Building risk management strategies into the vertical construction sector

A comparative analysis of the vertical and horizontal construction sector to identify key areas to better manage risk and improve productivity.

Project overview

The construction sector has been a perennial underperformer in the New Zealand economy.  The sector’s low productivity reflects very challenging operating characteristics: order-based production, low-task repetition, and site-specific operations are all products of a market that largely deals in bespoke, complex projects requiring unique approaches.  However, poor risk management can also play a part in low productivity through increased delays and errors, time-wasting, and ineffective problem-solving. Ongoing construction quality issues and high enterprise failure rates are signs that the sector is currently not managing risk as effectively as it could.

But some parts of the construction sector appear to be doing better than others. The recent success of horizontal infrastructure projects (e.g. pipes, roads, and cables) such as the Northern Toll Road Gateway, Waterview Project, and Christchurch Infrastructure Recovery are in contrast to ongoing challenges faced by the vertical construction sector (e.g. buildings).

The aim of this BRANZ funded project is to uncover core differences in how risk is managed in the horizontal and vertical construction sectors and identify opportunities for cross-sectoral learning. Our focus is on the role risk management plays in improving sector productivity.

Key findings from a survey of the construction sector on risk and resilience practices

  • Respondents believe external factors have the greatest impact on productivity, rather than internal capabilities

    The risk factors that reportedly caused the most delays, errors, and impacts on productivity tended to be external risks, such as the client changing their mind, council and other inspections, and design flaws and inadequacies.  Some internal capabilities such as communication, project team experience, project management, and staff morale appeared to be important in reducing errors and increasing productivity, but they are less prominent.  The authors note a caution that this finding could be influenced by Actor Observer bias that leads to a tendency to attribute actions to external causes. More research is needed to fully understand this finding.

  • Contractors adjust margins for risk but only when work is plentiful

    The results demonstrate that contractors are willing to increase margins where there are significant risks related to the project (nature of work) or client. They also demonstrate that contractors are willing to reduce contract prices to bring work in the door.  The willingness to reduce margins is a concern, as this lessens an organisations’ capacity to cope with risks during a project.

  • High risk maturity improves productivity

    The survey results generally support our project hypothesis that there is a strong link between productivity and risk management.  Higher risk maturity contributes to less project delays, lower error rates, both of which contribute to higher productivity.  In addition, organisations with greater risk maturity scored better on organisation performance measures.  This indicates that there is a value case for investing effort into good risk management.

  • Resilient organisations perform better

    Similarly, the results also support our hypothesis that resilient organisations perform better – including reduced delays, lower error rates and high productivity.  Notably, compared with risk mature organisations, more resilient organisations are more aware of the importance of internal, less tangible risk management processes for improving productivity such as communication, staff morale etc.

  • Horizontal contractors are potentially more nuanced in their consideration of risk than vertical contractors

    The survey results were less clear when it came to the differences between vertical and horizontal contractors.  The project hypothesis was that horizontal contractors were more productive and managed risk more effectively. The results only weakly supported this. The results indicate that horizontal contractors are more nuanced in their consideration of risk, in particular how different risk factors impact errors and how they price risk into projects.  Horizontal contractors appear to be aware of both internal and external risk factors.  That said, it also appears that vertical contractors have to manage significant project complexity which impacts their productivity and timeliness.

  • Subcontractors and smaller organisations are less likely to actively manage risk

    Overall, the data reflects the underlying understanding in the sector that risk is passed down the supply chain and subcontractors bear notable risk.  In our results, risk manifests in delays and errors caused by (amongst other things) poor project management.  Despite this vulnerability to delays and errors caused by others, subcontractors are much less likely to adjust their margins to account for risk (which according to our data are similar to head contractors’ margins). Our data indicates that small organisations are less nuanced in how they perceive and manage risk.  Given 97% of construction sector organisations are small companies, this is is an area worth further investigation.

Project reports

Building risk management strategies into the vertical construction sector: Survey report
Charlotte Brown, Sophie Horsfall, Alice Chang-Richards,  Nicky Smith

Building risk management strategies into the vertical construction sector: A preliminary report
Alice Chang-Richards, Charlotte Brown, Nicky Smith

Project team

This project has been funded by the BRANZ Research Levy.
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