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FMI Quarterly/March 2015/March 1, 2015

How to Build a Project Risk Assessment Process

mountainclimers_imageProject Risk Assessment is more than just beating the odds—it’s a culture.

The term “risk management” is not new to the design and construction industry. Defined as “the forecasting and evaluation of financial risks together with the identification of procedures to avoid or minimize their impact,” risk management can’t just be mandated. Like safety, risk management requires constant communication, education and efforts to build awareness and provide value to both employees and clients.

An employee-owned organization like Messer, for example, must be able to clearly display the value that it is providing workers not only in their jobs — but also in the firm’s financial reports. Achieving that balance isn’t always easy, but according to Alex Munoz, vice president of safety and risk management, the organization has been able to strike it by using effective risk management strategies across the board.

“One of the easiest ways to create a corporate culture around risk management is by making it everyone’s job,” said Munoz. “That means moving from an ‘It’s the department’s role,’ mentality to one that says, ‘We share a job, and that’s to create a risk-aware culture.’” Because of this mindset, Munoz said risk management is practiced at every organizational level — from the field engineer to the senior project executive and everyone in between.

“My department, for example, is charged with arming employees with the right information, data and competencies to be able to make the right decisions at the point of action,” said Munoz. “In many cases, that happens right on the job site.”

An effective risk management program must include a project risk assessment process to aid in understanding the risks inherent in a job prior to submitting a bid. Once the project is won, creating awareness around these project risks helps avoid potential costly pitfalls.

Avoiding Project Pitfalls

At Messer, the firm’s executive team champions its corporatewide approach to project risk management as a core value. Over the past few years, Messer’s project risk assessment program has helped the company avoid some critical pitfalls that could have cost the company millions of dollars.

“Recently, we were asked to perform work within an existing facility where the owner wanted us to take on an unlimited level of risk regarding existing property (namely, damage to the property),” said Munoz. Knowing that owners are responsible for the property insurance on their own facilities, the construction firm asked to be named on the owner’s existing property policy as an additional insured and for a waiver of subrogation for Messer and all of the subcontractors from the owner’s carrier. The waiver wasn’t granted.

“Given the relatively small size of the project fee,” Munoz said, “we simply weren’t willing to take on the millions of dollars in liability. In this particular instance, we felt confident in our firm’s ability to do the work, but we also know that the unexpected can happen. There’s always a fortuitous nature to risk, especially when working within sensitive environments.”

Looking back at some of the projects Messer has taken on, Munoz said the highest levels of potential risk usually involve force majeure events and consequential damages. To make sure it is properly assessing project opportunities that could present undue levels of risk, Messer thoroughly reviews all contracts and highlights issues like force majeure events, which in most cases are not insurable. “We also look for red flags on consequential damages, extreme liquidated damages and who is taking on the risk,” Munoz added.

Once these items are identified and flagged in the contract, the construction firm goes back to the owner and attempts to negotiate any liability down to the insurable level. In the case of a student housing project, for example, 3,000 new beds translated into 3,000 individuals who would need to be temporarily relocated (be it in hotel rooms or via some type of multifamily leasing arrangement) if the project was delayed due to a natural disaster. “We basically just figure out the liabilities based on worst-case scenarios,” said Munoz, “and go from there.”

Of course, some things simply can’t be quantified. For example, Messer handles a high volume of work for children’s hospitals. On these types of projects, you can’t just quantify a child’s life if, say, a toxin were to enter the air conditioning unit and be transferred to children whose immune systems were compromised.

“Because of the uncertainty,” said Munoz, “we break everything down on a case-by-case basis when assessing risk and work to figure out the various liabilities and worst-case scenarios that are involved with each.” Risk mitigation strategies through contractual language, risk transfer via insurance or operational controls are then designed for implementation on the project.

Clear Language Provides Options

By instituting a culture of risk awareness and management, and by focusing on a robust project risk assessment process, Messer has been able to head off issues that could have otherwise impacted the firm’s bottom line. On one occasion, for example, the company was faced with a construction defect. “We had limited any liability to the completed operations period that the subcontractors were able to obtain through their insurance coverage,” Munozexplains, noting that in this particular instance, most  subcontractors carried a typical two-year coverage period.

Due to a design error as a result of value engineering, some drains associated with the plumbing system were backing up on a frequent basis and a full six years after project completion. Wanting to do the right thing, Messer partnered with the owner and resolved the issue. “We weren’t contractually obligated, but we prioritize the customer relationship, so we helped out anyway,” said Munoz. “Due to our risk assessment program, however, we had many options when something went wrong.”

At the end of the day, good project risk assessment for contractors requires strong contractual language that protects your balance sheets and gives you options when it comes to “doing the right thing.” And while measuring the results of a project risk management strategy isn’t straightforward, Munoz said his firm has definitely gained the benefit of more favorable insurance terms.

“When we examine our loss runs, they’re very clean in general. Our rates have remained flat for the past four years — a period where higher-risk firms are seeing double-digit increases,” he said, noting that the firm’s risk management approach has also translated into a distinct competitive advantage.

Step by Step

When asked if owners are starting to demand a more transparent project risk assessment program, Munoz echoed the current market’s sentiment, “Yes, certainly. You definitely see that more from astute owners around risk.”

To companies looking to cultivate a strong risk management culture, education is an extremely important consideration. At Messer, roughly 60- 70 percent of employees have been on board for 15-20 years. This can make implementing change challenging. Education and engagement are critical to gaining support and buy-in.

“As an ESOP, we always talk about the employee-owners and how we can continue training them on the fine points of embracing our risk management strategy, and start thinking about it as being a part of our overall culture,” said Munoz. He also prompts companies to remember that, in the end, the best approach to risk management is collaborative and it involves the operations teams.

“Miss these two points and the strategy just becomes another initiative, rather than a complete cultural shift,” said Munoz.

When asked about key recommendations for companies considering implementation of a risk management program utilizing a project risk assessment process, Munoz provided the following insight:

  • The executive team must champion the entire project risk assessment process for the company.
  • By identifying and taking on significant risk, contractors are much more in control of their costs and are better able to compete on projects in the marketplace.
  • Risk management can’t be mandated. It requires constant communication, education and efforts to make people’s work easier.
  • Create a dashboard and have cross-functional teams build risk management systems so that you get real feedback from the people who are most affected by the project risks.
  • Companies that are astute at risk management and that implement a robust project risk assessment process can really differentiate themselves from the competition.
  • One of the easiest ways to create a corporate culture around risk management is by making it everyone’s job.
  • By instituting a project risk assessment process, companies can effectively head off issues that could have otherwise severely impacted the corporate bottom line.

The foundation for building a culture around risk management starts with implementing effective processes and procedures with built-in accountability. Contractors today find them themselves in a vastly different risk environment than they did five years ago. Best-in-class contractors like Messer understand that having a robust project risk assessment process embedded in how they conduct business is vital to helping them avoid pitfalls and identify opportunities in the project risks they encounter every day. Q

Ryan Howsam is a consultant with FMI Corporation. He can be reached at 303.398.7275 or via email at rhowsam@fminet.com. Joe Poliafico is a senior consultant with FMI Corporation. He can be reached at 303.398.7230 or via email at jpoliafico@fminet.com.

 

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