Risk mitigation may be the weakest part of your risk management policy and it requires constant attention. You have to keep track of additional risks as they occur, and monitor risk at all times.
Like any construction project, steel construction projects are huge, complicated, high-cost jobs with many different bosses. With complication comes the addition of risk simply because of all the moving parts and number of people involved.
While you may have a risk management policy in place, does it provide risk mitigation procedures to keep problems from happening or lessening their impact? What does risk mitigation mean?
Risk identification and management
The heart of construction site risk management is the identification and mitigation of risks ahead of time. In other words, you are attempting to tell the future and control for possibilities. This might seem like magical thinking, but risk mitigation is better performed proactively than reactively.
Part of risk identification includes identifying risk types, which can include:
- Schedule risk
- Cost risk
- Contractual risk
- Health and safety risk
- Reputational risk
- Organization/mission risk
Examples of major risks
Here are some examples of major risks that have been identified on previous projects.
- Fluctuations in energy costs
- Poor communication between stakeholders
- Poor documentation
- Poor material and equipment management
- Material delivery delays such as a delay of a prefabricated steel frame
- Labor shortages
In some areas of the world, political and social unrest is the biggest risk to a construction project. Transportation may be disrupted or steel and other materials are appropriated by another group. Worker and equipment safety are easily compromised.
Risk mitigation strategies
Risk mitigation can be split into four strategies.
- Avoid the risk entirely by eliminating the root cause of the potential problem.
- Transfer the risk to another party through contractual clauses and insurance.
- Reduce the risk by planning effective action in the cases where the problem manifests.
- Accept the risk. This should only be used as a last resort.
Risk mitigation requires the identification of specific issues. Effective mitigation practices contain the following:
- Risk reduction goals with achievable targets
- Identification of appropriate, cost-effective, proactive actions for attaining the goal
- Answers to the following questions about the actions:
- What is the root cause or trigger for risk?
- Does this risk have an impact on your business or just the project?
- How will you recognize the occurrence of the risk?
- What will happen if this risk does occur?
- How are you currently managing this particular risk?
- What steps can you take to manage or mitigate this risk better?
- What should you do if you don’t or can’t manage this risk?
Approaching risk mitigation through an applied strategy breaks it up into more manageable pieces. Taking stock of the impact of your actions on each risk will give you a more detailed picture to work with.
Risk mitigation tools and techniques
Use these tools and techniques for developing risk mitigation to help you reach appropriate levels of confidence around a variety of outcomes. These tools and techniques help you to determine the right level of contingency for each risk at each stage of a project lifecycle.
You have probably heard the old saw about 80% of the costs are caused by 20% of the problems. These techniques use that rule of thumb to concentrate on the most common and costly issues rather than spread the mitigation effort to things that don’t really matter.
Range estimating takes the 20% of problems and develops a range of risk for each. It then adds a high and low range to help you visualize individual impact. This is a fairly simple method that is useful for making educated guesses and framing further questions.
Advanced range estimating takes the range established above and uses it as input for a software application or tool that performs a Monte Carlo simulation. This is a problem-solving technique that can approximate more closely the probability of particular outcomes by running multiple trial runs or simulations using random values.
These applications can also produce a risk profile report and more accurately project logical highs and lows involved with each risk from the 20% bucket.
You can also go big with a complete risk analysis solution that provides range estimating along with risk profiling that includes confidence ranges and contingency amounts.
Tips for mitigating risk on your steel construction project
First, understand that the risk management policy you put into place is completely based on the construction contract. The contract contains the insurance provision requirements, indemnity clauses, exculpation clauses, and tells who is responsible for what if and when it happens.
Tip: Understand the definition of covered property.
The insurance policy will distinguish what’s yours and what materials belong to others. On top of that, the insurance may not become active until the materials are delivered. Then there is the question of sublimits, the differences between the sublimit for your stuff and someone else’s, and whether the sublimits compare correctly to the value of the property covered.
Pay special attention to the transit sublimit.
Tip: Coordinate insurance and contracts with the time coverage begins to avoid exposure to loss.
Tip: Get builder’s risk insurance, even if you don’t think you will need it.
Permanent insurance like ISOs Building and Personal Property Coverage often has more exclusions than dedicated builders risk policy. Better to be safe than sorry.
Corollary Tip: Don’t pay for unneeded coverage.
Tip: Take care with waivers of subrogation.
Subrogation is the waiver of the right to recover losses that are already covered by insurance. Some policies penalize the holder for waiving subrogation. Sometimes the statement of subrogation doesn’t work.
Tip: Understand insurance wraps.
Owner-controlled insurance programs (OCIPs) and contractor consolidated insurance programs (CCIPs) usually have large self-insured retentions (SIRs) rather than deductibles. The policies may not cover trade contractors, may not pay defense costs, and must be carefully coordinated with any waiver of subrogation.
Tip: Insurance is critical for risk management but isn’t the whole ballgame. Get indemnity.
- Indemnity may be limited but it can still be useful.
- It can cover losses not covered by insurance.
If you go for indemnity, check with several experts and be sure to coordinate with anti-indemnity laws when in force.
Tip: Challenge all assumptions.
- Establish all field conditions and allocation of expense before beginning the project.
- Don’t assume an engineer has signed off on the ability of an existing structure to bear the load of new construction on top.
- Understand that a “guaranteed maximum payment” isn’t any better than an “all-in-lump sum” clause.
- Prices can go up for a lot of reasons, lock it down with a “no damage for delay” clause.
- Give contingency allowances the hairy eyeball.
Tip: Read the policy.
No, really. Review it as soon as you receive it. If the terms do not align with prior agreements, reject it.
Risk mitigation may be one of your biggest money-saving practices. Use these tools, techniques, and tips to protect your business and mitigate your own financial risks.