Viewpoint
What Chief Risk Officers Do For Construction
Those in the position now are responsible for a broadening range of issues
Chris Smith
In the 1990’s it wasn’t uncommon to define risk management success as just limiting the number of deaths on a project site and purchasing and renewing insurance policies. But over the last 25 years, the risk manager role has evolved considerably.
In today’s construction marketplace, risk achievements are measured, in part, by the number of lives saved through proactive safety measures. The list of insurance policies purchased and renewed, from workers’ compensation and general, auto, professional and environmental liability to builders’ risk and equipment, has grown. They now include those that not only cover company operations but also insure liabilities and risks of an organization’s human capital—employees and management such as officers and board directors and related issues such as fiduciary mandates and crime.
In addition, risk managers are now tasked to find ways to enhance return on investment and drive real dollars to company bottom lines.
Traditional risk management approaches required separate contracts and insurance policies for every contractor on a project site. Now, it’s common to include contractor controlled insurance programs and subcontractor default insurance. Contracts are also evolving, with integrated project delivery and progressive design-build offering a new wave of quality improvements.
These changes, made since the early 2000s, have paid bottom-line dividends, enhancing safety and claims and improving overall return on investment and project success.
As a result, a new marker of the next level of construction risk management has appeared—the chief risk officer as a C-suite position. This emerging role expands beyond the standard territory to recognize the complexity of the challenges. CROs, in conjunction with other C-suite leaders, think about risk from an enterprise perspective. They no longer worry only about what insurance policies can do. Instead, they focus on human capital decisions and staffing, labor and performance issues, supply chain management and subcontractor pre-qualification.
Dick Walterhouse, former chief risk officer of Pankow Builders, talked about the importance of a seat in the C-suite. “We advanced the importance of risk management as a corporate initiative and developed a strategic plan for enterprise risk management that dovetailed seamlessly with our operations plan," which changed the company's culture, he said.
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I also like the way the issues were expressed by Scott Hobza, Spawglass vice president for enterprise risk management.
“Having good insurance and processes is a must, but only scratches the surface,” said Hobza, who is also an employee owner of the contractor. “True risk management starts by having a proactive mindset, setting a culture of risk management. Risk is managed or not at the lowest level, in the field at the project level, where decisions are made. What client will we work for? What subcontractor do we sign up? How will we set a culture of safety on our project? Will everyone follow our quality control program?"
Hobza adds that as SpawGlass chief risk officer, he "empowers our project teams with the knowledge of how their daily decisions affect" the company and answers the questions of whether to avoid, transfer or retain the specific risk.
While industry growth has played a big role in elevating risk managers to be CROs, the COVID-19 pandemic truly galvanized focus on the construction risk management position. Not only did every contractor have to address operational issues around risk, they also needed to coordinate supply chains and performance management. While LEAN construction is still at the forefront of contractors’ minds, risk evaluation is also a key part of the consideration.
Defining the Chief Risk Officer Role
The CRO role brings all risk issues together under one person's responsibility—aligning risk management with a company’s goals and objectives and overseeing all risk managers on the team. As a through-line for risk, the CRO would evaluate the urgency of each.
Those in the position may use an enterprise risk management approach or rely on technology to shape policies in ways that would have been impossible without benchmarking, artificial intelligence and use of risk management information systems.
Beyond the construction industry's assumed risks, CROs also need to monitor a company's financial stability, its compliance and emerging legal issues and other factors that could affect project and organizational success. Continuity is also a concern, as are labor shortages.
Risk management can no longer be siloed into its own separate area of the company, especially as the industry continues to grow. By making risk management a more integral part of the leadership team and the CRO a member of the C-suite, risk can be tackled more comprehensively and holistically to make construction safer, more efficient and more profitable.
Chris Smith, senior vice president for construction, infrastructure and casualty at insurance broker NFP, can be reached at Chris.T.Smith@nfp.com.
