors also find that formal brainstorming helps improve project safety and schedule, and increase client satisfaction; trade contractors believe it reduces the cost of construction.
Owners report that having input from internal experts is important to help improve project schedule. In fact, getting this input to owners may improve their schedule expectations, because it helps them develop a more grounded understanding about how long a construction project will take.
The top risk mitigation strategies yield similar benefits. Again there is wide agreement that both top strategies —regular meetings with the full project team focused on risk, and developing a plan to manage it — increase reliability in the project overall. Owners also recognize that regular meetings help maintain the intended level of project quality, while general contractors report that it improves project schedule and safety. Trade contractors agree about the impact on safety, and they also see a reduction in cost associated with these meetings. Improved safety is also a top benefit noted by contractors associated with developing a risk management plan.
The most frequently cited benefits of these efforts — increased reliability, improved safety and improved schedule — directly impact the reputations of contractors and their relationships with clients. Dedicating time and resources to these strategies has a major impact on project and company performance, and the strategies themselves are neither complicated nor costly.
Importance of Collaboration to Reduce Risk
It is notable that formal brainstorming and regular team meetings are the most collaborative among the variety of practices industry players can undertake. 91 per cent of owners, general contractors and trade contractors agree that increasing collaboration reduces risk, with delivery systems that encourage teamwork the second most important driver for increased use of risk management practices.
These findings consistently reveal that early team integration carries multiple benefits, from project quality to innovation and improving project budget and schedule. Being able to address all these factors reduces risk.
However, the report also suggests that these strategies are not necessarily being put into use early enough to support a fully integrated project. Only owners report that formal brainstorming and regular meetings of the full project team occur at a high level before the bidding and construction phases of individual projects. A low percentage of contractors report being involved in either of these activities during the predesign or design stages, suggesting they are not being sufficiently included. As contractors are typically the most well-informed about how to anticipate and mitigate many risks, the report clearly demonstrates a need to engage this group earlier to fully realize the benefits of these strategies.
Despite the strong evidence of benefits, the industry still struggles with adopting and integrating formal project delivery methods. The SmartMarket Report examines the challenges associated with collaboration and integration, including the research findings on integrated project delivery conducted by the University of Minnesota. Renee Cheng, a professor of architecture who led the research project, indicated that non-contractual approaches to integration are often less effective. “The collaborative culture actually grows from some of the discussion you need to have to set up the stakes, accountability and consequences in an Integrated Project Delivery (IPD) agreement,” according to Cheng’s research.
The SmartMarket Report reinforces the call to action for industry transformation around integration and collaboration. The high frequency of claims and disputes will continue to take a toll until the industry embraces good risk management. Doing this will be essential, both on the level of using specific, effective risk evaluation and mitigation practices, and in the way project teams are formed and interact throughout the project lifecycle.
Steve Jones is Senior Director, and Donna Laquidara-Carr is Director of Industry Insights Research at Dodge Data & Analytics. www.construction.com