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Construction
Management

CONSTRUCTION MANAGEMENT 1

OVERVIEW:
CONSTRUCTION
RISK
MANAGEMENT
PROCESSES

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Construction Risk Management

 Predict and Minimize Loss from Undesired Events

 Maximize the rewards

Foundation of Construction Risk Management Program

 Risk Data
 Internal Cash Flow Statements
 Job Site Safety Analysis
 Industry
 Economic Reports
 Ability to Collect and Analyze Data
on Past Performance
 Continually Look for Lessons

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Construction Risk Management

5-Step Construction Risk Management Process

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Construction Risk Management

5-Step Construction Risk Management Process 1 Identify Risk

1) Financial Risk 4) Economic Risk 5) Political Risk

 Credit Risk  Recession  Acts of Terrorism,
 Liquidity Risk  Inflation  Civil Unrest, or Simple
 Economic Forces Political Changes that
2) Safety Risk  Shrink Market Opportunities affect:
 Drive up Construction Costs  Project Timelines
 Job Site Accidents
 Dry up Project Funding  Funding
 High Rate of Injury & Deaths
 Worker safety.
3) Operational or Project Risk 5) Legal Risk
 Schedule Delays  Construction
 Workforce Interruptions  Heavily Regulated
 Lack of Funding  Highly Litigious Industry
 Equipment Failures
 Environmental Conditions

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Construction Risk Management

5-Step Construction Risk Management Process 2 Assess Potential Impact

Determines: Key Component of Assessing Risk:

 Frequency
 Recording Tracking
 Probability
 Project
 Severity of Potential Risks.
 Financial Data
FAQ:  Analyze more Historical Data
 "What is the worst that could happen?"
 "What is the likelihood of that event?“ Example:
 "How much would we lose if it occurred?" A Contractor bidding on their first Hospital Project
will have a much less accurate picture of their risk
than a contractor with ten years of performance,
safety, and financial reports on Hospital Projects.

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Construction Risk Management

5-Step Construction Risk Management Process 3 Controlling

Potential Responses to Identified Risks:

 Accept it Control the Risk:
 Avoid it
 Control it Implement Measures:
 Transfer it.  Reduce the likelihood of a Loss Event
 Mitigate its Impact
Accept the Risk:
Example:
Certain Risk are deemed Acceptable: A Contractor may choose to protect lien rights with
 Cost of Pursuing a Valuable high-risk customers, or on projects of a certain size
Opportunity to reduce the impact of a missed payment.
Avoid the Risk:
Transfer the Risk:
This may involve:
 Changing the Scope of Work Pass the risk on to another party:
 Declining the Contract entirely.  Construction contract
 Insurance Program

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Construction Risk Management

5-Step Construction Risk Management Process 4 Financing Potential Cost

Potential Project Risk in Finance The Cost of Risk Financing:

 Operating cost overruns.
 All Insurance Premiums
 Operating performance.
 Maintenance cost/timing.  Attendant Costs
 Raw material cost.  Broker Commissions/Fees,
 Insurance premium fluctuations.  Captive Contributions,
 Dividend Adjustments,
 Letters of Credit, and
 Other Costs impacting:
o Funding of Risk Transfer
o Retention

Example of Risk Financing Technique:

 Purchase of Traditional Policy where Risk is
Contractually Transferred from one party to another.

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Construction Risk Management

5-Step Construction Risk Management Process 5 Recover Losses

Form of Loss Recovery and Mitigation * Review Results

 Conduct Periodic Reviews of the

 Filing an Insurance Claim
Risk Management Program
 Filing a Mechanics Lien or Payment Bond Claim
 Analyzing both Successes and
 Sending Accounts to Collections
Failures
 Filing a Lawsuit
 Update the Process with Lessons
 Declaring Bankruptcy
Learned.
The landscape of risk in construction today looks
Risk Management Program should include: much different than it did even ten years ago.
 Policies and Procedures for Loss The building industry of tomorrow will bring new
Prevention and Recovery. risks, and new strategies to manage and mitigate
them.

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Construction Risk Management

Common Construction Risks for Contractors and Owners

10 - Common Construction Risks

1. Delays
2. Documentation Errors
3. Change Management
4. Sub-Contractor Default
5. Supply Chain Isues
6. Poor Project Management
7. Labor Shortages
8. Poorly Defined Scope of Work
9. Health and Safety Hazards
10. Payment Disputes

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Construction Risk Management

Common Construction Risks for Contractors and Owners

1 Delays 2 Documentation Errors

Stem from a variety of places, The 2nd highest cause of disputes globally
including: was Errors and Omissions in Contract
 Poor Project Management Documents - Arcadis 2022 Global
 Permitting & Inspections Construction Disputes Report
 Supply Chain Disruptions The leading cause of Construction Disputes in North
 Change Orders America in 2021 was “Poorly Drafted or Incomplete
 Accidents and Unsubstantiated claims" – Arcadis Report
 Adverse Weather
The risk of errors is compounded by the sheer volume of
documents required to complete a project, including:
 Drawings  Payment Claims
 Submittals  Lien Waivers
 Contract Documents  Change Orders, and
 Notices many others

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Construction Risk Management

Common Construction Risks for Contractors and Owners

3 Change Management

Refers to the process and protocols involved in Type of Changes in Construction:

preparing a company's personnel for upcoming  Alteration to Construction Project’s:
changes and providing them with the support they  Layout
need to implement the change.  Materials
Example: Management of Change in Construction  Structural Elements
 Errors in design or engineering  Adjustment to the Project’s Defined Scope:
 Poor Project Planning or Management  Additive or Deductive Work activities
 Funding or Cash Flow Problems  Deliverables
 Supply Chain Problems  Project Objectives
 Legal or Regulatory Challenges
 Defective Workmanship or Errors in Five (5) Steps to Manage Change on the Job Site:
following Plans 1. Identify 4. Formalize
 Personnel Changes 2. Assess 5. Execute
 Unexpected Site Conditions 3. Approve

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Construction Risk Management

Common Construction Risks for Contractors and Owners

3 Change Management

 One of the most important Change Management aspect is

GOOD COMMUNICATION.

 Risk prevention around change management begins during

preconstruction.

 The more time and effort spent on investigating site conditions and reviewing
drawings and site plans for accuracy, the fewer changes required after breaking
ground.
 Owners and Contractors should follow a clear and efficient process for
communicating and managing changes, doing everything possible to reduce the time
between RFIs and change order approval.

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Construction Risk Management

Common Construction Risks for Contractors and Owners

4 Sub-Contractor Default 5 Supply Chain Issues

 A Serious Risk Drivers for Cost Increases and Material Shortages:
 the Larger the Project, the greater the  Shipping and Trucking Issues
number of Subcontractors on the Job.  Natural Disasters
 Entire Project can be Affected  Business Closures
 Scope of Work falls on the Critical Path.  Spikes in Demand
 Fuel Prices
Forms of Sub-Contractor’s Risks
 Economic Recession
 Performance and Quality Risk  Strikes and Labor Disputes
 Schedule Risk
 Financial Risk Mitigation Measures:
 Relationship Risk
 Monitor Risk of Material Shortages via Global
Mitigation Measures: Supply Chain Developments
 Adopt a Flexible and Diversified Supply Chain
 Written Agreements to Transfer the Risk of Loss
 Indemnity or Indemnification Clause

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Construction Risk Management

Common Construction Risks for Contractors and Owners

6 Poor Project Management 7 Labor Shortages

 Leads to: Growing Challenge of every Industry:
 Miscommunication
 Delays  Lack of Qualified & Reliable
 Disputes Employees
 Potential for Strike or Walkouts on
 Cause a Ripple Effect across other Projects Union run Projects.
 Increasing Risk for Specialty  Unavailability of the needed
Contractors Manpower to Finish the Project on
 Scheduling subs, Time and Materials can Schedule.
go to waste

 Disrupt Schedules on other Jobs

 Difficult Labor and Equipment Coordination

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Construction Risk Management

Common Construction Risks for Contractors and Owners

8 Poorly Defined Scope of Work 9 Health and Safety Hazards

 Management Issue Frequent Concerns:
 Roll Downhill
 Hard to keep Project on Track  Maintain a Healthy Workforce
 Drives the Project Cost Up  Avoid Financial Loss
 Profit Margin Down  Increased Workers Compensation &
Insurance Premiums
Mitigating Measures:  Penalties from Safety Violations
 Improve Communication can Lead to a better- Top 4-Health and Safety Risks in Construction -
Defined Scope by OSHA :
 Avoid Scope Creep to stay Profitable
 Falls
 Caught in or between
 Struck by
 Electrocution

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Common Construction Risks for Contractors and Owners

10 Payment Disputes
Arise Frequently due to: Mitigating Measures:
 Funding/Financing Delays
Owner & Contractor should Observe:
 Change Orders
 Retainage  Comprehensive Documentation
 Lien Waivers  Clear Communication
 Back-Charges  Close Adherence to Contract
 Work Quality Disputes Requirements.

Payment Problems:
 Disrupt Contractor Cash Flow The time to get paid in construction is
 Increase the Risk of Default among the longest of all industries.
 Increase an Owner’s Risk of Lien Claims
 Contractors and Suppliers Take Action
 Recover Unpaid Contractual Amounts

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CONSTRUCTION
OCCUPATIONAL SAFETY AND
HEALTH

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1. Risk prevention around Change Management begins during ____________.

2. Name at least five (5) common construction risks.
3. What are the potential responses to Identified Risks?
4. What are the key components of Assessing Risk?
5. What are the five (5) Steps of Risk Management Process?

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