Managing Risks in Construction Projects: Insights from Jacob Austin

Understanding Risk in Construction

Defining risk can be simply put as 'the uncertainty of any given outcome, which could be a positive opportunity or a negative threat'. Taking on risks can be like playing the game of snakes and ladders. Roll right and you're ladders all the way to victory. Roll wrong and the snakes will take you back to where you started.

Each company has its own risk appetite. Some are willing to take on additional risks for potential rewards, while others prioritize the certainty of a certain outcome and aim to mitigate risks. However, it is clear to see that taking on no risk at all means having no reward. As a business owner, accepting a certain level of risk is necessary.

The Role of Subcontractors in Risk Management

As a subcontractor, understanding where risks are coming from and deciding which ones to keep, mitigate, or eliminate is crucial. This starts right at your first involvement in any construction project - the inquiry document - this reveals the risk associated with pricing, and shows the contract arrangements in play, such as fully fixed lump sum, target cost arrangements, remeasurement contracts, and cost-plus arrangements, each with varying levels of risk and certainty.

Delving deeper into the enquiry documents - it is vitally important to consider the scope of works and the risks involved in accurately quantifying the works and pricing unknowns. Subcontractors need to carefully assess and manage these risks to ensure profitability and success in their business.

Identifying and Managing Risks

There are various unknown risks that contractors may encounter in their projects. These risks can include unforeseen issues such as patching, boxing, or soft ground that may require additional work. Identifying them is a matter of brainstorming and drawing on your past experiences with a critical and imaginative eye. Contractors may want to gain cost certainty on these risks and are willing to pay a premium for the subcontractor to hold onto that risk. However, this can also be an opportunity for the subcontractor if the risk does not occur.

Other risks may be introduced by specific methods or prescriptions outlined in the scope of work. These risks can affect productivity and the number of visits required. It is important for subcontractors to assess all drawings and de-risk their situation by addressing any discrepancies or design risks.

Time-Related Costs and Unknown Risks

Time-related costs, such as supervision and accommodation, also need to be considered, along with the risk of liquidated and ascertained damages. Managing subcontractors and extensions of time can help limit exposure to these risks. Additionally, subcontractors may need to consider insurances, bonds, and collateral warranties, which can be used to manage risks rather than introducing more.

There are also unknown risks that may arise, which subcontractors may have priced as an all-risk lump sum. These risks are often unforeseen and can vary from project to project. Subcontractors should carefully consider whether it is worth being back-to-back with the main contract on certain issues, as it may result in unnecessary costs.

Mitigating Risks

To effectively manage risks, subcontractors should identify and assess them as early as possible. Jacob advises listeners to develop a table and rank the risks from highest to lowest score. Once this is done, the next step is to consider mitigation strategies.

Mitigation can involve controlling, avoiding, reducing, or accepting the risk. Accepting a risk means acknowledging that it will happen and being prepared for the consequences. Avoiding a risk may involve not working on a particular contract or clarifying potential risks. Reducing a risk could mean changing methodologies to minimize exposure or even eliminating the risk altogether. It's important to note that some mitigation measures may come at a higher cost.

The Importance of Communication and Early Warnings

After considering these options, it is crucial to have a conversation with the contractor. Ideally, this conversation should take place before placing an order. During this discussion, both parties can debate and agree on how to handle various risks. It may be possible to allocate risks to other subcontractors or negotiate financial arrangements related to risk management.

In my opinion risks are often not given enough attention in construction projects. However, some contracts, such as the NEC suite of contracts, require early warnings and risk registers. Failing to notify risks in a timely manner can have consequences. Contractors should be given the opportunity to implement mitigations if they were not previously aware of the risks.

I very much encourage conducting risk reviews early on, but if that's not possible, it should be done as soon as possible. I recommend referring to resources like the Government Orange Book: Management of Risk - Principles and Concepts or ISO 31000 for further guidance on risk management if you need it.

In conclusion, risk management is a crucial aspect of construction projects. It requires a comprehensive understanding, careful assessment, and informed decision-making to protect interests and achieve desired outcomes. It's all about navigating that game of Snakes and Ladders well. Risk management is your tool to rig the dice.