Risk management in construction projects
The risk management process involves planning, monitoring, and controlling instances of risk.
Why have a risk management plan?
- Project issues are clarified, understood and considered from the start.
- Decisions are supported by thorough analysis.
- The definition and structure of the project are continually monitored.
- Clearer understanding of specific risks associated with a project.
- Build-up of historical data to assist future risk management procedures.
The first step in developing your risk plan is to identify the factors that could impact your projects. These risks can be grouped by category.
Types of risks
Contractor risks can include:
- financial difficulties
- planning and scheduling problems
- subcontractors’ slow mobilization
- architects’ incomplete drawings
- incomplete structural drawings
- contractor insurance
- cash flow management.
It is recommended you do not enter into an agreement with a builder or contractor until the funding agreement with the NSW Childcare and Economic Opportunity Fund Board (the Fund Board) is executed.
Health and safety risks that need to be considered:
- construction accidents
- design or construction faults
- injuries to visitors and/or users of the service.
Please check your builder has adequate contract works and workers compensation insurance prior to engaging them.
Operational risks could involve:
- extended delays prevent new enrolments
- extended delays prevent children attending
- loss of fee revenue
- non-productive wage expenses
- complaints from neighbours
- complaints from parents and carers.
Financial risks can include:
- cashflow and timing of milestone payments
- contractor cash flow problem
- subcontractor financial difficulties
- cost overruns due to supply chain disruptions, increase in cost materials, unforeseen expenditure, or other reasons.*
*Please note that, under the Funding Agreement, any cost overruns will be the approved provider’s responsibility. To mitigate the risk of cost overruns, you are encouraged to discuss financial risks with suppliers when obtaining quotes. You should also ensure your budget and quotes reflect the final scope of works with all design features you intend to deliver and include allowances for contingency and escalations.
Project risks that need to be considered:
- problems with project management
- equipment breakdown and maintenance problems
- late delivery of ordered materials
- interference with ongoing operations.
Environmental risks could include:
- geological conditions
- pollution and/or contamination conditions
- local government zoning protections
- natural disasters.
Legal and/or regulatory risks that need to be considered:
- disputes over contract terms
- code violations e.g., WHS breaches
- land – permitted uses
- security of tenure
- development application approval not obtained or requires change in project scope to meet compliance*
- service approval is not obtained or is obtained for a lower number of licensed places per day*.
*To mitigate this risk, we encourage you and your suppliers to carefully review all relevant regulations that apply to your project, including but not limited to the Building Code of Australia and the regulations that apply to early childhood education and care (ECEC) services.
*You should engage a licensed building practitioner with accreditation or registration with their relevant body to provide you with plans and calculations of unencumbered space and compliant plans.
Steps to develop your risk assessment
In your application, you are required to:
- Identify any project risks (this may include hazards, who or what may be harmed).
- Evaluate the risk and determine the likelihood of risk occurring and what impact the risk will have on the project.
- Identify strategies to mitigate the risks from occurring or reduce the impact of the risk.
- Review and revise your risk management plan regularly as needed.
See the following for steps and example on how to identify the likelihood and impact of your risks, and how to determine the best mitigation strategies for each risk.
- Risks: Describe the risks identified in regard to your capital works project.
For example: when assessing the DA, Council requests a change to plans, which may lead to an increase in project costs. - Likelihood: Indicate the likelihood of risk occurring: Rare, Unlikely, Moderate, Likely, Certain
For example: low likelihood. - Impact: Indicate impact the risk would have in your project: Low, Medium, High, Very High.
For example: high impact. - Mitigation strategies: Outline mitigation strategies you will implement to prevent the risk from occurring and/or reduce the impact if it does occur.
For example: contingency funding has been factored into budget to support project increases. Licensed building practitioner has drafted plans and ensured compliance with all relevant regulations.
Risk matrix
The risk matrix plots probability of a risk event with its impact in a chart to show overall risk for different situations.
Determine the likelihood of the risk occurring:
- Certain – More than 90% chance of an event occurring over the life of the project.
- Likely – 61% to 90% chance of an event occurring over the life of the project.
- Moderate – 41% to 60% chance of an event occurring over the life of the project.
- Unlikely – 10% to 40% chance of an event occurring over life of the project.
- Rare – less than 10% chance of an event occurring over life of the project.
After determining the likelihood, then rate the risk for severity:
- Low – The consequences are minimal and may cause a near negligible or only minor damage. This hazard poses no real threat. Examples: no media coverage, and/or no bodily harm to employees or customers.
- Medium – The consequences are moderate and may cause a sizeable amount of damage. This hazard cannot be overlooked. Examples: loss of $100,000, regional media coverage and/or minor bodily harm.
- High – The consequences are critical and may cause a great deal of damage. This hazard must be addressed quickly. Examples: loss of $1 million, national media coverage, major bodily harm and/or police involvement.
- Very High – The consequences are catastrophic and may cause an unbearable amount of damage. This hazard is a top priority. Examples: loss of $10 million, extreme bodily harm and/or police involvement.
Watch the videos on Risk Management in Construction Projects on the application resources page.
This page is provided for information purposes only. Those referring to the information on this page should obtain their own independent expert advice and must rely entirely on their own enquiries.
The Fund Board is under no obligation to advise of any changes to this page, and to the extent permissible by law, does not accept any liability to any person for the information or advice in this page.
This page has been created to assist applicants for the program. Use of, or reference to, this page does not guarantee that an applicant will be successful in its application to the program. Applicants for the program should refer to the program guidelines, and to the extent there is any inconsistency between this page and the program guidelines, the program guidelines will prevail.