Harness Construction Risk Management For Better Profits
Construction risk management opens up new possibilities in profits because what you don’t lose to risky business is like finding money. Insurance can’t make up for contract clauses that stack the deck against you, and if risk doesn’t hold a top place in your planning, you’ll have a tough time overcoming its effects.
Construction risk management often seems like an effort in futility. After all, projects overflow with risk and that’s on top of dealing with everyday business risks. And, if you don’t feel like you’re keeping up with risk, you’re not alone.
While 73 percent of executives feel that risks to their companies are on the rise, companies in general are not meeting the increased risks with improved risk management. In fact, only 12 percent of responding companies demonstrated qualities that marked them as true risk management leaders, according to a PwC U.S. risk review in 2015.
The Litany of Risks
For every construction business, risk is like a hot potato, and it’s handled that way. So, construction has more than its fair share of companies shouldering risks not directly under their control. Meanwhile, developers and large construction companies remain above it as they use their power to push risks down the chain. Contractual risks in construction are systemic, and mostly hurt construction small businesses.
Safety issues, environmental issues, unknown conditions, unreliable project participants, nefarious owners, weather, changing politics, changing economics and other business and project aspects round out the risk landscape. It’s a tough scenario for any business, let alone a small one. But, there are ways to come out on top.
It’s All in How You Think About It
PwC’s report was based on responses from 1,200 senior executives and board members. Those companies with effective risk management tended to view risk as a way to improve performance and growth. Over three years, 55 percent of risk management leaders increased their profit margins, and 41 percent achieved annual profit margins of more than 10 percent.
“Risks are increasing dramatically and executives are constantly faced with making decisions to protect their businesses, while also trying to improve their financial performance,” said Dean Simone, leader of PwC’s U.S. Risk Assurance practice. “By integrating risk management into the business life cycle, these two objectives can easily come together to work in unison. Developing an effective strategy requires investment, but the payoff and competitive advantage can be enormous.”
So, What Are the Leaders Doing?
Risk management leaders differentiate themselves from poor risk managers in these ways.
They clearly see how various risks interconnect with each other and how they cascade. So, they use aggregated views of risks when deciding how to handle them.
These leaders aren’t risk averse, and are willing to take risks for growth. They look at both risks and opportunities to decide where to focus.
Their risk management programs align with their company wide strategic planning. Finance, internal audit and corporate compliance are deeply integrated.
They are proactive and use sophisticated risk management tactics. That allows them to plan for risk, instead of reacting to it. They also use a variety of tools in their analysis. They identify and forecast emerging risks, they scan the horizon and early-warning indicators, and they build resilience to risk. They’re also using new analytics systems so it’s easier to bring disparate data together for new insights.
The key to raising your business’ risk intelligence is a deliberate approach that links risk management to the business, and to strategic planning. You need a deep understanding of your company’s risk interconnections and risk appetite. Finally, it’s important to monitor and report consistently. You need the insights when they are fresh so you can get in front of growing and emerging risks, and see the threats and opportunities clearly.
You can see the latest PwC Risk report, right here.