Risk is one of the most significant concerns when it comes to the construction industry: how to manage it, mitigate it, and keep it from hurting a project’s bottom line as much as possible. As a result of how inherently risky construction is, general contractors always need to factor in risk when creating estimates and submitting bids.
Constantly having to adjust for risk can be frustrating as well as time-consuming.
However, the reality is that constantly having to adjust for risk can become a major headache, especially in times of economic downturn. An article from global business magazine Brink News observes that when economic growth slows and competition increases, it becomes more and more tempting for teams to ease up on strict risk management policies or underbid too aggressively. These actions can seriously damage a general contractor: while the huge potential for financial loss is obvious, there is also the hit that a contractor’s reputation can take, and that is much harder to recover from.
Even still, general contractors need to find ways sustainable over the long term that significantly alleviates the burden of risk. Of course, there are dozens of ways to mitigate risk, some of which include investing in the best construction estimating software, improving labor quality, ensuring standardized policies when it comes to safety on site, and automating processes when possible to reduce manual error.
Another approach to reducing risk before even submitting a bid also involves choosing to spend more resources on projects that are inherently lower-risk as opposed to high-profile, high-risk projects. This risk mitigation tactic is actually driving one of the current biggest trends in U.S. construction, the boom of residential building.
High-Risk vs. Low-Risk Projects
Not all projects are created equal, and some of them have a greater chance of being high risk and low reward by design, while others tend to be low risk and higher reward. Projects with higher risk are usually ones that create a lot of public attention, or that are extremely challenging from a design and safety perspective. Some examples include public works like large highways, rapid transit lines, and road tunnels, as well as skyscrapers.
Residential construction is booming thanks to both demand and its less risky nature compared to commercial projects.
Low-risk projects, on the other hand, pose fewer safety hazards, provide more consistent rewards, and are easy to keep investing in. The best example? Residential construction. In fact, private sector spending on residential construction shot up to seven percent in 2020, and in the fall of that year, privately-owned housing saw a 12.8% year-over-year growth. Single-family housing is only expected to continue growing rapidly in 2021.
Residential construction is attractive for a number of reasons. First, there are generally fewer safety concerns as opposed to projects that require a lot of crane work – most housing developments tend to be relatively low to the ground and are usually less structurally challenging than a building meant to be 40 stories or more into the sky. Additionally, residential building is often more “crisis-proof” than commercial building. During economic downturns, commercial projects such as restaurants or hotels are frequently put on hold or altogether canceled by project owners wary of losing precious resources. Residential projects, however, remain strong, especially as an economic downturn begins to recover and homebuyers feel both more confident and more excited about investing in a permanent residence, especially in the age of remote work and learning.
Are Lower-Risk Projects Always the Best Choice for a Contractor?
Truthfully, as reassuring as lower-risk projects like residential projects can seem, “lower risk” is not always an inherently good thing or even something your company would want to seek out. Some companies thrive off of building a reputation for handling complex projects. But as your company grows and expands, it never hurts to put more focus into sectors that will generate more consistent returns.