INSURANCE AND RISK MANAGEMENT Creating a Lean ERM Process By John Watras, Zurich North America I


n today’s unpredictable business environment, organizations turn to enterprise risk management (ERM)


as a strategic approach to manage risks. Developing an ERM process is most often discussed in the context of a large multinational corporation, including large construction companies, where operational and people risks can span a range of product lines and geographies. So, it’s natural that many small


to mid-sized general contractors may have overlooked this strategic approach because it appears too complex and unwieldy for their needs. Many may assume that the process will be too time-consuming to implement or don’t know how to take the first step. However, this thinking appears to


be a case of the proverbial “throwing the baby out with the bathwater.” Tat’s because the basic concept of an ERM framework — the discipline of identifying, organizing and creating an action plan for managing opportunities and risks — is an approach that can benefit general contractors of all sizes. In fact, the argument can be made that smaller and mid-sized general contractors need ERM more than larger ones, since even a single risk that results in financial or reputational damage can be more difficult and even impossible to overcome.


ERM Manages Construction’s Growth Opportunities


Over the last several years, the


construction industry has benefitted from strong growth, outpacing many other industries and the economy overall. It’s estimated this positive growth will continue into 2016, according to the Dodge Construction Outlook, which recently predicted that total U.S. construction starts for 2016 will rise 6 percent to $712 billion, following gains of 9 percent in 2014 and an estimated 13 percent in 2015.


12 March/April 2016 However, a strong business


environment can bring more risks. While projects may now be easier to get for general contractors, this is also the time when oversights in labor, contracts, materials, and backlog can turn a profitable situation into a bottom line loss. An estab- lished ERM framework can assist general contractors in determining the associated risks that come with an increase in project volume in 2016 and future years. It should be designed to help the organization evolve with changing market conditions, leverage emerging opportunities, anticipate surprises, and recover from any disruptions.


Creating a “Lean” ERM As previously discussed, many


small and mid-sized general contractors do not need the robust ERM process that large national or multinational firms may need, as they are typically more locally or regionally based. A more streamlined or “lean” ERM framework can provide general contractors with the benefit of a consistent and ongoing assessment of their risks which is focused more tightly on where these risks are most likely to occur. It is important to note that owners and top managers should be at the table together when identifying and prioritizing risks, and determining who will have the respon- sibility for controlling them throughout the organization. As one of the largest insurance


providers in the construction industry, Zurich has worked with various sizes of construction companies in creating an ERM framework. For a basic starting point, Zurich uses this 4-step ERM framework with our


construction clients:  Step 1: Identify and Prior- itize Risks


Identify the external and internal risks and prioritize risks by levels (high, medium, low is a common


 Step 2: Create An Action Plan


ranking).  Step 3: Outcomes


High-risk areas should be given top priority, and plans should address how to control for weaknesses and to mitigate losses. Assign personnel responsibilities and a completion date for each risk.


 Step 4: Management Reporting and Continuous Feedback


Determine the appropriate reporting timeline on each of the priority risks, whether it is weekly, monthly, or quarterly.


Report outcomes to owners and key managers. ERM is not a one-time exercise, but a dynamic and continuous process for organi- zation-wide improvement.


A full-up ERM framework for larger construction firms typically assesses four main risk areas – strategic, opera- tions/people, financial, and market. For small to mid-sized contractors, Zurich recommends a lean ERM that focuses on operations/people which is the area with the most frequency of risks: subcontractor pre-qualification and management, quality management, materials, contracts, labor and backlog.


Risk Areas to Examine in a Lean ERM


Any successful ERM process starts


by thoroughly identifying and priori- tizing risks as outlined in Step 1 above. A focus on the operations/people area of the business should, among other areas, include a deep dive into:


Subcontractor pre-qualification and management process  Does the subcontractor have the financial capacity and technical ability to complete the work on time and on budget?


California Constructor


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