Frequently we hear horror stories of projects that have gone wrong, finished late, gone far over budget (sometimes in excess of double the original estimates), poor quality, accidents, lengthy legal battles and projects that don’t do what they were supposed to do. Construction projects face numerous risks. Understanding these risks could help clients avoid, or mitigate the level of risk on their projects. Clients have different risks to the contractor, and each stakeholder in the project faces a different set of risks. Sometimes these risks are the same for a number of stakeholders – so for instance, if the project is slipping against the construction schedule this could negatively impact both the client, subcontractors and the contractor. One would consider that if the contractor loses money on the project this shouldn’t be a risk for the client, yet, if the contractor loses so much money that they become bankrupt before the project is finished then this could have a major impact for the client, who would almost certainly have to engage another contractor, at additional costs, to complete the project, which would also certainly result in a delay to the project. In addition when contractors lose money their subcontractors, employees and suppliers are also at risk.
Unfortunately, many clients fail to recognize, understand, and mitigate construction project risks, which then frequently leads to an unsuccessful project.
The 10 risks clients need to be aware of and take action to minimise.
- The final project cost exceeding the project budget. Not only could this make the project unviable in the long term, but it could even lead to the client becoming bankrupt. Reasons for projects exceeding the budget include:
- The budget was incorrect.
- The project had numerous changes and variations.
- The project increased in scope.
- The contractor was delayed by the client’s team.
- The contract documents didn’t clearly allocate responsibilities, or the scope of works wasn’t adequately defined.
- Unexpected site conditions are encountered which adds to costs. Changed founding conditions can add greatly to costs.
- The project is completed late. The client not only gets their project late which means that they can’t earn revenue from the project, or they incur additional costs to use other facilities in the interim. Delayed projects also inevitably incur additional supervision and management costs. Late projects could also result in damage to reputation. Reasons for late completion include:
- The scope of the project changes during execution, creating delays and variation claims.
- The contractor receives access and information late.
- The contractor doesn’t perform.
- The project schedule was unreasonable and unachievable.
- Bad weather causes delays.
- Encountering unexpected ground conditions which requires additional work.
- Adverse weather which can delay the project and damage existing and completed work.
- Shortage of resources. This could include equipment, materials, people and contractors. A shortage of resources can cause:
- Prices to increase.
- Delays to the project.
- Poor quality work.
- Contractors that don’t perform. This can result in:
- Poor quality work.
- Projects that are finished late.
- Poor safety on the project.
- A project that doesn’t perform as required. This could be because of:
- An unclear scope of work.
- A poor design team.
- Quality problems with construction.
- The client having unreasonable expectations.
- The client cut costs unreasonably, removing essential items required for the project to operate successfully.
- Poor public perception of the project. This can lead to bad publicity and even protests, legal action and boycotts. Governments have even been brought down by poorly conceived and managed projects. Neighbors can feud for years because of one project. Projects can be delayed and even stopped by irate members of the public.
- Poor safety which can result in:
- The project being stopped.
- Damage to existing infrastructure.
- Bad publicity.
- Delays to the project.
- Incurring excessive or unnecessary costs for the project, even theft. Not achieving value for money.
- A major contractor or supplier becoming bankrupt on the project. This could lead to project delays and additional costs while another contractor is sourced. In addition warranties for workmanship and equipment could be worthless.
Avoiding and minimising risks
- Projects that exceed budget can be minimised by:
- Ensuring that the budget is accurate. Budgets should continually be assessed and updated through the life of the project to take account of all the known information and changes. Check that the budget includes all of the costs and that these costs are an accurate assessment. Where necessary include suitable contingencies and allowances for unknown costs.
- Having the correct scope of work for contractors to price.
- Minimising changes and variations during both the design phase and during construction.
- Carrying out proper research of the project site conditions, including doing ground investigations before construction begins.
- Projects are often finished late because:
- The construction schedule isn’t realistic. Ensure that the schedule is realistic by employing experienced project managers.
- The project schedule doesn’t take account of the client’s operations, project restrictions and the normal expected weather events.
- There are changes and variations during the project. Reduce and eliminate changes by ensuring that the project scope is properly prepared and complete and that the contractor has all the information when they price the project.
- Progress isn’t monitored during the course of the project. Slippage isn’t addressed and rectified.
- Contractors are selected on the basis of their price alone and not on their experience and their available resources for the project.
- The project is managed poorly resulting in delays with granting access and issuing information to the contractor.
- Poor planning.
- Adverse weather can’t be avoided, but steps can be put in place to limit or mitigate the impacts. This could include:
- Designing the project so that work that could be impacted by poor weather is assembled and built under cover, or off site. Even redesigning the project to eliminate activities which could be impacted by the weather, for example using different foundation methods could eliminate the requirement to excavate in the rainy season.
- Planning the start of the project so it doesn’t begin in the worst weather.
- Allowing adequate time in the construction schedule for the normal expected weather.
- When there is lots of construction happening in the country, state or region, then there can be a shortage of resources.
- Projects can be rescheduled to start when the level of construction falls, which could even make the resources, and consequently the project cheaper.
- The project could be designed to make use of modules which could even be constructed in areas where resources are more available. Alternative materials could be used which are more readily available, or which aren’t so labor intensive to install.
- The duration of the construction work could be extended to account for the shortage of resources.
- Clients often focus on choosing a contractor based purely on their price. However, the cheapest contractor might not end up providing the cheapest project. It is important to select a contractor that has the required experience and skills to deliver the project safely, to the required quality and on time. Clients should check the contractor’s previous projects and clients. They need to review the contractor’s planning for the project and check that their project resources will be adequate.
- Poor performance of the completed project can be avoided by:
- Selecting a design team that has the required expertise, experience and resources to design and to deliver the right project.
- Clients not only focussing on the price of the project, but ensuring that the project will deliver what’s required.
- Clients not being persuaded by their personal agendas, but rather what’s in the best interests of the project.
- Clients having reasonable expectations for what they can afford.
- Choosing experienced project managers to manage the design and construction process.
- Poor public perception of a project is often caused by:
- Inadequate communication with all stakeholders about the project.
- Ignoring good environmental and design principles.
- Favoring some project stakeholders while ignoring the concerns of others.
- Not managing the construction process properly, which results in excessive noise (particularly after hours), dust, damage to the surrounding property, litter, environmental damage, traffic congestions and parking problems.
- Good safety practices must be enforced uniformly from the start of the project. The safety records of contractors should be checked before they are selected.
- Clients can avoid excessively costly projects by:
- Thoroughly adjudicating contractors’ prices to ensure they have priced the complete scope of work.
- By appointing contractors using a legally enforceable contract document that has no conflicting clauses or loopholes.
- By checking all variation claims and invoices carefully, ensuring that items haven’t been previously paid, and that the contractor is entitled to be paid the item.
- Considering alternative solutions, methods and projects that could deliver the desired end result cheaper or better. This means thoroughly researching and evaluating the project.
- Ensuring that project systems are robust to eliminate contractor collusion, checking that one contractor isn’t unfairly favored over others in the bidding or pricing process and that there are always sound financial checks and balances through the life of the project.
- Clients can avoid contractors becoming bankrupt on their project by:
- Paying their contractors fairly and on time (in terms of the contract) and not withholding money without due reason.
- Speedily resolving, agreeing and paying variation claims.
- Thoroughly checking the contractor’s financial affairs before awarding them the contract.
- Carefully evaluating contractor’s and supplier’s prices to check that they haven’t made a mistake and underpriced the work. A bargain price might turn out very expensive if the contractor becomes bankrupt part way through the project because their price was too cheap and didn’t cover their costs.
- Always being aware when the contractor is running into financial difficulties (possibly they have another project which is in trouble) and taking steps to limit their risks.
Far too often projects are completed late, end over budget, leave some stakeholders unhappy, and on occasion, the projects don’t deliver the desired end result.
Every project has some risks, but knowing what these risks are, and taking steps to lessen or mitigate the risk could mean the difference between a successful and an unsuccessful project. Every project is different, so it is important to assess each and every project. Risks will change during the course of the project so clients should reassess project risks at each stage of the project.
Good project management and planning is essential, as is the selection of the right contractor. The ‘cheapest’ project often doesn’t deliver the desired results and usually isn’t the cheapest project at the end of the day. Clients need to have a better understanding of their project and ensure that it is actively managed to control the majority of risks. In some cases, projects can be overly risky, and the wise client will walk away and move onto another project, even if they’ve already incurred some costs on the project.
Don’t let your project end badly because you didn’t anticipate the risks. Don’t let the obvious risks trip your project up.
What are the biggest risks to construction projects?
Have you witnessed a construction project tripped up by risks which were obvious to most people and should have been anticipated by the client? I’m sure we’ve all witnessed clients selecting contractors who were clearly incapable of delivering the project!
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