Companies and owners that have been involved in a project valued at the $100 million mark are keenly aware of risk management, but they carry it out in different ways, says a new report on the subject by McGraw-Hill Construction Research & Analytics.
The report was based on telephone surveys of risk-related personnel at 12 A-E firms, 12 general contractors and construction managers, and 11 owners of infrastructure.
Changes during design and construction, scope creep, budget and cost overruns, delayed approvals, and problems with safety and site conditions account for most of the risks. Almost a quarter of the projects suffer from delays, construction firms reported. Almost one out of five projects run over budget, and about one out of 10 have disputes with an average claim size of $3 million.
To manage these considerable risks, suggests the MHC report, companies and owners need to implement formal risk-control processes “beyond simple checklists” and communicate and collaborate better with other members of the project team.
“To quote Peter Drucker, ‘A problem anticipated is a problem half-solved,’ ” says Harvey Bernstein, MHC’s vice president for industry insights and alliances and executive editor of the report.
“The bigger firms are really on top of risk and controlling it, but a lot of midsize and smaller firms—even in this down economy where there is so much competition to get a job—the last thing [they do] is to factor in cost of risks. Or they ignore or decline to factor them in,” says Bernstein.
One telling section of the report came from in-depth interviews with 15 risk experts at the surveyed companies. When gauging the risk inherent in a construction project, the most commonly recognized measures are the ability to finish on time and within budget, says the report.
“While these measures of risk seem relatively straightforward, several expert respondents question exactly what being 'on time' and 'on budget' entails," says the report.
The handling of extensions to changes affects “on time” completion, one contractor said.
“Given the challenge of even defining 'on time' and 'on budget,' it is not surprising that estimates for the percentage of projects completing on time and on budget vary widely among the experts," said the report.
In another section, the report stated that at the go/no-go stage of a project, contractors typically consider risks involving project funding, contract terms, labor issues and whether they will have enough internal resources.
In the opinion of risk experts, the most difficult risks to quantify are incomplete design, changes in the economy and unforeseen site conditions.
Risk increases when dealing with firms prone to litigation and if the scope of work is unclear, team members are unfamiliar with one another, project funding isn’t adequate or the ownership structure has multiple partners. Projects that have less schedule flexibility—such as condominiums and bridges—are also riskier.