What Is Construction Risk Management?
Construction risk management is the process of assessing and mitigating the risks involved in a construction project. Risks can be operational, legal, technical, financial, or safety-related. They can also be hazards, such as exposed wiring, or uncertainties, such as future material costs. Each risk type requires a different mitigation approach.
Summary Overview:
|
Construction is one of the riskiest industries. According to the Bureau of Labor Statistics, more than one-fifth of workplace deaths in 2023 occurred in the construction industry. Construction is also a risky business for contractors. The American Institute of Architects (AIA) has been tracking an accelerating decline in billing activity in the industry since the post-pandemic boom in 2021. A 2024 report found that more than two-thirds of the 230 contractors surveyed highlighted inflation or labor retention as the main risks.
Construction risk management isn’t about eliminating uncertainty — it’s about building resilience. Managing construction risks with an effective risk management framework can help avoid disruptions while maintaining stakeholder confidence. Risk management helps project managers move from reacting to risks to controlling them.
Check out this complete guide to construction project management, with advice on budgeting, scheduling, and risk management. You can also download one of these free construction management templates.
Build a Risk Response Plan for Construction
To build a risk response plan, you need to identify and assess potential risks to your construction project. Next, prioritize those risks based on impact and likelihood. Finally, plan your responses to each and monitor risks as the project progresses.
Follow these steps to build an effective risk response plan:
- Identify
Begin identifying risks during the pre-construction phase by reviewing contracts, design documents, and site surveys. Review these regularly to capture additional risks as the project proceeds. - Assess
Evaluate the likelihood and consequences of each risk. Create a centralized document or digital tool that assigns each risk an owner and a planned response. Continuously update the document to keep all stakeholders aligned. - Prioritize
Prioritize your potential project risks based on how disruptive they could be to the project budget or schedule, or how they could impact safety. Ensure that your planned responses focus your resources on the most critical or likely threats. - Plan
Develop a contingency plan for each risk. This might include assigning extra budget, finding alternate suppliers, or making arrangements with subcontractors or laborers. - Monitor
Continuously monitor your project and the risks you’ve identified. Using site inspections, progress reports, and data, you can review risks and responses in real time and make adjustments as necessary. Be transparent with all stakeholders about risks to maintain alignment and trust.
Learn more about what to include in a risk management plan, and check out this guide to creating a project risk register.
Common Types of Construction Risks
Construction projects face a wide range of risks that can affect project schedules, costs, and quality. These include financial, legal, environmental, occupational, and operational risks. All of these risks are also related to reputational risks, where low-quality work, safety or regulatory issues, or poor management can damage credibility.
- Financial Risks: These risks involve unexpected cost increases due to changes in material prices, trade regulations, interest rates, vendor or contractor relationships, or currency exchange rates. They can also be related to economic downturns, supply chain disruptions, or cash flow issues, all of which cause budget strain.
Learn more about how construction cost overruns happen and how to prevent them, as well as best practices for construction cost management.
- Schedule Risks: Delays are a constant threat in construction, whether from permit holdups, unexpected weather problems, late deliveries, last-minute scope creep, or frequent change orders. These can all push completion dates.
Improve your project with these collections of construction schedule templates and construction change order templates.
- Safety Risks: Construction safety risks include physical hazards such as falls, struck-by incidents, electrocution, injuries from moving or misusing equipment, or trench collapses. Health hazards can include exposure to noise, chemicals, dust, extreme temperatures, and fire. Lack of adequate training or protective gear can jeopardize worker well-being and create costly delays.
- Environmental Risks: Construction projects can have a severe impact on the environment and climate. This could include pollution from dust, vehicle emissions, spills, and runoff, as well as habitat destruction and potentially hazardous waste from construction debris. Environmental risks can also more immediately affect workers. Prolonged exposure to polluted air in confined spaces can lead to extensive lung damage.
- Legal Risks: Projects might face contract disputes over scope or payment, fines related to compliance violations, liability, employment problems. Maintain detailed records and make sure you’re up to date on recent regulations.
- Productivity Risks: These risks include quality failures, ineffective project management, inexperienced staff, or labor shortages, which can lead to delays and client dissatisfaction.
Strategies to Address Construction Risks
The main strategies to address construction risks include avoiding the risk entirely, mitigating its damage, shifting responsibility to another party, or accepting it as unavoidable and preparing for it. The most effective approach depends on the specific nature of each risk.
Here is a breakdown of the different ways to address construction risks:
- Avoidance: This means changing the project plan to eliminate the risk entirely. For example, you can avoid a certain kind of safety risk by removing specific equipment from your process or using safer and more predictable materials. There might be a cost for this . For example, it might involve replacing a more efficient tool with a less efficient one.
- Transfer: This involves shifting responsibility for the risk to another party. You can use insurance, warranties, or contracts to ensure that certain risks — such as equipment failure, injuries, property damage, liability claims, material defects, or business interruptions — are borne by other parties, such as subcontractors, suppliers, manufacturers, or insurance companies.
- Mitigation: Mitigation means taking proactive steps to reduce the likelihood or impact of risks. For example, you can mitigate the risk of workplace accidents, material shortages or price fluctuations, or rework costs by implementing stronger safety protocols, negotiating long-term supplier contracts, or investing in worker training.
- Acceptance: Some risks may be inherent to a construction project. In this case, the best approach might be to acknowledge the risk and prepare to absorb the potential impact. This can be done with contingency budgets or schedule buffers, which can provide the extra time or budget required to get a project back on track.
Construction managers should always build in contingency on budgets. Try one of these construction budget templates to learn more.
Technology That Reduces Risk
Modern construction technology can help teams reduce risk. Examples include building information modeling (BIM), Internet of Things (IoT) sensors, drones, software, augmented reality (AR), and machine learning technology. These tools can improve planning, oversight, and real-time decision-making for construction projects.
Here are some examples of construction technology that can help reduce or manage risk:
- Building Information Modeling (BIM): BIM creates a detailed three-dimensional blueprint of a construction project before construction begins. This helps teams identify design clashes or structural issues early in the process.
- Augmented Reality (AR): AR can complement BIM technology by visualizing BIM models on site to help identify potential risks or safety hazards. Digital twin technology can be used to create replicas of the construction project, allowing teams to test scenarios before making updates to the project.
- Internet of Things (IoT) Sensors: IoT sensors offer project managers remote access to job sites, changing the way construction projects are monitored and executed. These sensors can be placed on equipment, materials, and workers to continuously monitor conditions such as machine performance, worker safety, air quality, waste disposal, and other hazards. Wearable safety technology such as smart helmets or smart glasses can monitor workers’ vitals and issue alerts or first aid in unsafe environments. These real-time insights and collaboration between on-site and off-site team members can help prevent accidents and ensure compliance.
- Drones: Unmanned aerial vehicles give managers and contractors access to otherwise unaccessible areas of a construction site. They can help conduct site inspections, track progress, and identify any imminent danger. They can also survey restricted or hazardous environments and provide real-time updates.
- Generative AI and Machine Learning: AI tools can help forecast risks such as cost overruns, delays, market shifts, or labor shortages. Predictive analytics can help adjust schedule, equipment, and materials. Natural language processing (NLP) can help streamline and scan documentation such as change orders or contracts. These make construction processes more efficient and streamlined.
- Construction Management Software: Platforms such as Smartsheet can unify scheduling, communication, documentation, and reporting in a single system. These tools provide real-time visibility into project progress to centralize change orders, streamline approvals, and improve collaboration.
Streamline all phases of the construction project lifecycle with the right construction management software.
Construction Risk Management Starter Kit
Download the Construction Risk Management Starter Kit
Use this free starter kit to help you handle the various elements of construction risk management. This kit includes templates for risk assessments and a risk register.
In this kit, you’ll find:
- A construction project risk assessment template for Excel and Adobe PDF to help you evaluate risks and control measures
- A construction risk assessment matrix for Excel for to help you prioritize potential risks
- A construction documentation tracker for Excel to make organizing and monitoring your project documentation easier
- A construction risk register template for Excel and Adobe PDF to help you highlight the likelihood and consequences of different risks
Streamline Your Construction Projects With Smartsheet for Construction
From pre-construction to project closeout, keep all stakeholders in the loop with real-time collaboration and automated updates so you can make better, more informed decisions, all while landing your projects on time and within budget.
The Smartsheet platform makes it easy to plan, capture, manage, and report on work from anywhere, helping your team be more effective and get more done. Report on key metrics and get real-time visibility into work as it happens with roll-up reports, dashboards, and automated workflows built to keep your team connected and informed.
When teams have clarity into the work getting done, there’s no telling how much more they can accomplish in the same amount of time. Try Smartsheet for free, today.
Construction Risk Management FAQs
Risk management in construction projects is the process of identifying, assessing, planning for, and addressing potential risks that could affect the ability to deliver a quality construction project safely, on time, and within budget. It helps project teams prepare for unexpected challenges.
Construction project managers identify risks by inspecting the site, thoroughly examining contracts and blueprints, reviewing past projects for issues, and collecting input from stakeholders. Checklists, templates, and tools such as software can also help project managers identify risks in a construction project.
Risk assessments should be updated regularly. Updates can occur at milestones, after design or scope changes, and when new risks emerge. Continuous monitoring ensures risks are caught early, allowing the plan to stay aligned with real-time site conditions, as well as market and environmental shifts.
Cyberattacks can disrupt construction project schedules, compromise sensitive data, or interfere with equipment. As the use of digital tools such as BIM, drones, and IoT sensors increases, the risk of cyberattacks grows. Strong cybersecurity measures are key for keeping a project financially secure and safe from breaches or ransomware incidents.
Both public and private projects face risks, but their governance and tolerance for risk differ. Public projects are often subject to stricter regulations, oversight, and accountability. With private projects, risk management focuses more on client priorities, cost control, and efficiency.
Risk management should account for the general public and governing bodies as stakeholders. Project managers should adjust budgets and timelines in the project plan accordingly.