Why construction monitoring is so crucial for risk management

Construction projects as large as medium-sized companies

Imagine 600 construction workers, 50 planners and 20 project managers coming together for four years to build a high-rise building for 250 million euros. Such volumes are comparable to the turnover of a medium-sized company - only that this company has been manufacturing similar products and has well-established processes for 30 years. By contrast, all the players involved in a construction project only work together for a relatively short time. For years now, construction projects have not only been getting bigger and more demanding, they have also become increasingly complex as a result. The building services of a modern office building today are as complex as the building services of a hospital in the 1970s. Building on a reliable data basis, construction monitoring is becoming increasingly important. Methods such as "Building Information Modeling (BIM)" in planning or the use of "Lean Construction" are inexorably on the rise. The automotive industry has already had significant experience in these areas for years and now the transformation to the digital world is imminent for the construction industry and project development. What this will look like in the future is being researched, for example, by the Fraunhofer Institute in practice-oriented research projects within the framework of the "Competence Network for SMEs 4.0". A few weeks ago, an Austrian construction company also reported that its order books were not only well filled, but full. Other construction companies, planners and architects describe a similar picture. So one could speak of a construction boom; the demand for the "concrete gold" seems to be unbroken. Well over 1,000 commercial project developments are currently being planned, designed or executed in Germany. And all of these projects require financing - in other words, best times for banks and financiers one would think.

New rules for risk management of construction projects for banks

Even if the last few years have certainly not been the worst for the property financing banks, the market and margin pressure is also becoming increasingly intense here. Construction prices are rising and available land in good locations is scarce. On top of this, there are constantly increasing requirements for risk management and the associated IT requirements of the banks by the banking supervisory authority BaFin. The ultimate goal of the new rules is to protect investors and investors. To this end, MaRisk (Minimum Requirements for Risk Management in Banks) was amended in October 2017 and next year the "Basel Committee" (keyword: principles for the effective aggregation of risk data and risk reporting in accordance with BCBS 239) will impose a whole range of additional requirements on systemically important banks and their risk management in the construction sector. Put simply, banks must then be able to identify and report the risks of their loans, such as cost increases, delays in deadlines or, in the worst case, borrower default, at the push of a button. If you now think of the complexity described at the beginning, it quickly becomes clear which task has to be mastered here.

Agile construction monitoring brings the added value

This initial situation rightly sounds very static. Regulatory requirements and masses of data suggest a very theoretical framework with little flexibility and a high level of additional expenditure without any significant advantage. But this is exactly where agile concepts offer a chance. With the advent of the above-mentioned tools "BIM" and "Lean Construction", the availability of data on construction sites and in construction offices will also change. In the meantime, you can already feel the upheaval in many projects, digitalization is becoming more and more common. It is now up to the banks and their consultants to install a modern and agile construction monitoring system as part of risk management, which meets new requirements and at the same time adapts to new methods. The tightened rules may seem pointless, but they provide an ideal basis for a comprehensive and recurring analysis of project data. In doing so, the focus of the analysis must be adapted to the current project situation. At the same time, however, the Construction Monitor must remain within the framework of the risk model. This ultimately provides an opportunity to rethink the processes of credit and risk management and to make them more efficient.