We discuss how construction risk management can help you plan for unpredictable variables like weather, price rises and labour shortages.
If you want to find out how technology can help, check out our recent guide to the best construction job costing tools and software.
In 2023, the outlook for construction businesses is more difficult than at any point since the 2008 financial crisis. Prices are at their highest ever, labour shortages are increasingly common and supply chain issues make it difficult to get hold of the materials you need.
All this creates uncertainty, making the already difficult job of construction risk management even more complex. What construction estimators need is a solution that allows them to predict the unpredictable.
Easier said than done you might say. But not entirely impossible…
Why a construction risk management is so important
Risk in construction is impossible to avoid. Even the best-planned projects can be ruined by factors you can’t control, such as:
- Scope changes
- Weather conditions
- Labour availability
- Material price changes
- Regulatory requirements
“As a former construction estimator, I know just how difficult it is to predict events that are out of your control. Over time, I’ve developed a few sure-fire ways of reducing risk:
1) Track project data,
2) Include contingency reserves,
and 3) Use the right construction estimating software.
This helps keep the project on track and your budgets intact.”
Danny Mitchell, Archdesk Head of Content and former Construction Estimator
Construction estimators have one of the most difficult jobs in the trade: Predicting the unpredictable.
Unsurprisingly, it’s a task many struggle to get right the first time. In fact, studies show that moderate levels of optimism bias are common across construction projects, leading estimators to underestimate how much time and budget they need.
If these mistakes aren’t spotted early, they can lead to missed deadlines, blown budgets and reduced profits.
So, how do you get it right? The solution lies with construction risk management.
Done right, it can offer more certainty and flexibility, while securing your profit margins against a difficult financial outlook.
Top tips for effective construction risk management
Effective construction contingency planning leads to better project management, happier clients and fewer delays. But where do you start?
Here are some tips to help you get it right:
Identify risks
The trick to effectively managing risk in construction projects is to know your enemy. After all, a known unknown is always better than an unknown unknown.
The goal here is to understand the specific variables that could go wrong, including anything from bad weather to employee sickness. By defining these risks, you can better plan for them - even if it’s difficult to tell whether they’ll actually happen.
Quantify your risks
Once you’ve defined your risks, the next step is to work out how likely they are to actually happen. This is always going to be educated guesswork – but it’s possible to be much more accurate than you might think.
Consult with project managers and look through historical information to identify a worst/most likely/best case scenario for each of your timelines. From there, you can calculate a ballpark risk based on these estimates.
Alternatively, it’s also possible to come up with a more scientific risk estimate based on methods like Monte Carlo – more on that below. But even if you don’t want to use these techniques, having your own ballpark estimates is infinitely better than diving into the project and hoping for the best.
Create a contingency reserve
Once you have ballpark timelines, you can adjust your estimates to accommodate them.
Most contractors will add in a certain percentage on top of their price estimates as a cushion for unpredictable variables, perhaps 5-10%.
The challenge here is that the more of a cushion you include, the more likely you are to lose out on the bid to a cheaper competitor. It’s important to make sure the contingency reserve is evidence-based so you’re not adding in more than you need.
Track, update, analyse
There’s no substitute for clear evidence. That’s why it’s so important to track time and costs across the project, so you can tell how well your estimates stack up to the reality on the ground.
Always consult historical data and discuss with key project stakeholders to ensure your estimates are better aligned with reality.
Regularly review and update
Construction estimating doesn’t end when the bid is over. If the project is delayed or over-budget, you need to know about it as soon as possible. From there, you can proactively adjust your timelines or expectations – which is always better than letting the project run on into uncertainty.
The best way to do this is to have regular reviews at key stages in the project, involving PMs, estimators, accountants and other key stakeholders. This helps better monitor and manage the cashflow of a project, ensuring everybody agrees the best way forward – even if plans need to change.
That way, there’s a much higher chance of you catching potential issues before they have a chance to ruin your profit margins. Check out our recent blog on construction estimation basics to learn more about the different stages of an effective construction estimate.
“If there’s a change order with new adjustments to the initial estimate, say instead of 100 square feet of a certain tile, you now need 400 square feet of that tile…
You’re going to have to buy extra tiles and you did not estimate for that.
So, are you going to have a change order for that 300, or are you going to have to eat the costs because you screwed up the estimate? Those are two very different scenarios.
But either way, your accounting team needs to know which one it is.”
Suzanne Cox, Construction Industry Expert.
Monte Carlo: Not just a spin to win
Don’t worry, you’re still reading a blog about construction risk management.
Monte Carlo is an algorithm that’s widely used for forecasting and decision-making in industries like construction.
As we discussed earlier, the key to effective construction contingency planning is to understand the biggest risk factors.
Monte Carlo takes it one step further by calculating the percentage likelihood that these risks will actually happen.
Don’t worry, we’re not going to ask you to do any complicated maths.
The best way to use methods like Monte Carlo is to get hold of specialist construction estimating software that can factor this into your estimates.
Here’s how it works:
Monte Carlo in action
Monte Carlo aims to improve construction risk management by testing out your ballpark best/likely/worst case estimates.
Here’s an example of what that might look like for a roof tiling job:
- Best case: Four days
- Most likely: Six days
- Worst case: Eight days
These are just ballpark figures.
But when you plug them into the Monte Carlo algorithm, it’s possible to get something much more scientific out of the other end.
The algorithm will use these figures to generate up to several hundred random figures for the risk variables, essentially game-testing every possible outcome within the parameters you’ve set. It will consider, for instance, how factors such as the weather, material availability and others will affect the timeline.
When that’s all done, it will assign a percentage likelihood for your best, most likely and worst case scenarios. That might look something like this:
- Best case: Four days - 15%
- Most likely: Six days - 40%
- Worst case: Eight days - 45%
This makes it clear that the worst case scenario is vastly more likely than the best case. That’s useful information, since you might otherwise be tempted to split the difference and allocate six days to the project. Now, it’s clear that’s far too conservative and seven to eight days is much more appropriate. Using information like this, you can create more accurate, data-informed estimates. This makes it much easier to reduce the risk in construction projects.
Monte Carlo isn’t an exact science. The best maths in the world can’t predict a snowstorm or your workers getting the flu. But it’s vastly superior to putting your finger in the air and hoping for the best.
Construction risk management: Not just a shot in the dark
When it comes to construction contingency planning, data is everything. Without it, you’re flying blind. Good estimates require a detailed understanding of everything that’s happened on the ground in previous projects, so you can more accurately predict what’s going to happen in future.
There are many ways to do this. You could write everything down on the back of an envelope and spend hours trying to find the right piece of paper when it’s time for your regular reports.
You could also save everything in an Excel document and waste your working life fiddling with formulae and macros, only to realise the whole thing’s two weeks out of date anyway.
Alternatively, if you want to keep hold of your time and sanity, you could get Archdesk. Here’s how it works:
- Integrated time tracking automatically updates hours worked to the day, so you can easily compare with your original estimates and always see live information.
- Plan out budgets and forecast costs so you can keep a constant eye on your project’s progress.
- Stay on top of sales processes with integrated quote tracking that lets you see the live status of all ongoing bids at a glance.
- Automate creation of regular financial reports, taking the hassle out of tracking your projects.
Sounds pretty helpful right? Request a demo today to find out more.
FAQs
What is construction risk management?
In estimating, construction risk management is the process of understanding what factors might affect the timeline and budget of your project, such as weather conditions, material availability, labour productivity and market fluctuations.
How do you achieve effective construction risk management?
Effective construction risk management requires first identifying the factors that are most likely to affect your project, then assess how likely they are to happen and what steps you can take to mitigate them. Techniques like the Monte Carlo method can play a huge role in effectively quantifying these risk factors.
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