Identifying Risk
Thomas C Schleifer, Ph.D.
Most contractors are guilty of failing to diligently identify the unique risks in every new job BEFORE they undertake it. One example I often site is a failed project that I dealt with for a surety. The otherwise successful firm contracted to build a unique building with curved walls (not unlike NYC’s Lipstick building of Bernie Madoff fame). The organization had never built anything but a traditional rectangular building. After problems on top of problems, continuously tearing down unacceptable work, and multiple delays they finally threw in the towel and abandon the project. These construction professionals never recognized the risk inherent in taking on a type of project they had never built before.
Experience Risk
After decades studying the causes of construction business failures my research reveals that the primary cause of project failures is inexperience with the type of work, project, or process. This, of course, begged the immediate question: “Should a construction enterprise ever take on work they have never performed before?” Which begs the further question: “If experience is critical to success, how do I gain the initial experience?”
Because so many contractors continued to take on “new” kinds of work that ended up losing money, my research gradually morphed into how to reverse or manage losing projects while they are still in progress. The unfortunate conclusion from this research was that it is incredibly difficult to reverse troubled projects, expensive to manage them, impossible to eliminate the damage once done or to minimize costs already incurred. The only workable solution to project failure, therefore, IS prevention, i.e., not taking losing projects. After all, project failures don’t just happen. They are jobs that are deliberately pursued and captured. Loss prevention resides almost exclusively in project selection.
Risk Identification
The first step in any risk mitigation program is identifying the risks inherent in the job being considered. Of course, every job has unique risks, but research has identified five major factors in “experience risks” that are common to most jobs. They are:
- Size – Small projects don’t count – Mid-sized projects will save your bacon – Large projects can put you out of business.
- Type – If you know what you’re doing and have done it before you’ll probably succeed.
- Complexity of Design – Complexity is the death of profitability.
- Teams – New or inexperienced teams rarely beat the spread.
- Location – Home team advantage is bankable.
Project Selection Program
“Prevention resides in project selection”. The need for a process to screen-out losing projects at the pre-project stage to enhance profitability led me to the development of the Project Selection Program. It is a transformed version of the Value at Risk calculation used in finance and investing I mentioned in last week’s blog. Any of you familiar with my work have heard me discuss the project selection program before. I bring it up again here in the context of our discussion on risk management in the unstable market of 2023.
How It Works
The probability of success in go/no-go decisions in project selection can be accurately measured in advance and is directly associated with the construction organization’s experience with similar work. Within the program, elements impacting success have been weighted to produce a numeric scale of how well the prospective project matches the firm’s experience. During the testing phase of the program, numerous contractors ran the program on three of their completed projects, which included two successful projects and one project they wish they had not taken. The results were consistent, and this huge amount of data verified that the tool is an accurate predictor of the potential for success (or not) of the tested project for the firm in question.
Simple But Indispensable
There is little doubt that an impending recession, a continued shortage of skilled labor, kinks in the supply chain, and inflated costs will challenge even the nimblest contractors in 2023. The recognition of specific risk factors in every new job under consideration and a simple way to measure their impact on profitability is essential to contractor success and survival.
The Project Selection Program is available (at no cost) on the Simplar website at: https://simplarfoundation.org/blog/. The beauty of it is its simplicity and accuracy. You don’t have to take my word for it. Test it on projects you have already completed and see for yourself.
Next week we’ll discuss the measurement of various kinds of risk.
Find additional information on topics discussed here in the book The Secretes To Construction Business Success, published by Routledge https://bit.ly/3G9ornf.
For a deeper look into the Project Selection Program, read more here: PROJECT SELECTION PROGRAM
For a broader view into risk management read more here: RISK MANAGEMENT
To receive the free, weekly Construction Messages, ask questions, or make comments, contact me at research@simplarfoundation.org
Please circulate this widely. It will benefit your constituents. This research is continuous and includes new information weekly as it becomes available. Thank you
