Risk is Not a Dirty Word
Over the last thirty years I have conducted literally hundreds of seminars with construction professionals covering an array of issues concerning the business of contracting. Along the way I have noticed that whenever I bring up risk, the audiences glances through notes, wanders to the back of the hall to refill coffee cups or check their cell phones. Few want to read blog posts that start with the word – Risk. What is it about risk that construction professionals find difficult to deal with? Why do some believe that risk a dirty word?
I have discussed this avoidance phenomenon with hundreds of construction professionals and came up with two plausible reasons why many prefer not to think too much about risk. The following is a compilation of their comments.
What We Think About Risk
- Many think any discussion of risk is useless – “There is little anyone can do about the risky nature of the construction industry or, for that matter, the ubiquitous presence of risk in all commercial transactions; so why dwell on it?”
- The word, risk, is negative and engenders uneasy feelings. It’s like cautioning a gambler who is about to sit at the table that they are about to enter into a risky transaction. They’d rather not hear it as the chips begin to circulate. “It is what it is at this point,” he thinks to himself.
How do Construction People Approach Risk?
Few Contractors, Engineers or Architects are philosophers or psychologists. They’re engineers, technicians, designers and business people. They don’t sit around fretting. They use calculations to solve problems and arrive at intended outcomes through the application of business and scientific principles. This is how our industry produces the built environment. When contractors erect a building or construct a bridge, they are not constantly concerned that it’s about to fall down. They adhere to the principles of sound engineering and construction practice. They check and re-check measurements and calculations. They identify the variables and determine and utilized the proper techniques. That’s how we build projects and that’s how we are inclined to run our businesses.
Let’s take a look at risk from the point of view of an engineer, technician, designer and business person: What do we need to know when planning a project?
What variables do I need to consider to arrive at a positive outcome?
After identifying the variables and appropriate techniques, what actions need to occur to minimize negative potentials or effects; and maximize positive outcomes? In other words, if I do that well, what is the likelihood I will accomplish my goals. What are the risks?
My research has identified the following list of variables that affect every construction project to a greater or lesser degree. Each is listed with just one of the questions that should be considered as part of an evaluation of the potential exposures involved. They will all be discussed in future blogs on this site along with the associated risks.
- SIZE – Are we experienced at building projects of this size?
- TYPE – Have we ever built anything like this before?
- GEOGRAPHIC AREA – Is this project too remote to be managed efficiently?
- KEY PERSONNEL – Do we employ the right people to complete this project profitably?
- MANAGERIAL MATURITY – Is top management seasoned enough to manage our business and tackle this project?
- SKILLED LABOR SHORTAGE – Are there enough skilled craftsmen available to bring this project in on time and on spec?
- GROWTH – Can our capital and personnel sustain our anticipated rate of growth?
- SUBCONTRACTOR STATUS– Are the subs available for this project stable and professional?
- CAPITAL – Do we have enough capital to finance this project?
- PRICING – Have I bid too low to bring this project in profitably?
- CONTRACT – Does the agreement demand more than I can deliver?
- CHANGE RISK – Are fluctuating markets, technological innovations, commodity costs, and government regulations changing too rapidly for me to react?
- WEATHER – Can severe or extended climate conditions affect the outcome of this project?
- INFLATION – Are interest rates, wages, equipment costs, taxes, and other expenses rising beyond my calculated profit margin?
This is not an exhaustive list, but is representative of the variables that all contractors face whether consciously or unconsciously. In future blogs we will examine how to manage and mitigate the risks you face every day and how to factor them into your business plan to arrive at accurate estimations of project and business success and profitability. Read more about Recognizing and Managing Risk or ask questions!