"To boldly go where no one has gone before."

Every time construction professionals enter a new contract; we are piloting the Starship Enterprise "...to boldly go where no one has gone before."  That is the unique nature of the construction business. Every new contract is a new business. At first glance it may look like more of the same, but closer examination reveals new geography, new subcontractors, new ownership, new designers, new cash flow problems, new regulations, and new contract stipulations. Managing a construction project is like producing a Broadway show. Every performance presents management with new risks. Just because last night's performance was a success does not mean that tonight's performance will necessarily go well. Characterized by tight margins, periodic labor shortages, and competitive new technologies and methods, the construction industry operates in a landscape that has little room for error. Construction professionals love the challenge. It's in our DNA. We love to "push the envelope"; "to boldly go where no one has gone before." By our very nature, construction professionals are risk takers.

Risk Assessment

Professional business management skills begin with risk assessment. This is true for all industries but is central to success in finance, insurance, gambling, and construction. Because of the unique nature of these four industries, professional training in risk assessment is essential for financial success.

• Investors price investments based on risk assessment.
• Insurance companies base their premiums on risk assessment.
• Casinos set the line based on risk assessment.
• Contractors craft bids after assessing the risks unique to each new project.

Some of us thrive in this environment, and some don't make it. What's the difference? We all eagerly assume risk and go for the gold. Those that make it are the ones who have learned how to assess risk accurately. Those who fail take on too much risk without realizing it

Identifying Project Risk

Construction projects have built in risk factors stemming from the nature of the industry. Because of the cyclical nature of the construction market, the nine primary risks listed below are exacerbated by and recur during, market cycles. In the volume-driven industry of construction that thrives on growth, there are failures even among the older and well-established firms. The nine risk factors below recur repeatedly following any market fluctuation and must be continuously reassessed for their impact on potential profitability.

1. Shortage of Skilled Labor
2. Growth
3. Subcontractor Performance
4. Capital Shortage
5. Commodity Risk
6. Contract Risk
7. Accounts Receivable Risk
8. Innovation Risk
9. Change Risk - Size, type, geography, personnel, and managerial maturity.

Early Risk Recognition

"All the signs were there, but I was hoping for the best."

Do not ignore risk. You know the signs.

1. Shortage of skilled labor - Signs: Unexplained cuts in crew size; Declining work quality; Work slowing down.
2. Growth - Signs: Capital shortage; Personnel stressed; Management failures.
3. Subcontractor performance - Signs: Can't get enough help; Falling behind schedule.
4. Capital Shortage - Signs: Complaints from suppliers or subcontractors about unpaid invoices; Partial or late payments; Over-billing of quantities or percentage of work completed; Unusual requests for payment of materials ordered or stored off-site.
5. Commodity risk - Signs: Project owners are beginning to think of construction services as a commodity and think of price as the single key differentiator. This, of course, shrinks profit margins across the board and increases contractor risk. Can we really afford to win a contest where we're the low bidder?
6. Contract risk - Signs: In a highly competitive construction market, project owners and designers may attempt to shift contract risk onto the contractor. Signing any contract must be preceded by careful risk assessment.
7. Accounts receivable risk - Signs: If collected on time, accounts receivable is an asset that can be used to pay bills. Unfortunately, owners and designers often delay payment as an unauthorized insurance measure against poor contractor performance. Each new owner's payment history must be carefully risk assessed.
8. Innovation risk - Signs: Advancements in new technologies introduce potential risks if venturing into unchartered territory consumes time and manpower but does not initially produce the intended efficiency.
9. Change risk - Signs: Any change in project location, size, price, or type outside a firm’s experience represents risk that must be carefully assessed.