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Report Analyzes Reducing Construction Risk

Monday, February 27, 2017

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A recent industry analysis found that construction risk has fluctuated since the recession with 75 percent of building owners and contractors experiencing a dispute or claim in the last five years.

According to "Managing Risk in the Construction Industry," a new SmartMarket Report from Dodge Data & Analytics, nine in 10 say that the solution is increased collaboration and communication across the board.

“Too often the industry accepts high risk as a standard operation condition. As construction activity accelerates after the recession, improving risk management is as important as increasing productivity, safety and profitability,” the study’s introduction claims.

U.S. Army Corps of Engineers, CC-BY-SA 2.0, via Flickr Commons

While three-quarters of those who participated in the study experienced a claim or dispute in the past five years, 83 percent of those were general contractors.

The data in the report was based on an online survey conducted in July and August of 2016 with responses from 507 building owners, general contractors, construction managers, design-build firms and trade contractors.

Risk Numbers

While three-quarters of those who participated in the study experienced a claim or dispute in the past five years, 83 percent of those were general contractors. The top three risks that claims arise from are split between owners, general contractors and trade contractors.

Building owners are most impacted by construction defects, while subcontractor default, termination or failure claims and disputes impact the general contractors the most. Warranty issues are the most common for trade contractors, but the costliest disputes arise from construction defects, similar to owners.

U.S. Army photo by Sgt. Michael Baltz, CC-BY-SA 3.0, via Wikimedia Commons

In addition to identifying who is at the greatest risk for a dispute or claim in the construction industry, the report also found out the best way to mitigate those risks. Collaboration and communication are key.

There is, of course, some variation in risk that is dependent upon variables such as size of project/company and project type. Companies that do large projects of $20 million or more are more likely to experience a claim or dispute. The discrepancy is most notable among contractors where 95 percent of those with annual revenues of $500 million or more have experienced a claim compared to 77 percent of those with revenues less than $50 million. Likewise, more companies doing transportation infrastructure projects (80 percent) report experiencing a dispute compared with general building (74 percent), industrial (74 percent) or water infrastructure (73 percent).

Management Suggestions

Despite all the variables, however, the report suggests that all companies adopt the use of enterprise risk management, which would control all the risk factors an enterprise faces, systematically engaging all personnel in risk management steps.

Traditionally, only larger companies have adopted this process, said David Druml, a construction risk management consultant. However, the model works well for smaller-scale business and “any owner or senior office who wants to improve the profitability of their firm would be well advised to take an interest in ERM,” he said.

Dodge Data & Analytics

Nearly all (91 percent) of those surveyed agree that collaboration reduces risk, with the most effective strategies involving formal brainstorming with the team and regular meetings with the full project team.

In addition to identifying who is at the greatest risk for a dispute or claim in the construction industry, the report also found the best way to mitigate those risks. Collaboration and communication are key.

Nearly all (91 percent) of those surveyed agree that collaboration reduces risk, with the most effective strategies involving formal brainstorming with the team and regular meetings with the full project team.

Strategy Impact

The positive effects of brainstorming are wide-ranging and impact each facet a little differently. The greatest benefit to owners, for example, is the increased reliability in overall project performance, while the greatest benefit for trade contractors is reportedly the reduced cost of construction.

General contractors, however, were largely split in their responses to this survey citing four main benefits in brainstorming for their stake in a project. Increased reliability in over project performance, improved project safety, improved project schedule and increased client satisfaction top their list.

The report stresses that, regardless of which tactic a company or professional uses to combat construction risks, effective mitigation begins at the outset.

   

Tagged categories: Building owners; Construction; Contractors; Labor; Project Management; Risk management; Subcontractors

Comment from Scott Birch, (2/27/2017, 5:32 AM)

What is the best appproach for a small trade contractor to initiate ERM?


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