Avoiding risks in Construction isn’t about luck – but about asking the right questions
30 June 2018
The other day I was discussing today’s risk landscape with the Executive Team of a sizeable Engineering & Construction client. The conversation turned into a debate about the geographies and types of projects they’re currently avoiding, in order to minimise their risks and maximise the chances of getting paid.Similar discussions are taking place in companies across the construction industry. And it isn’t hard to see why – with seasoned insiders saying that the level of risk is now at unprecedented levels, both in the private and public sectors.
For evidence, you only need to take a look at the daily headlines. In the private sector, we’ve seen profit warnings and even high-profile failures from construction and support services firms. There have been growing concerns over the resilience of the sector’s supply chains and whether one or two failing projects or contracts could bring down the wider business.
Meanwhile, on the public sector side, recent contractual issues and procurement failures have triggered unprecedented scrutiny of procurement decisions and contracts, both from, the media and official bodies. And this is playing out against a background of concerns over the availability of the skills and capacity needed to fulfil the Government’s huge investment programme.
So risk is everywhere you look – and is shared between Government and the businesses working with it. Yet some companies appear to be largely unaffected by it, exhibiting an uncanny ability to maintain a steady course above the turbulence.
Which raises the obvious questions: how are they doing this? Are they just lucky? Or have they been smart enough to steer clear of trouble?
As ever in business, the answer is that they’ve made their own luck – and the conversation I described earlier illustrates how. First, by taking a clear-eyed and objective view of the risk environment. And second, by making a strategic decision to avoid types of contracts and regions where the risks are too great – while also taking steps to closely monitor the status and performance of existing contracts, and acting early to recognise and tackle any issues before they escalate.
While this is smart business, its isn’t rocket science. And it comes down to ensuring that the Board, Audit Committee and management ask the right questions at the right time about the right things.
These questions must be posed in all key areas of the business. And if you want your company to be among those who are steering clear of risks, here are some to ask yourself:
- Strategy – Are we in the right geographical markets? Are we targeting the right sectors and types of contracts – and avoiding those that carry too much risk?
- Finance – How are we interpreting the accounting rules? Are we being prudent enough? What’s the status of our key financial indicators, and is there a sufficient level of challenge? Could we benefit from a stress-testing exercise? How are we managing our pension liabilities?
- Governance – How active are Board, Audit Committee and executives in challenging and probing critical risk areas? Do we need an effectiveness review?
- Processes and systems – Do we have robust processes around business development (taking on the right projects), feasibility (at the right price), contact management (managing them on a controlled basis) and financial management (with the right controls and management information on performance)?
- Projects and contracts – Do we have a clear view of project and contract status across group/area/division/business unit levels? How is the portfolio performing, and how are the KPIs trending? When were key projects and controls last audited independently?
- Risk management – Are we clear on our biggest risks and exposures – and on how we’re managing them? Does our enterprise risk management (ERM) system really give us the information that we need and drive the right actions? Do we have an effective system for managing Health, Safety and Environmental (HSE) risks?
- Culture and behaviours – Does our incentive structure drive the right behaviours?
- External investors – What are fund managers saying (and doing) about your company, and are you taking notice? How are you engaging with them? How do you compare against your peers?
These are the kind of questions that many companies across the industry have been asking themselves in the past few months. If you’re not doing so already, you should be too.
The message is clear. Industry risk is now at such a level that it warrants a specific exercise to review and challenge the existing approach in all the areas above. If you’re on the Board, Audit Committee or part of an Executive Management Team, what questions are you asking?