Risk
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Extreme Weather Events Show Why the Construction Supply Chain Needs a Risk-Management Transformation

Restructure your risk-management model to plan for events that can affect everyone—and everything—on a project.
By Brad Barth
June 14, 2023
Topics
Risk
Markets

A perfect storm of recent extreme weather events has exposed the fragility of North America’s construction supply chains amid an increasingly fluctuating, fast-changing risk landscape. Supply chains that were already reeling from resurgent demand for raw materials coming out of the pandemic have been further disrupted by major storms such as recent tornados in Arkansas and Mississippi. Such events can have a ripple effect across many distinct supply lines as exemplified when the 2021 Texas freeze caused railroad closures and knocked out both petrochemical and semiconductor plants, causing shortages that affected construction and many other industries.

The wide-ranging reverberations from these events demonstrate how stakeholders across all stages of capital projects increasingly share common vulnerabilities. Crucially, the way in which disruption from extreme weather events has caused project delays and cost overruns shows how time, cost and scope are increasingly interlinked and equally vulnerable to systemic risks.

Traditional project-management methods where risks are not collectively managed and mitigated by all stakeholders are becoming increasingly inadequate, as risks to cost, time and scope are often considered in isolation. The domino effect of supply-chain disruption across capital projects similarly shows the inadequacy of project-management models where suppliers are not afforded a key stake in the project (or sometimes even a seat at the planning table). This traditional model cannot adapt to sudden, systemic risks that disrupt multiple suppliers and ripple out across all stakeholders, deliverables and project-management metrics.

The gathering storm

A slew of recent extreme weather events demonstrated the increasingly fluctuating risk climate in which capital projects operate, and the increasingly wide-ranging nature of the threats to capital projects due to global supply chains being interconnected. Hurricane Ida affected semiconductor and plastic production and saw many logistics trucks diverted for relief aid, while atmospheric rivers in British Columbia knocked out a major oil pipeline and shut down road and rail links to a port. By affecting numerous logistics chains for key commodities for capital projects, these storms showed how supply-chain risks increasingly affect projects in unexpected ways and can have massive reverberations across time and cost. The recent tornados in Mississippi similarly left a 170-mile trail of destruction affecting multiple separate transport links.

The wide-ranging effect of extreme weather events illustrates the need for more holistic, upfront risk planning to create more agile, adaptable and resilient project plans. Integration of risk-management responsibilities with procurement planning across all parties, from suppliers to contractors, is now key as those parties increasingly share common vulnerabilities.

Achieving risk-adjusted procurement will require a fundamental transformation from a siloed, opaque and proprietary project-management mentality to one that embraces collaboration, openness and data sharing. It will also involve an evolution toward cloud-based project-management platforms and connected data built around enabling project-wide collaboration and visibility.

Collaborative, holistic, early risk planning

Traditionally, the burden of capital project risk assessment has been shouldered almost entirely by the contractor, with little proactive involvement from key suppliers. Those in the best position to identify supply-chain risks—the suppliers themselves—often have minimal incentive to surface potential risks and, in fact, might be disincentivized to do so, in order to avoid creating doubt in their ability to deliver. Traditional design-bid-build models also leave very little room for collaboration in risk planning across owner and contractor, as contractors are encouraged to compete for projects largely on cost, with no contractual expectation to risk-adjust those costs. A contractor is encouraged to use a cheaper supplier to reduce costs even if the supplier is more vulnerable to risks that could cause project delays.

Perhaps in response to the rising prevalence of systemic risks, the construction industry is moving to more iterative and collaborative contracting models that prioritize risk management with a wider distribution of responsibilities among all project stakeholders. In these shared-risk construction delivery models, major stakeholders share the burden of monitoring and mitigating project risks on an ongoing basis, with contractual mechanisms to account for risk-based contingencies. These models encourage project partners to behave as a collaborative coalition, sharing and integrating risk data to produce a holistic risk picture that encompasses all project stages and stakeholders.

While these shared-risk models don’t always include suppliers, the trend is heading that way. The approach long taken with power plants—where everything from the design to the construction schedule revolves around the turbine supplier—is slowly making its way to other types of construction. The process of identifying supply-chain risks associated with the major components required for successful completion of a construction project is occurring earlier and earlier, with the aforementioned shared-risk contracting models providing proper incentive for all parties to be proactive in that effort.

As an example, a major transportation project in Toronto was recently awarded using a project alliance agreement. Such agreements utilize a single contract signed by multiple parties, including the owner, designer, contractor and key suppliers. Alliance agreements generally call for all parties to mutually identify—and share—risks throughout the project lifecycle, with regular risk-assessment events to quantify the contractual impact of those risks.

Enabling this trend hinges on the construction industry moving from siloed planning tools and technologies toward interoperable project-management systems and connected data that can unite separate stakeholders and democratize risk planning. Shared risk and other collaborative contracting models are exposing those silos and, in so doing, are accelerating the adoption of integrated, cloud-based project controls systems that can be accessed by all parties. The alliance coalition working on the transportation project in Toronto is utilizing such a system from InEight to perform ongoing cost and schedule risk assessments.

Ultimately, early visibility to potential risks is key. Evaluating supply chains, and how events such as storms can have a domino effect on those supply chains, leads to alternative scenario planning that can enable swift and nimble reactions to keep projects on track. Modern project controls systems facilitate planning around not just the most likely case, but also the worst case and best case as well. As projects move through their lifecycle and more and more data is captured, turning more assumptions into knowns, those scenarios can be continually assessed to help navigate around unplanned events. Plans built using spreadsheets are typically point-in-time constructs, not updated continually with current progress and risk data. Project controls systems, on the other hand, can be set up to accept a steady feed of as-built data so that the current plan can be validated in near real time.

Another benefit to collaborative project controls systems is that data can be captured consistently across projects, creating a knowledge library that can be used to make risk planning progressively smarter over time. Historical data related to costs, schedules and risks from past projects can be leveraged when planning new projects, which not only makes the planning process more efficient, but also enables organizations to scale effectively as less experienced personnel can tap into institutional knowledge. This way, lessons learned on one project can feed into improved planning for subsequent ones. Integrating past and present data—including supplier performance—can additionally facilitate a benchmark-based, risk-adjusted planning process that creates more realistic expectations for project cost and schedule outcomes.

Planning ahead

In a globalized economy, an extreme weather event on one side of the globe can affect projects far away. The interconnected nature of supply chains means that key materials and components often flow through different regions so that understanding the procurement risks associated with critical materials is more important than ever. Risk planning can no longer be confined to individual project stages, or even to individual parties. Modern project controls systems along with connected data can form the missing link that enables the industry’s move to more collaborative, more transparent construction delivery models.

by Brad Barth

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