Identifying Risks in Your Construction Business

Artisan contractors and construction industry professionals face more potential for loss than business owners in other industries.

You don't need to shy away from risk. We're going to walk you through facing your risk head-on and show you how to turn fear of the unknown into certainty.

The first step: identifying and understanding your risk.

Why Identify Risk?

Identifying and understanding your business risk is the first step in risk management.

Managing your risk reduces the likelihood your business will experience a significant loss while leading to better cash flow, greater stability, and longevity.

While you can't completely eliminate all risks from your construction business, you can identify the ones that are controllable and take action to protect your business from the ones you can't control.

Internal vs External Risks

Risk comes in two forms for your business: internal risk and external risk.

Internal Risk
Internal risk comes from the normal operations within your company. It includes risks from:

• Humans
• Physical property
• Technology

Human Risk
Your business relies on real people.

And all of those people are imperfect by nature; everyone has a bad day and is capable of making a mistake. Human risk includes things like mistakes, fraud, theft, vandalism, injuries, ineffective management, union strikes, problems with suppliers, and damage to third parties resulting from the people you employ.

Physical Property Risk
Any physical property you own, rent, or use for your business is an investment. And those investments are at risk.

Your work vehicle(s) are on the road, under constant threat of an accident from a distracted driver. Your materials, supplies, tools, and equipment are vulnerable to theft or destruction.

Even the completed work that you've invested in a project can be at risk from vandalism, fire, or human error.

Technological Risk
The construction industry is becoming more and more reliant on technology. And, as more smartphones, tablets, software programs, and connected tools and devices make their way to your business, so does the chance of data breaches and hacks.

External Risks

External risks are those that cannot be reliably forecasted or controlled by your company, no matter how hard you try. If it's out of your hands, it's likely an external risk.

Some examples of external risk include:

• Market changes
• Natural disasters
• Politics, laws, and regulations

While these types of external risks are really out of your control, it's important to identify and understand them in order to transfer them away from your business, if possible.

Pretending they don't exist because you can't control them is a recipe for (natural) disaster.

Industry-Specific Risks

Many of the risks mentioned above are relevant to most industries. Pretty much every business relies on humans, technology, and physical property to get the job done.

But the construction industry is also home to some very specific risks that other industries don't have to face.

Fatalities are a huge liability, and 1 in every 5 private industry fatalities happens in construction. Keeping employees safe from injury or fatality is a huge responsibility for construction business owners and enormous risk to your business.

In addition to fatalities, construction-specific risks include:

Bid Risk: failing to be properly licensed, insured, or bonded could keep you from winning bids.

Contractual Risk: Construction contracts, purchase orders, rental and lease agreements, and other contractual documents can contain sneaky language that fails to transfer risk away from your business.

Site Risk: Hazardous materials, material and supplies kept on-site, tools and equipment, and even the work that you've completed on a project could be at risk for damage or loss.

Delays, disputes, overruns, claims, litigation, and legal fees can seriously eat into your profit margins. Worse, as your profit margin shrinks, so do credit opportunities and the health of your business.

Identify, Understand, and Manage Risks to Increase Profits

Listing out all of these potentials for monetary loss may leave you feeling a little anxious.

But fear not.

Because identifying and understanding your risk is all part of your risk management process.

Implementing risk management will allow you to flip these potential money pitfalls into opportunities for increased profits.

Now that you've listed out all of the internal, external, and construction-specific risks your business faces, get ready:

Because our next post will walk you through controlling these risks.

This post is the first in our contractor risk management series.