Scott B. Tracy, CPA, CCIFP is an assurance services partner with CliftonLarsonAllen LLP and is the co-managing partner of CliftonLarsonAllen’s national construction and real estate practice. He can be reached at Scott.Tracy@cliftonlarsonallen.com.
By sharing risk data internally, companies can improve consistency and reduce costs.
The benefits of enterprise risk management (ERM) have been discussed often among construction business owners, yet many contractors still struggle with implementing ERM plans in their companies. In addition to mitigating risk, ERM provides significant value to the strategic development and execution of business plans. With many managers already aware of the relevant risks in the contracting, highway and heavy construction industries, owners must ask themselves these questions: What value does ERM provide my business, and how does it enable a better perspective about longer-term risks?
To get the most value from an ERM plan, contractors must pay close attention to five key benefits.
1. Increased Consistency and Communication
ERM enables companies to better collect and assess risk by sharing all company risk data and organizing it into consolidated evaluations. With the standard terminology and conceptual framework of these evaluations, a company can implement more consistent practices that improve coordination among various layers and departments.
Concerns about confidentiality, propriety and job security often cause risk communication to lag. As a result, information relative to strategic risks—risks related to the achievement of corporate objectives and plans—is not shared across department lines. By definition, ERM includes everyone in the company. An ERM plan addresses the problems associated with overworked contractors who might be unwilling to share risk responsibilities across departments, instead choosing to shoulder the entire task themselves.
Companies must educate all employees about the areas of risk that could affect the company and how these risks are managed. When employees better understand the potential risks of faulty equipment, unsecured supplies and old protective gear, they are more likely to take advantage of the communication network inherent to ERM.
2. Enhanced Reporting
ERM supports better structure, reporting and analysis of risks. Risk dashboards—which consolidate risks across the company—enable executives to make better decisions relative to risk thresholds, appetites and tolerances. A better categorized system of reporting allows for different types of reporting to take place, all following specific classifications.
ERM reporting can manage risk through the following methods:
- Identifying and managing risk companywide rather than by function or department
- Prioritizing according to level of risk and potential company impact
- Comparing risks against each other, along financial and compliance lines or by both quantitative and qualitative factors
Ultimately, ERM reporting efforts enhance the strategic decision-making capabilities at all levels. The focus should include risks related to the overall construction industry, including accounting and tax requirements, labor and safety laws, legislative changes, third-party liability factors and workers’ injuries.
3. Improved Focus and Perspective of Risk Data
ERM can identify and assess key performance indicators regarding risks as well as quantify risk factors and tolerances. The use of key risk metrics and measurements further improves the value of reporting and analysis. Factors for the construction industry may include an economic slowdown, increased competition or the failure to retain top talent. While a contractor is busy building a reputation for getting jobs done right and on time, these factors may not receive the attention they deserve.
ERM models also permit more comprehensive views of risk. Traditional risk practices focus on the perspectives of mitigation, acceptance or avoidance. Effective ERM processes provide a framework to evaluate risk as an opportunity to increase competitive positions and exploit certain market conditions.
4. More Efficient Coordination of Regulatory and Compliance Matters
Financial institutions, sureties, regulatory examiners and financial statement auditors—in addition to other contractors—will begin to inquire, test and leverage monitoring and reporting data from ERM programs. Since ERM data involves monitoring controls and mitigating factors relevant to various risks across the company, this information can provide an effective means for reducing the effort and cost to understand the risks within a company.
5. Cost-Effective Management of Risks
Through ERM, a contractor can consolidate disparate risk management functions and better manage market, competitive and economic conditions. Construction-related companies can use ERM data and reporting to more effectively coordinate with project owners and customers, better manage investment decisions with their financial institutions and make more timely decisions regarding opportunities and potential pitfalls. By potentially reducing the time and cost of risk management and by streamlining monitoring and reporting functions, ERM can reduce the cost of existing processes for contractors. Although initially difficult to enact, ERM pays off in terms of lowering risk while providing savings and increased sustainability for the company.