Successful and sustainable enterprise risk management in construction companies requires a holistic approach. Check out our blog to implement successful enterprise risk management by taking the right steps.
What is Enterprise Risk Management in the Construction Industry?
Enterprise risk management (ERM) is a methodology that enables construction companies to manage risk at the organizational level.
Given the complex structure of the construction industry, with many components and each construction project being unique, we believe that enterprise risk management is crucial in the construction industry, which is one of the driving forces of our country.
With the implementation of enterprise risk management in construction companies, risks are identified, control processes are evaluated, accepted risk levels are determined, and action plans are developed to manage and reduce risks to the targeted levels.
Today, when we are exposed to more dangers and uncertainties than in previous years, there is a need for management with an integrated perspective. In this context, risk-oriented process structuring with the support of senior management constitutes the basic criteria for success.
Construction companies implementing ERM experience increased competitiveness, proactive decision-making, more efficient use of resources, and consequently increased profitability. These results also provide additional benefits such as access to financial resources and sustainability for SMEs.
Goals of Construction Companies
Like any commercial enterprise, construction companies have many objectives and management considerations in addition to making a profit.
- Compliance with tax legislation
- Compliance with construction standards and legislation
- Compliance with health and safety regulations
- Project management and execution of standard processes
- Accurate calculation of costs
- Personnel and subcontractor management
- Customer financing
- Long-term profitability management
- Managing cash balance and relations with financial institutions
- Customer segmentation
- Branding, enterprise communication, customer continuity
- Constructing buildings that respect nature and produce their energy
- Construction with certified materials
Construction companies that adopt enterprise risk management principles have an advantage in achieving these goals.
Medium and large-sized construction companies that adopt a enterprise risk management approach will see the positive financial results of these choices in the long term.
Enterprise Risk Management in the Construction Industry
The stages of ERM for a construction company can be defined as planning, analysis, and control processes. The basic approach of Teolupus is to set objectives, guide construction company strategy and emphasize the importance of identifying, analyzing, and responding to risks in this area. Partners or managers of construction companies must first identify and assess the risks they are exposed to. Only then will it be possible to manage them in a healthy way.
Importance of Risk Management in Construction Projects
Since two separate construction projects are not exactly the same, each project must be evaluated on its own terms. However, with an effective management system, all projects can be approached with a specific management technique.
To mitigate risks, it is preferable to focus on those that are the most likely to occur, the most controllable when they occur, and those that lead to the greatest consequences. While these efforts may increase costs in the short term, in the long term, they will increase the profitability of the construction company to a sustainable level. These techniques include alternative design, checklists, design of experiments, prototyping, modeling, multiple developments, technological maturation, etc.
In construction projects, uncertainties that jeopardize safety, quality, and operational needs negatively affect both project duration and project budget.
Risk management in the construction industry is an understanding that should be applied at every stage of the project.
In addition, in our country, which is in an earthquake zone, enterprise risk management practices make a significant contribution to protecting the profitability of construction companies in projects that comply with earthquake legislation in parallel with laws and regulations.
Construction Industry and Risk
Although project production and management costs are estimated in the construction industry, any deviation from cost targets can produce unexpected results. In particular, errors in analysis can lead to the abandonment of a profitable project.
The variety of uncertainties in construction projects makes management difficult. Therefore, the most important step to be taken after classification in determining potential losses is to determine the risks to be encountered in the project.
Risk Management Process in The Construction Industry
In the construction industry, where there are complex and varied uncertainties, decisions often need to be made in these situations. When making these decisions that involve risk, the aim is to ensure that the results are long-term, sustainable, and profitable. Although it is not always possible to achieve the desired outcome, it is possible to avoid some of them and keep others under control at acceptable levels by using certain methodologies.
The construction industry is highly exposed to risks due to the multi-stakeholder nature, scope, and nature of business processes. In a standard construction project, the following risks are basically encountered:
- Staying within the cost budget, forecast, estimate, proposal,
- Comply with the deadlines set for approval, design, construction, and settlement,
- Production in accordance with quality, function, and purpose
- Meeting the necessary standards for safety and environmental protection.
Uncertainties in the industry often appear in the form of financial losses. The task of contractors, subcontractors, suppliers, and consultants is to identify their sources and develop a risk management strategy that will provide the most appropriate organization.
In the construction industry, financial, operational, strategic, and environmental risks are the most commonly considered group. Operational risks are also of considerable importance in the construction industry, which is carried out within the scope of cost planning and affected by market conditions.
Due to its complex structure and the different conditions of each project, the construction industry is considered high-risk. Coordination of a wide range of labor force is important in construction projects. Structural and external factors increase the complexity of construction projects.
Unforeseen cost increases, schedule delays due to procurement problems, and poor quality of construction are common problems. Minimizing and controlling project risk will reduce the need for additional budget.
In construction companies, CRM enables efficient business processes to be carried out by addressing the process with a holistic approach.
Although it is appropriate to manage the aforementioned risks by an expert, it is important that enterprise risk management in construction companies is not left at the department level but carried out throughout the organization.
Benefits of Enterprise Risk Management in the Construction Industry
A systematic and holistic management approach is mandatory for time, cost, and quality success in complex projects in the construction industry. It would not be wrong to say that the transition from project-level management to enterprise risk management has not yet been completed in the industry. However, the construction industry needs a holistic management approach rather than a project-level approach. The main benefits of enterprise risk management can be listed as follows:
- Strong structure
- Centralization and institutionalization
- Identification of risk categories
- Identification and analysis of risks
- Holistic perspective and integration
- Description of potential opportunities
An enterprise strategy should be developed to identify, prevent and mitigate risks in construction projects. In this way, it will be possible to make the right planning in the projects carried out in line with the determined strategy. A sustainable enterprise risk management strategy can be achieved by raising the understanding of risk management from the project level to the organizational level. The following benefits will be obtained if project risks are correctly defined and executed within the rules of enterprise risk management:
- Making decisions with more accurate data
- Increasing construction project profitability,
- Evaluation of the validity of construction projects,
- Analyzing and controlling risks to profit-making,
- Identification of construction project risks and calculation of potential cost,
- Increasing profitability by deciding not to enter high-risk and low-profit projects as a result of detailed analysis,
- More accurate determination of project budget and project durations,
- Savings in insurance premiums as a result of the assessment.
In the risk management process, strategies can be developed to prioritize and mitigate those that can be controlled and cause the greatest harm.
As a result, a construction company manager who decides to implement a enterprise risk management strategy will be more cautious against penalties, act in accordance with reputational risk and evaluate savings opportunities.
Enterprise Risk Consultant TeoLupus
TeoLupus offers specialized services to medium and large-sized construction companies within the scope of professional enterprise risk management consultancy in line with its expertise.
Our Certified Internal Auditors (CIA) and experts certified in Risk Management Assurance (CRMA) at TeoLupus evaluate your construction company’s risks in accordance with international COSO 2017- Enterprise Risk Management and ISO 31000 standards. Contact us to evaluate the risks your construction company is exposed to and to better manage your corporate risks.
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