Due to the unpredictable nature of the construction
industry it is considered to carry particularly high risk. Few can
challenge the veracity of this view - after all, the failure rate of
construction companies is one of the highest of any industry. Controlling risk
is the bedrock of a construction business. But, to know how to control risk,
you need to know what to control. In a recent poll taken by Ernst & Young of
major construction businesses, only 62% were confident that they had effective
risk management in place. In other words, a significant number of contractors
know their systems are inadequate. It’s hardly surprising then that the
failure rate within the construction industry is so high. Until you make a
strong effort to identify and manage your risk factors in a consistent manner,
you could fall victim to business failure.
Business failures happen quickly. A six month bad cycle
of performance is sometimes all it takes to turn a good company into a bad
risk. To guard against failure a construction company needs to know what
factors of risk are not under control. Thus, in this document, we identify 56
risk factors that play a part in business failure: everything from bid
procedures to project tracking, to financial systems and controls. Most
factors are a detailed system, plan, procedure, method, policy, or safeguard
that must exist within a construction company to achieve maximum control over
risk.
To fully understand risk, one must understand that risk
factors vary greatly in level of importance as well as in their contribution
to overall risk exposure. Certain risk factors have the potential to cause
a business interruption or failure themselves, while other risk factors must
work in combination with factors of equal or greater importance to cause such
consequences.
The varying level of importance between risk factors is
more readily apparent when examining them in detail. For example, poor
software system backup procedures could potentially wreak havoc if computer
hardware was to fail. The task of re-creating lost information would likely
cause a significant amount of unexpected work but is not very likely to cause
a business failure. On the other hand, failure to have a sound succession plan
in place in the event that a sole business owner becomes incapacitated could
lead to the termination of banking or bonding relationships and thus cause a
business to fail.
In this report, we’ll introduce you to the 56 risk factors
that play key roles in determining the amount of exposure a construction
company has to risk of failure. Each risk factor falls into one of four
levels of importance as follows:
-
Importance Level 1: Risk factors at this level must be
combined with risk factors of greater importance to cause a business to
fail.
-
Importance Level 2: Risk factors at this level must be
combined with risk factors of equal or greater importance to cause a
business to fail.
-
Importance Level 3: Risk factors at this level must be
combined with risk factors of equal or lesser importance to cause a business
to fail.
-
Importance Level 4: Risk factors at this level acting alone
can cause a business to fail.
The importance level is a good indicator of which risk
factors a company needs to act upon first. Factors with a high level of
importance can cause the largest losses bearing the greatest risk and should
be the primary focus. Monitoring of these factors on a continual basis can
help your company reach the next level and secure its future. | 
