Construction projects are always unique and carry uncertainty, making risk analysis and management key in the project management success of corporate projects. Adding to the challenge is that the construction market has changed. Good, bad or indifferent, the recession has painted a new landscape with tighter margins and less room for error.
The days of high margins and favorable contractual language are gone. Owners are more educated and the competition is tougher. As a result, businesses are running fast and hard and ironically increasing their risk exposure while decreasing their prices. Effective risk management is more important now than ever in the construction industry – a trend that will not likely reverse itself.
Rather than viewing risk as an unavoidable evil, firms have embraced risk management as a strategic opportunity. Risk management at its highest level has two overarching objectives, one being offensive and the second, defensive. Offensively, risk management aims to increase the value of the business by formalizing risk tolerance potentially increasing profit margin and stabilizing earnings. Defensively, risk management serves to protect the business by guarding the balance sheet, profits and legacy of an organization.
Below are three of the top reasons construction and engineering firms are embracing both an offensive and defensive risk management strategy:
- Transform risk management into a profit center. Traditionally risk management has been viewed as nothing more than a cost center. A function that reviews insurance coverage, supports claims and promotes safety. As the competitive landscape has changed, more and more contractors have focused on adding margin by better managing the risks they face.
- Better understand risks associated with specific projects. Reflecting on the last several years, many contractors will admit to taking work without fully understanding the risks associated. For those fortunate enough to have avoided the pitfalls of unknown risks, many have evolved the way they evaluate and analyze various project risk, such as contract terms, constructability, financing, partners, location, etc.
- Protect the legacy and longevity of the organization. As organizations continue to face more potentially severe risks, many companies are questioning their ability to withstand a severe hit to the organization.
To learn more about developing a risk management strategy for your business, download FMI’s whitepaper “Risk Management: A Blueprint for Success” by clicking the image below.