Managing Risk in Construction

Ed Littleton

Are you a risk taker? Perhaps outside of the day-to-day risks life presents, you occasionally play the lottery, or you’ve sought to find a long-lost relative, or you’ve taken an adrenaline-fueled skydiving adventure. In our daily lives, we constantly evaluate that some events are bigger risks than others. In the field of construction risk management, we attempt to identify potential project risks and take proactive steps to mitigate their impact. Just like winning the lottery, some of these risks are due to rare or unforeseen events.

Over a multiple-year span, a consortium of experts overseeing a variety of major capital projects analyzed the root causes of troubled projects and concluded that project failure is largely predictable and avoidable. It’s easy to understand why. Unlike a controlled production environment such as a factory, contractors operate in ever-changing conditions, where hundreds of people and factors can positively or negatively influence a project outcome every day.

As risk management has evolved from an insurance procurement and claims management role to a strategic business function, there has been a growing consensus in recent years that most of these root causes, if properly understood and identified early, can indeed be prevented.

This position was skillfully captured in KPMG’s hallmark article, Avoiding Major Project Failure – Turning Black Swans White, argued “…Almost all project failures, even catastrophic failures, are really not black swan events but a series of failures.” The term black swan has been around for hundreds of years and, thanks to the work of economics professor Nassim Nicholas Taleb, has come to be used as a metaphor for events that are unpredictable, have widespread ramifications and are rationalized in hindsight.

According to Taleb’s hypothesis, a thousand-year storm is a black swan event on a construction project. A subcontractor default, which was likely preceded by any number of warning signs like underperformance or schedule delays, is not.

So how do we manage the risks we can control? Warren Buffett once observed, "Risk comes from not knowing what you're doing." There is so much truth in this statement, but risk can stem just as equally from lack of awareness about a problem. At Balfour Beatty, we believe a risk or problem can be most effectively managed if we know about it early and can get the right people at the table to solve it. That process begins with understanding the most critical risks facing the industry today.

As the pace of change and innovation have accelerated in construction, never have poor review and planning posed a greater threat. Cost overruns and differing scope expectations can occur when stakeholders fail to align and plan collaboratively.

A lack of clear communication across all parties increases project risk exponentially. Construction projects involve not hundreds but thousands of logistics. Establishing clear lines of communication across all parties, as well as precise lines of ownership and authority, are critical to the success of a project. Recognizing the value in developing early alignment around project goals, we developed a framework called SmartStart® that sets our teams up for the greatest success from the outset of the project.

As an industry, we are only just beginning to feel the ramifications of the talent shortage. In 2018, the Associated General Contractors of America (AGC) conducted a survey that revealed 80% of construction firms are having trouble filling hourly craft positions. At a time when capital expenditures on construction have increased, the steady decrease of skilled, experienced labor has resulted in talent wars cropping up across the country. Without the necessary people to perform the work, projects can suffer from schedule overruns, lack of quality craftsmanship or worse.

Balfour Beatty teams are trained to identify and proactively manage these and other risks in partnership with our clients throughout the entire project lifecycle. By focusing on improving our reporting, we are obtaining more accurate metrics that allow for greater transparency. Fundamentally, we believe bad news delivered early is good news, providing the opportunity to correct and change course.

We have also embraced and embedded Lean principles and practices throughout our organization to reduce risk by minimizing impacts, defects and defaults in execution. Our goal is to protect both Balfour Beatty and our clients’ assets from major exposure, while balancing the risk we share with them.

Much in the same way we interpret safety to be a shared responsibility among all our people, we have cultivated a culture of accountability when it comes to risk. Balfour Beatty teammates understand that even if they’ve used the same blueprint for a building five times, the next build will come with its own unique set of circumstances and risks which vary according to market type.

For both owners and trade partners, it’s critically important to partner with a general contractor that understands risk and manages it effectively. A large percentage of third generation contractors fail. That’s a startling statistic! Research shows that an unchecked desire for growth, whether it be geographic or extending into new market types, simply leads many of these companies to assume too much risk.

At its core, risk evaluation/control is meant to protect the entire project team. When a major subcontractor defaults, contracts rarely if ever make an owner whole. Conversely, a single default has cascading ramifications for every stakeholder. We may not be able to control the lottery’s winning numbers, but we can proactively plan, align, communicate and appropriately share risk to achieve the most predictable and favorable project outcomes for everyone.