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Can the Global Construction Industry Master the Risk Management Balancing Act?
Increased competition amid slow economic growth influences its top risks
This article was published in the Q1 2012 issue of Aon One, April 2012.
As the world economy evolves, organizations continue to change their perception and preparation for risks. The global construction industry is no exception. Over the past several years, this industry has witnessed a shifting economic, legal and regulatory landscape, combined with a large number of weather- and geotechnical-related catastrophes, demonstrating the variety of directions and forms from which risk may come. With such increasingly complex variables, organizational sustainability in the construction industry demands proactive understanding and management of risk.
Reflecting these complexities, the results of Aon's 2011 Industry Report on Construction marked a noted shift in risk and priorities for organizations in the industry. Concerns over damage to reputation/brand rose significantly, as did those related to regulatory and legislative changes. Respondents to the survey felt better prepared for the risks, with 67 percent feeling adequately prepared for the top 10 risks.
A few key findings from the report:
- In the list of top risks, threat of increasing competition has jumped from sixth place in the 2009 survey to second place in 2011. This concern is fueled by high supply and limited demand, as well as highly aggressive bidding—sometimes at or below cost.
- Damage to reputation/brand has risen significantly in ranking from 11th in 2009 to third in 2011. This change is attributed to the challenges related to maintaining a client base amid increasing competition. Where construction firms are working hard to replace diminished backlogs, the temptation to bid work at or below cost increases. With these practices, the risk of not completing the job on time and on budget also rises. This can have a negative effect on reputation. Although this is not indicative of the entire sector, the pressures on margin and the ability to remain viable as the economy continues to falter will have a negative impact.
- Regulatory/legislative changes have jumped from 10th to fifth in ranking. This reflects the increasing pressure and costs associated with new and pending legislation on issues such as minimum wage; the threatened 3 percent withholding on federal, state and local agency sponsored projects; healthcare reform; and increasing limitations to indemnification agreements. The lack of progress on infrastructure funding has also affected the sector in a negative fashion.
While ranked at 11th on the list of top risks, political risk/uncertainties are expected to grow as this sector expands into developing countries.
When it comes to choosing an insurer, value for money/price jumps up three spots, from the fourth largest priority in 2009 to the top priority in 2011. This increase reflects the current business environment in which construction companies have been operating, one that's taken them through an unprecedented global financial crisis to the current period of unstable and slow recovery.
- The construction industry's overall preparedness for the top 10 risks has increased from 60 percent in 2009 to 67 percent in 2011. Respondents rate regulatory/legislative changes, with only 39 percent, as the least prepared risk.
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