This content was prepared by Builtin Insurance Brokers and is being published by NZME as advertorial
How a holistic approach to risk benefits construction firms.
By Ben Rickard, Senior Risk Adviser, Builtin Insurance Brokers.
It seems hardly a week goes by at the moment without a headline about another construction company going out of business. Sometimes the reasons for failure are beyond the control of the company, but often the threats to a business are easy to spot if you know where to look. Business owners and managers need to be able to identify these risks in advance and, most importantly, take action to mitigate them.
For builders, imagine a world where you could run your business without worrying about any unexpected threats coming along to knock you off course.
No economic downturns, no new government regulations, no natural disasters, no accidents on site, no nightmare customers, no staffing issues, no defective products, no cashflow concerns. It would mean your focus could be directed to taking advantage of opportunities, achieving strategic objectives and growing profitability.
In reality, eliminating all risk is impossible, but the next best thing is to plan for them, so that if and when they do happen, their impact is substantially minimised.
It’s also important to differentiate between positive risks – the ones you take to grow your business, such as expanding into a new area or taking on more staff, vs negative risks (the threats).
There are three primary steps to eliminating threats:
1: Risk Identification
First, you need to know all the risks you face. Without a meaningful categorisation, this can be difficult. Categories of risk may include:
• Natural Risk
• Security Risk
• Technology Risk
• Workspace Risk
• Supply Chain Risk
• Environmental Risk
• Product Liability Risk
• Financial Risk
• Economic Risk
• Human Risk
• Governance and Legal Risk
• Reputational Risk
• Business Risk
Within each category are individual hazards. It usually takes an experienced risk professional to help company directors and business owners complete this process, but there are inexpensive software tools that can make it much easier.
2: Risk Analysis & Quantification
Once you have identified the risks, each needs a price attached to it. That is, what is the cost to your business if that particular event was to happen? What would it cost if a large contract failed? Or there was a cyberattack or an economic downturn? Or a serious accident involving key staff? Identifying the likelihood and severity of each risk allows us to quantify and rank them.
3: Risk Treatment
This is where we work out the most cost-effective way to deal with each risk – the cheapest solution to get the biggest reduction in risk? There are four options:
1. Ignore it (do nothing)
2. Avoid it (don’t do the thing that is creating the risk)
3. Reduce it (implement an approach that minimises the cost or likelihood of the event happening)
4. Transfer it (e.g. pay an insurer to take on the risk instead)
Various treatment options may include:
1. Additional training for staff, such as driver safety, customer relationship management, contract management, technical skills
2. Incentive programmes for staff, such as for safety, customer feedback, sales targets, defect complaints
3. Investment in security systems, fencing, cameras, fire prevention measures, lock boxes for tools and equipment
4. Written policies
5. Systems and processes
6. Professional advice
7. Robust contractual terms & conditions
8. Insurance
The theory here is simple but the effect can be transformative for those who do it well. However, it will generally only happen with high level engagement by business stakeholders and executive leadership, including cultural change within the organisation towards a “risk mindset”. The support of a professional risk manager and the right tools are essential to a successful transformation.
Eliminating risk might be impossible, but planning for a crisis and minimising the cost of risk is one of the most important responsibilities for any board of directors. Yet many are not adequately doing so, or doing so in a haphazard way that can leave gaps. With the right advice and following the right process many of these threats can be, if not eliminated, then at least substantially mitigated.
Builtin are New Zealand’s Construction Risk Management Experts. For more information visit builtininsurance.co.nz, email Ben Rickard at ben@builtin.co.nz or call the team on 0800 BUILTIN.