How do firms manage risk in a riskier world?

In the last decade, we have witnessed more volatility and uncertainty in the markets than the previous three decades put together. Brexit, Covid, climate change events, Ukraine, multiple UK Prime Ministers, US-China strategic competition, the explosion of AI, cyber security attacks and the Middle East conflict to name but a few. It is fair to say that managing risk is an inescapable part of modern-day business life, including that of managing risk through construction endeavours.

All infrastructure and construction projects have risk attached to them, a statement which is hard to dispute. The vast majority of projects and programmes will also try to manage risk, largely by using traditional techniques of identifying risk, assessing it, controlling it and monitoring the evolving situation – using qualitative approaches relying on judgement and experience of the whole project team along with perhaps a quantitative approach involving calculations and statistical data to give a weighting to the impact and likelihood of potential risks.

This type of risk analysis is fairly standard but it is often way down the agenda of things to talk about and, sadly, sometimes done just to tick a box as part of a project’s governance. The true value of doing it is, therefore, largely lost. To a small extent this is understandable, as it’s a human instinct to worry more about those things that are causing the current day project challenges, rather than concerning oneself with what might go wrong tomorrow, next week, next month or next year. This is why we hear the expression, “we’ll worry about that if it happens”. But the truth is, this is not good enough – ignoring risks in a risky world is a recipe for failure.

The current type of risk analysis is fairly standard but it is often way down the agenda of things to talk about and, sadly, sometimes done just to tick a box as part of a project’s governance

In a healthy environment, where there is appetite to manage risk (which should always be the case), the four techniques generally deployed are risk avoidance (stop doing the action causing the risk), risk mitigation (reduce the risk, build safety nets and controls), transfer the risk (pass to a third party, take an insurance policy) or accept the risk (acknowledge it makes sense to sit with you and make financial provision just in case).

Having carried out proper risk analysis and then developed strategies to actively manage those risks, it’s critical that all this work is captured in a risk management plan which remains a live document for all stakeholders to own. It should also detail financial provisions where appropriate and these need to be built into budgets accordingly. There does need to be some control here, as it’s not uncommon for the team to identify a rather long list of things that could go wrong but the reality is that the full list of risks identified will never all come to fruition, so it is about judgement and making sensible provisions for a more likely range of possible outcomes. This is another reason why risk management is a dynamic and constant topic as items in the risk management plan will either be heightened, reduced, triggered or pass depending upon the evolving situation of the project and the world that sits around it.

Machine learning algorithms have the ability to process vast amounts of data to predict construction trends and potential risks along with how best to manage them

As a glimpse ahead, it feels ironic that the new normal of volatility and disruption coincides with a digital era of AI technologies which could transform the effectiveness of risk management. Machine learning algorithms have the ability to process vast amounts of data to predict construction trends and potential risks along with how best to manage them. It is an exciting prospect to imagine the art of the possible with AI enabled risk management.

In an increasingly complex world, risk management is no longer a luxury but a necessity. Given what’s at stake as part of commissioning a multi-million (or even billion) pound project or programme, it is entirely feasible that the first name on the team sheet in the future will be the risk manager, providing solutions enabled through artificial intelligence which predicts, controls and manages all risks associated with the project. So, while clients crave beautiful buildings and infrastructure, I’m equally certain they crave certainty as well.

Iain Parker is a director and head of London cost management at Turner & Townsend Alinea