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CFO, Construction - 4 min read

Construction is a lucrative industry in Australia, but it’s not without its dangers. Cash flow issues, uncertain timelines, insurance requirements and contractual liabilities are just a few of the risks facing all Aussie construction companies, regardless of their size or scope.

 

Turning your back on these can be financially crippling if things turn south. Just ask Queensland companies Cullen Group and One Home, who went into liquidation owing over 500 creditors more than $25 million combined.

 

Effective risk management will empower you to spot problems as they emerge, make informed business decisions, and move forward with confidence knowing you’ve done your due diligence. Let’s look at how you can safeguard your construction business with simple and systematic risk management.

 

Risk Identification

Not every construction company faces the same kinds of issues, which is why it’s essential that you understand your unique risk landscape. Gather your stakeholders and brainstorm the possible dangers your business may face now and in the future, including:

 
  • Work-related risks, such as injuries and accidents;
  • Contractual risks, such as penalties paid for late project completions;
  • Financial risks: unmanaged growth, cash flow fluctuations, theft or damage to equipment, increased financing costs and labour shortages;
  • Natural risks, such as bad weather or natural disasters that could damage property and equipment;
  • Project risks: poor management, miscalculation of time and resources, inadequate company policies;
  • Competitive risks, such as lost tender opportunities or increased pressure to lower prices.
 

Once you’ve formed a detailed picture of your risk ecosystem, you can start to put effective preventative systems in place.

 

Rank Your Risks

If you’re like most construction companies, your list of potential problems is long, but some of them are much more likely to affect you than others, and they’re likely to be very different from the risks faced by your competitors. For example, your cash flow could be more volatile than your competitors’ because you’re experiencing a phase of rapid growth, or have a number of large/low margin projects, as opposed to a high proportion of short-term/high margin projects.

 

Examine each item on your list and rank them by importance. If you can use hard numbers to justify your rankings, you’ll be in a better position to mitigate your issues later on. For instance, if the rising costs of materials are a potential problem, determine how much prices could rise without causing significant damage to your bottom line. This information will help you to evaluate your position.

 

Sort Each Risk

In general, business risks can be dealt with in one of the following four ways.

1. Avoid the Risk

Although this may be one of the safest ways to deal with a potential problem, you may lose out on valuable opportunities. For example, let’s say that a particular customer is high-risk because of past payment problems. You could choose to turn down work from this customer, knowing you won’t have to be chasing unpaid invoices in the future. Of course, avoiding the customer altogether means that you will miss out on potential business, and the referrals that client may provide.

2. Transfer the Risk

Instead of taking all the risk upon yourself, consider ways of transferring it to another entity. Insurance may be the most common way of transferring the burden. When you have comprehensive coverage, the insurance company assumes responsibility for some potential liabilities.

3. Mitigate the Risk

In many cases, you can take steps toward lessening the probability that risks will turn into significant problems. In construction, safety is always a concern, but you can reduce the chances of injury and accident by following industry standards, keeping equipment serviced and investing in staff training.

4. Accept the Risk

Every business needs to accept that some things are simply beyond their control. For example, sometimes projects will be delayed because of inclement weather, and there’s nothing to do but wait it out. However, quality construction management can usually find ways to lessen the damage.

 

Risk Monitoring and Control

As your construction company grows, your risks will change. That’s why it’s important to make management a regular, ongoing priority for your business. As well as investigating your insurance, company policies and operational procedures, you may also want to adopt new technologies to manage your risks.

 

To learn more about risk management for your construction business, or to team up with one of our expert business consultants, reach out to us at Altus Financial.

 

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