Risks associated with construction projects are diverse in nature irrespective of whether you are building a new house or a commercial office complex.
In most cases, if a risk becomes a reality, the outcome can be devastating in that it can result in the collapse of the project, or even the construction firm itself.
This aspect explains why construction risk management is a necessity for businesses operating in this sector since it represents a viable strategy to guarantee survival and growth.
So, what is the best approach to guarantee effective construction risk management? The answer is straightforward; good processes.
Essentially, businesses operating in the construction industry require strong, easy-to-follow procedures that inform correct choices and actions at both enterprise and project levels.
Types of Construction Risks in Saudi Arabia
Typically, the construction industry is characterized by a significant number of risks. Primarily, construction risks are described from the perspective of either the absence of certainty regarding the project outcome or the effects of a decision or plan.
Therefore, the risk arises from the lack of certainty regarding the projections of expected outcomes since there is the possibility that the outcomes can exceed expectations or vice versa.
However, for a contractor in the construction industry, risk refers to an event that can leadto unexpected costs from which no profit is expected.
Construction risks are broadly classified into two categories;
- Human risks
The difference between natural and human risks in the construction sector is that natural risks are not a consequence of human activities or systems, while human-made risks are connected to human activities or systems.
Bad weather conditions such as floods, lightning strikes, and hurricanes present a crucial risk to the success of construction projects. For example, if there is continuous rainfall for a month while the project is still coming out of the ground, beating deadlines can prove challenging.
Apart from bad weather conditions, pollution presents another risk factor under this subcategory. This perspective is informed by the fact that excessive dust, harmful gases, and wastes have negative effects on the environment and can affect the eventual quality of the construction project.
Geology and geographic issues represent another type of natural risks facing the construction sector in the Middle East.
The risk factors under this category include events such as an earthquake, volcanic eruption, or a geological faultline.
Primarily, if these subsurface conditions are different from what was expected, the probability of higher excavation expenses, for example, goes up.
Although geological mapping reports can offer insights about the kind of soil that you can expect to deal with, contractors still have to depend on their experience with other events involving dangerous ground conditions in different types of soil, the conditions of the proposed site, as well as its history to make decisions concerning the geological systems’ risk on any project site.
These kinds of risks are connected to the funding of the project. Primarily, local and global events can result in unforeseen modifications in interest rates, credit score, capital supply, and cash flow.
Although pre-construction risk assessment can offer information regarding the feasibility of the project, there are instances where the price of specific construction materials goes up suddenly. In other cases, suppliers can withdraw credit, for example.
In this case, criminal activities such as sabotage and arson, trespass, damage or theft of construction equipment, and acts of vandalism such as unauthorized graffiti represent some of the risk factors involved.
The outcome of these kinds of acts is the postponement of a project. In case a legal process is initiated, the risk of a lengthy procedure that involves the stoppage of the project for a considerable amount of time is enhanced.
Contractual issues and government bureaucracy in approval procedures represents some of the legal risks within the construction industry.
An example of a contractual issue can be connected to scenarios where the contractor finds it hard to understand the terms of the contract as a result of the ambiguity with which they are written. Alternatively, contractual risks can involve the penalties the contractor is required to pay in case a project is not completed within the required timeline.
It goes without question that construction sites can be susceptible to viruses and infectious diseases.
The occurrence of a health epidemic or even a pandemic such as the ongoing COVID-19 crisis poses a health risk to construction sites.
On the other hand, construction accidents as a result of errors or carelessness while operating machinery presents another health risk for contractors.
These risks include late drawing and instructions, poor designs, as well as resource availability.
For example, the lack of qualified laborers or poorly trained employees can result in undesired quality results for the project. Similarly, the location of the site and accessibility, equipment and process failure, new technology unsuitability, as well as collisions and accidents represent the other technical risks.
Strategies of Managing Construction Risk
While construction risks may be varied and complex, the risk management procedure often follows the four principles of;
- Risk Avoidance
- Risk Transfer
- Risk Mitigation
- Risk Acceptance
Therefore, the resources used to manage risks in the construction sector include;
- Professional Advice
- New Technologies and Approaches
Be it building design, budgeting, project management, financial oversight or any other aspects of the construction industry, the appropriate construction management software can simplify tasks and improve efficiency. Coincidentally, these benefits also result in the mitigation of associated risks.
An insurance broker can give you advice about local authority obligations for construction insurance.
Furthermore, they can help identify and quantify your risks and help you find the most suitable insurance cover that is suited to your specific needs.
Nonetheless, it is important to acknowledge that some of the risks involved in the construction sector are uninsurable.
Some of the leading sources of professional counsel regarding the management of risks associated with the construction sector include law firms focused on construction contracts and lawsuits, banking and accountancy organizations, construction consultants, as well as business friends.
New Technologies and Approaches
Some hazards that were automatically acknowledged before can now be managed or eveneliminated with the advancements that have been made as a result of technology. For example, specific risks associated with bad weather conditions can be addressed with the use of pre-manufactured material, which also work to save time spent on site.
Types of Coverage Plans Available under Construction/Engineering Insurance
1.Contractors All Risk Insurance
The scope of this cover involves two different sections;
- Material damage
- Third-Party Liability
Material Damage;This plan protects your company against unexpected and sudden physical loss or damage from any cause apart from those that are clearly excluded from the construction project.
In most cases, these policies cover risks such as;
- Impact damage from falling object
- Natural risks
Third-Party Liability; This policy covers all the costs which the insured party shall become legally obligated to pay as damages in case of;
- Accidental bodily injuries or illness of third parties irrespective of whether they are fatal or not
- Unexpected loss or damage of property that belongs to third parties during the construction or erection of items insured by a Material Damage policy.
2.Erection All Risks Insurance
An Erection All Risks Insurance cover protects against the risks connected to storage, assembly, testing, and commission of a plant or machinery. This policy offers comprehensive protection and all the risks involved are covered, unlessspecifically excluded
In specific circumstances, construction companies can request for an extension of the policy to ensure it covers third-party liability and exposures.
3.Machinery Breakdown Insurance
The focus of this policy is to protect companies from unexpected loss or damage to machinery that are covered as a result of risks such as;
- Weaknesses in casting and material,
- Faulty design,
- Faults at the construction site
- Poor machinery use expertise
- Physical explosions
- Short circuits
- Water shortage in boilers
Benefits of Managing Construction Risks with an Insurance Policy?
Construction risks are complex and difficult to manage. This aspect calls for both theoretical and practical approaches in dealing with them.
It is proven that the failure to address risks is the chief reason for the inability to meet performance objectives, overspending, or failing to beat deadlines.
These challenges become even harder since construction projects are characterized by lengthy performance timelines, huge budgetary allocations, huge number of stakeholders, as well as unstable economic and political environments.
Buying an insurance policy to safeguard against particular events that would lead to a loss if they took place represents one of the primary ways to manage risks. For example, if a crucial piece of equipment is vandalized and the contractor needs to invest in additional unplanned expenses, an insurance policy can cover this loss.
So, what are the benefits of managing your construction risks with an insurance policy? Primarily;
- An insurance cover can provide financial security for your business. Primarily, you will receive compensation for any damage or loss resulting from a covered risk factor. Similarly, an insurance cover will reimburse you for any structural damages or loss of materials.
- Any damage to the project can result in disputes about compensation and accountability. However, having a construction risk insurance plan can help resolve disputes related to compensation, the coverage period, among other possible issues that may emerge.
- Extended policy coverage can protect your business from the effects of natural construction risks such as floods and earthquakes. However, it is important to note that coverage of these types of risks may require higher budgetary allocations.
- Having a construction risk insurance policy may be a requirement for a bank loan necessary for funding the project to completion. Therefore, this type of insurance cover can improve your company’s credibility and safeguard the lender’s money.