Properly managing risk in the construction industry can have a major impact on project cost, schedule and resource use, potentially offering significant savings according to a new Dodge Data & Analytics study.
Produced in partnership with Alliant and supported by e-Builder and Procore, the Managing Risk in the Construction Industry SmartMarket Report reveals the top construction risks, their impact on the industry and the benefits associated with using specific risk evaluation and mitigation strategies. One clear finding that emerges from this data is that the industry’s growing focus on collaboration and integration may be an important step toward reducing construction risk.
Impact of Risk on the Construction Industry
The report reveals that building owners, general contractors and trade contractors in the U.S. all experience a high impact from the risks they face, with three-quarters reporting that they have experienced a dispute or claim in the last five years. The claims faced vary among the three players: about one-third of owners find that claims arising from construction defects are both the most frequent and the costliest. Just under half of general contractors report that subcontractor default, termination or failure claims are the most common and expensive. More than one-third of trade contractors report frequently experiencing warranty issues, but only about a quarter report them as their costliest claims, with roughly the same percentage reporting construction defect claims as the costliest.
These vastly different experiences suggest that while risk takes a toll on the industry as a whole, the top issues and the best measures to control them are very different for owners, general contractors and trade contractors.
Top Construction Risks
The study examines the variety of risks different players encounter in the construction industry. For example, owners are most concerned about operational risks, such as planning or scope changes, schedule changes and cost escalation. Contractors are more focused on risks associated with contract term and procurement of labor, especially in the currently tightening job market.
The increased tendency for owners to shift project risk to contractors is the top driver for increased use of risk management practices by more than half (59 percent) of contractors. This trend is also noted by three surety experts from Ace Surety, Zurich and Liberty Mutual Safety who were interviewed for the report. Importantly, these experts also agree that this increased risk can be mitigated by construction firms who understand and implement controls for risk. This risk management knowledge is likely to become increasingly important in gaining a competitive advantage in the future, as the trend of shifting risk and seeking a single source of accountability is likely to continue to grow.
The Most Effective Risk Evaluation and Mitigation Practices
General contractors and trade contractors agree that formal brainstorming with the project team, along with expert input from internal resources, are the two most effective risk evaluation strategies. There is wide agreement that these strategies help to increase reliability in overall project performance.
General contractors also find that formal brainstorming helps improve project safety and schedule and increase client satisfaction while trade contractors believe they help reduce the cost of construction. Contractors generally report that holding regular meetings with the full project team, focused on developing a plan to manage risk, is among the top risk mitigation strategies.
Owners report that having input from internal experts is important to help improve project schedule. In fact, getting this input to owners may improve their schedule expectations, because it helps them develop a more grounded understanding about how long a construction project will take.
The top risk mitigation strategies yield similar benefits for owners. Again there is wide agreement that both top strategies—regular meetings with the full project team focused on risk and developing a plan to manage it—increase project reliability overall. Owners also recognize that regular meetings help to maintain the intended level of project quality, while general contractors report that it improves project schedule and safety.
Trade contractors agree about the impact on safety and they also see a reduction in cost associated with these meetings. Improved safety is also a top benefit noted by contractors associated with developing a risk management plan.
The most frequently cited benefits of these efforts—increased reliability, improved safety and improved schedule—directly affect the reputations of contractors and their relationships with clients. Dedicating time and resources to these strategies has a major impact on project and company performance, and the strategies themselves are neither complicated nor costly.
Importance of Collaboration to Reduce Risk
It is notable that two of the most effective measures, formal brainstorming and regular team meetings, are the most collaborative among the variety of practices industry players can undertake. This is one of several indications in the report of the importance of collaboration in reducing risk:
- ninety-one percent of owners, general contractors and trade contractors agree that increasing collaboration reduces risk; and
- the use of delivery systems that encourage team integration is the second most important driver for increased use of risk management practices.
These findings are consistent with many other studies conducted by Dodge Data & Analytics. These studies consistently reveal that early team integration carries multiple benefits, from project quality to innovation and improving project budget and schedule. The ability to address all these factors reduces risk.
However, the report also suggests that these strategies are not necessarily being put into use early enough to support a fully integrated project. Only owners report that formal brainstorming and regular meetings of the full project team occur at a high level before the bidding and construction phases of individual projects. And a low percentage of contractors report being involved in either of these activities during the pre-design or design stages, suggesting they are not being sufficiently included. As contractors are typically the best informed about how to anticipate and mitigate many construction risks, the report clearly demonstrates a need to engage this group earlier to fully realize the benefits of these strategies.
Despite the strong evidence of benefits, the industry still struggles with adopting and integrating formal project delivery methods. The Managing Risk in the Construction Industry SmartMarket Report examines the challenges associated with collaboration and integration, including research findings on integrated project delivery conducted by the University of Minnesota. Renee Cheng, a professor of architecture who led the research project, indicated that non-contractual approaches to integration are often less effective. “The collaborative culture actually grows from some of the discussion you need to have to set up the stakes, accountability and consequences in an Integrated Project Delivery (IPD) agreement,” according to Cheng’s research.
The SmartMarket Report reinforces the call to action for industry transformation around integration and collaboration. The high frequency of claims and disputes will continue to take a toll until the industry embraces good risk management. Doing this will be essential, both on the level of using specific, effective risk evaluation and mitigation practices, and in the way project teams are formed and interact throughout the project lifecycle.