How To Protect Your Construction Business From 7 Common Risks

February 2024
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Your business is a commitment of time and resources. Naturally, you want to protect those investments and your business against losses as best as possible. Risk management can help safeguard your business against the most common risks most owners face. While there are a lot of opportunities for artisan contractors, skilled tradespeople, and construction businesses, building a business in the construction industry increases the risks to your people, profits, and the future of your business.

The seven most common risks to your business can be sorted into three categories:

  1. Internal risks come from the normal operations within your company.
  2. External risks cannot be controlled by you or your company and cannot be reliably forecasted.
  3. Industry-specific risks are those unique risks inherent to the construction industry.

Internal Business Risks

Internal risks are those that are in your control because they arise from your regular business operations.

These include:

Human Risk

Human risk can be attributed to the people who are running or working the business. This can range from union strikes to ineffective management, problems with suppliers or vendors, employee corruption, or illegal activities. Human risk can also include:

  • Misclassification mistakes or intentional fraud on timecards
  • Theft, loss, or vandalism of equipment, materials, and tools
  • Third-party injuries or property damage

Technological Risk

As more and more technology finds its way into the construction industry, risks increase. The smartphones, tablets, laptops, and software programs you use to conduct your business contain critical data and information. An accidental data breach, intentional hack, or missing laptop could put the sensitive information of clients, employees, and subcontractors at risk.

Physical Property Risk

Construction business owners invest a lot of money into physical property. From your work trucks to equipment, materials, and tools to warehouses and office space, any physical property your business rents or owns is at risk for accidents, damage, loss, or theft.

Physical property can include:

  • Automobiles
  • Building Materials
  • Equipment
  • Office spaces
  • Supplies
  • Temporary Structures, like Scaffolding
  • Tools
  • Trailers
  • Warehouses

And even the project site itself.

External Business Risks

COVID-19 showed us that some events and circumstances are far beyond our control yet have the potential to disrupt or damage a business. That's why pandemics are considered an external business risk.

Other examples of external risks include:

Economic Risk

Fluctuating costs of materials, goods, oil, and gas from market changes is an example of economic risks outside your control. Changing real estate market values, oversaturation of new homes from other builders, rising interest rates, or decreasing home values are other economic risks outside your control.

Natural Risk

In California, builders have to contend with the risk of wildfire damage every summer and storms that bring flooding, landslides, and power outages every winter. Storms, wildfires, high winds, floods, extreme snow, and even natural disasters such as tornadoes, earthquakes, and hurricanes can disrupt your business, damage your property, or cease your operations. Unfortunately, you can't control Mother Nature.

Political Risk

Laws and ordinances in your state, county, or city can change and affect your business. Federal and state laws involving employee pay and safety, health care requirements, and workers' compensation requirements can all impact your profit margin. Local ordinances and zoning regulations can also significantly impact your business.

And, as we all saw during the recent pandemic, a state- or federal-wide shutdown can bring your business operations to a screeching halt.

You have no control over the laws and ordinances that govern your business, and it can be difficult to anticipate and identify the ones that will.

Unique Risks for Construction Business

There are many risks associated with the construction business that many other business owners never have to worry about. Liability from construction defects, project changes, budget overruns, contractual risks, and site conditions are just a few.

But the biggest risk for a construction business owner comes from the employees and subcontractors who are helping you get the job done.

Employee Safety and Hazards

According to OSHA, one in every five of all workplace fatalities are construction workers.

Construction sites contain numerous hazards that can lead to serious injury or death. The most common workplace safety risks are:

Electrical Incidents: contact with power lines, lack of ground-fault protection, path to ground missing or discontinuous, equipment not used in the manner prescribed, and improper use of extension and flexible cords are the most common causes of electrical injuries.

Falls: falls are the leading cause of fatalities in the construction industry. Most fall injuries are related to unprotected sides, wall openings, and floor holes, improper scaffold construction, unguarded protruding steel rebars, and misuse of portable ladders

Struck-by: Approximately 75% of struck-by fatalities involve heavy equipment such as trucks, cranes, and vehicles, falling or flying objects, or result from constructing masonry walls.

Trenching and Excavation: cave-ins are the primary hazard in trenching and excavation work, but trenching injuries can also result from struck-by hazards, hazards from undermining sidewalks and buildings, and unsafe conditions such as hazardous atmospheres and electrical hazards from overhead and underground power lines.

How to Mitigate Construction Business Risks

Many construction business risks can be reduced or eliminated by identifying them, putting policies into place, and training employees. However, not all risks can be eliminated completely. That's why the insurance industry is in place. Insurance policies allow you to transfer a particular business risk over to an insurance carrier. To find out which insurance policies can best protect your business, contact an experienced insurance professional to discuss your business needs. A thorough risk management plan and insurance protection can help ensure your business continues to thrive despite the most common risks it's likely to face.

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