Running a construction business / being a general contractor involves risks from many angles. There are some best practices that can be undertaken to try and reduce some of these risks and thereby maximize the chances for long term success.
Relevant Templates:
- Construction Business Financial Model
- General Contractor Job Success Dashboard
- Project Management Template
Risk management is a critical aspect of running a general contracting business. It involves identifying potential risks, assessing their impact and likelihood, and implementing strategies to minimize or mitigate those risks. Here are some key risk management strategies that can be applied to a general contracting business:
- Risk Identification: Begin by identifying the potential risks associated with your contracting business. This can include risks related to project delays, cost overruns, safety hazards, legal issues, contractual disputes, supply chain disruptions, and more. Conduct a thorough analysis of your business operations, projects, and industry to identify both internal and external risks.
- Risk Assessment: Once risks are identified, assess their potential impact and likelihood. This involves analyzing the severity of each risk and the probability of it occurring. Use historical data, industry benchmarks, expert opinions, and internal knowledge to evaluate risks objectively. Spreadsheets can be a great tool to keep all your items organized and tracked. Awhile back I made a risk assessment template that may give some guidance on how to set something up like this.
- Risk Prioritization: Prioritize risks based on their potential impact on the business. Categorize risks as high, medium, or low based on their severity and likelihood. This helps in allocating resources and attention to the most critical risks that require immediate attention.
- Risk Avoidance: Some risks may be too severe or have a high likelihood of occurring, making them unmanageable or unprofitable. In such cases, consider avoiding these risks altogether. This can involve declining projects with unfavorable risk profiles, avoiding clients with a history of disputes, or refraining from entering markets with excessive competition or regulatory challenges.
- Risk Transfer: Transfer risks to third parties through insurance policies or contractual agreements. General contractors typically carry insurance coverage for liability, property damage, workers' compensation, and other relevant areas. Transferring risks to insurance companies helps mitigate financial losses in the event of accidents, property damage, or legal claims.
- Risk Mitigation: Develop strategies to reduce the likelihood and impact of identified risks. This can involve implementing safety protocols and training programs to minimize accidents, conducting thorough due diligence on subcontractors and suppliers, regularly monitoring project progress, and using proven project management techniques to prevent delays and cost overruns.
- Contractual Risk Management: Carefully review and negotiate contract terms to allocate risks appropriately between parties involved in a project. Ensure that contracts clearly define responsibilities, liabilities, and dispute resolution mechanisms. Seek legal counsel to ensure your contracts adequately protect your interests and limit your exposure to potential risks.
- Contingency Planning: Develop contingency plans to address unexpected risks or events that may occur during a project. These plans outline the steps to be taken to mitigate the impact of a risk event and ensure project continuity. Contingency plans can include backup suppliers, alternative project schedules, additional budget reserves, and crisis management protocols.
- Monitoring and Review: Implement a systematic process to monitor and review risks on an ongoing basis. Regularly assess the effectiveness of risk mitigation strategies and make adjustments as needed. Stay informed about industry trends, regulatory changes, and emerging risks to proactively update your risk management approach. Again, Excel or Google Sheets is great at doing these things.
- Employee Involvement and Training: Engage your employees in risk management efforts. Encourage them to identify and report potential risks and provide training on risk awareness, safety protocols, and project management best practices. Building a risk-aware culture can significantly contribute to overall risk management effectiveness.
Remember that risk management is an iterative process. Regularly reassess and update your risk management strategies to ensure they remain relevant and effective as your business evolves.
