This feature is part of a series that takes an in-depth look at risk in construction. To view other posts in the series, check out the spotlight page.
Construction companies are three times more likely to fail in an economic recovery than in a downturn, according to Ryan Howsam, a principal at FMI Corp., so managing risk is one of the most important aspects of running an AEC business.
“Contractors die of gluttony, not starvation,” he said during a September webinar.
With the U.S. experiencing one of the longest recoveries in history, contractors must be especially vigilant not to run out of cash. “This is a time managing risk is more important than ever,” said the certified risk and insurance specialist.
For contractors, risk falls into several buckets, each with its own set of considerations for how to manage it. Most organizations, said Holsam, view risk in various silos, including finance, operations, business development, estimating, self-perform and project management.
PCL Construction’s vice president of risk management, Hugh McLellan, told Construction Dive the company puts risk into three buckets:
Enterprise — things that impact any company, including the economy, interest rates, a change in political parties, local governments, regulatory changes and even reputational risk.
Organizational — things that affect cash flow, such as recruiting and retaining talent, cyber liability, the cost of financing and working capital.
Operational — things that impact a project, including health and safety issues, quality assurance, design risks, constructibility, subcontractor defaults, faulty workmanship or products and the supply chain.
Ways to mitigate risk
Perhaps one of the most important tools for managing project risk is to communicate early and often. Project kickoff meetings are commonplace, said Mike Kennedy, general counsel for the Associated General Contractors of America, where risk managers and in-house lawyers converse about a project’s characteristics and potential risks.
“The best claim you had is the one you never got,” Kennedy told Construction Dive.
Most contractors expect to see more change in the industry during the next five years than in the past 50 years, according to a FMI and AGC survey, and Kennedy believes collaboration from all project team members “seems destined to become one of the fundamental strategies for managing the increased risk" that comes with change.
Having appropriate insurance coverage also is vitally important, as well as the placement of risk in contracts. “An awful lot of risk is allocated by those contracts and how they’re written,” he said.
In addition, construction firms must anticipate risk, develop plans on how to mitigate it and figure out how to minimize claims that result when risk is not managed well, Kennedy said. For example, every general contractor bears the risk of a subcontractor defaulting, so many large construction companies now purchase subcontractor default insurance, he said.
"[Contractors] often put risk mitigation plans into effect where they think there could be a problem,” said Kennedy. “They’re more proactive.”
How PCL reduces risk
McLellan said PCL Construction actively mitigates the risks in each of the buckets he defined. Regarding enterprise risk, the company maintains an abundance of working capital and stays liquid so that if interest rates rise, the firm can generate investment income.
Cyber-liability, which falls under organizational risk, is managed by the PCL's chief information officer and what McLellan calls a “very robust cyber crew and business technology group” that not only looks at potential threats, but also examines opportunities to leverage technology and innovation to make the company more competitive.
Under operational risk, McLellan said his firm strives to maintain safe jobsites, which it enforces through its employees as well as its trade contractors. “If we run a clean, safe and good worksite, typically that comes out to be a profitable job,” he said. “An indicator of a poor-performing job could be the kind of work-safety issues you could incur on it.”
Safety is the single-most-important part of a construction business, Howsam said, adding there’s a direct correlation between companies that have safe jobsites and ones that are profitable. He encourages contractors to start each meeting by addressing safety and to use every incident as a teachable moment.
“I hope you’re talking about it so much people are sick of hearing about it because that means you’re just starting to make a program,” he said. “Everyone deserves to come and leave the jobsite with 10 fingers, 10 toes and two eyes."
How technology can help
Technology can be an effective tool in risk management, but McLellan emphasizes it is just that — a tool. "Decisions are made by humans ... and how you mitigate loss and risk is by making more good decisions than bad decisions.” Metrics and analytics often are best used to help people make those good decisions, he added.
PCL engages a quality assurance group, which employs a tremendous amount of technology, such as BIM 360, 3D scanning, 4D animation and 3D printing, to name a few, to ensure that “when we put something in place it’s done well and done right at the beginning.”
Kennedy said that although technology creates risk, it also provides opportunities to better manage it. “More data is good if you can make sense of it and have the analytical capability to determine what it’s really telling you.”
But there is a such thing as too much data. Drones, for example, can take "umpteen" hours of video, he said, but contractors are tasked with finding the best ways to use it. They must determine where and how to use technology to improve productivity and efficiency as well as maintain quality, he added.
Increasing communication between technology and construction leaders may lessen that gap. Kennedy said that though IT experts might not have a lot of experience in construction, which has unique processes and requirements, he believes the next five years will see an increase in communication between the construction industry and IT leaders.
“Those bridges have yet to be built,” Kennedy said. “IT and construction are now very much in the process of trying to connect those dots.”