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06/08/2012

RISK MANAGEMENT WITHIN THE CONSTRUCTION INDUSTRY


RISK MANAGEMENT WITHIN THE CONSTRUCTION INDUSTRY

 

Apart from the growing demands of stakeholders for more functional and more effective physical infrastructures, the construction industry is confronted with various challenges including complying with effective risk management of construction projects. Development and management of sustainable risk management practices is now a very important endeavors to the global construction industry hence the necessity to the inexistence of risk management measures. It is the goal of this discussion to discuss risk management within the construction industry specifically in the housing industry.

Risk management

Lewis (2002) noted that risk management is the systematic process to identify, quantify, analyse and respond to project risk. The management of risks includes maximising the probability and consequences of positive events and minimising the probability and consequences of adverse events to project objectives. Management of risk would be important in such a way that it can create value and a part of the decision-making process of project managers.

As risk management is both systematic and structured, this will be relevant in projectification in terms that it can lead to continual improvement and enhancement of processes and activities relating to the project. Includes processes concerned with conducting risk management planning, identification, analysis, and responses and monitoring and control on the projects. Risk management also includes maximizing the probability and consequences of positive events and minimizing the probability and consequences of adverse events to project objectives (Society for Technical Communication, 2003).

Risk management in the construction industry

Senaratne and Sexton (2009) stress that unplanned changes in construction projects are common and lead to disruptive effects such as project delays, cost overruns and quality deviations. Rework due to unplanned changes can cost 10-15 per cent of contract value. By managing these changes more effectively, these disruptive effects can be minimised. One of the ways to minimise this is through effective risk management. Different forms of risks are created and shared among the processes unique to the construction industry.

Lindahl and Ryd (2007), further, claim that innovative and effective communication and collaboration must not be only evident among project managers and teams but also between clients and construction project management professionals. Based on workshops conducted on construction clients, the need for better briefing with the focus on end-users is known to be increasing. Difficulties for construction projects to deliver what the user-clients need include lack of systems and methods to keep track of user client demands sufficiently and in a satisfactory way. As such, goals need to be iterated and validated on a regular and coherent basis throughout projects. 

Chan and Chan (2004) noted that the construction industry is dynamic in nature wherein the concept of project success has remained ambiguously defined in the construction industry. Time, cost and quality have been fundamental to the success of construction projects. However, as time goes by, the criteria of project success changes which now include value and profit, health and safety, environmental performance, quality, functionality, user expectation and satisfaction and participants’ satisfaction, all of which relies heavily on effective risk management policies, standards and measures.

The responsibility of the project team is to identify and describe risks and assess the probability of risk occurrence in the site as well as assess the impact of the risk(s) identified. The project team will also perform the risk response and assist the project manager with risk monitoring and control. The risk owner, on the other hand, has the responsibility to develop and update the risk response strategies. S/he will also have the jurisdiction to monitor the risk and inform the project manager of the threat of emerging risks or opportunities for the project. Risk will be identified based on applicable risk management handbook and sample risk list.

The analysis of risk will be the quantitative risk analysis for the purpose of estimating the risk that the project will finish within objectives and estimating the contingency needed for the cost and schedule. Risk analysis will be used to identify the best decisions in the project site. The risk response strategy will centre on deciding on the actions to be taken in response to residual risk, plan response to residual risk and then communicate mitigating strategy and response plan to risk review team. The risk management plan will be revised periodically and the changes will be reported to the project manager. 

Types of risks within the construction industry

A risk faced by the investors was the deterioration of property value, which means that there could be also market risk such as commodity risk. Furthermore, these properties have also inherent risk known as legal risk. Risks are also evident on the fact that these assets were rarely traded (liquidity risk) meant that even the approximate value of these structured financial products was not known (Engdahl, 2008).  These are coupled with other risks including operational risk, interest rate risk, credit risk and consumer credit risk. These risks could have been avoided if an ongoing review of activity risk assessments, an emergency response planning and a detailed assessment of critical assets are inexistence.

Considering the recent financial crisis which badly affected the construction industry, the risks could have been effectively managed. Managing risks in the construction industry is more complicated and numerous. The first risk is the risk of undertaking a specific construction project with inadequate knowledge. Investing in knowledge is imperative in the construction industry as this is where informed will be base.

Quality construction project development should be the goal. What had been the problem of construction project developers during the subprime securitisation debacle is that they have built properties only to find out in the end that they could not make profits on them, not even break even because of the low property value which affects house pricing. Risks encountered are the downturn in the property market and increased interest rates which results in increased holding expenses. Thereby, risks could have been managed in a proactive manner if there is an ongoing review of activity risk assessments. 

Risk management processes within the construction industry

It is also critical for the construction project developers that a comprehensive financial stability is performed. Essentially, there is an existence of systemic under pricing of risks in the property market. Decisions therefore should be also based on financial soundness. We should take note that while construction project is most profitable it is also riskier as it involves a long investment period with no positive cash flow. To address the expected risks, the construction industry should be particular in creating contingency plans. Contingency plans are simply the alternative plan which will be used if possible foreseen risk event becomes a reality. A contingency plan could help property developers to examine every critical aspect of the operation and think both reactively and proactively. Hence, risks could only be managed effectively unless there is emergency response planning.

Nevertheless, valuation appraisal should be performed. Exposure to risks could be minimised through adopting procedures that are transparent and independent for providing quality that, according to Adcock (2002), contributes to excellence in governance, management and administration. Firewall Unit must be in place for the purpose of transferring some risks while also providing an independent and transparent approach. Sensitivity drivers must be also identified so that property developers could respond to expected and emergent risks more effectively. Property developers should treat risks in such a way that they can transfer and reduce such. Control, further, must be in place for the entire property development. As such, risks could have been managed if there is a detailed assessment of critical assets.

Risk management in the UK construction industry

Risk management in the UK construction industry is commonly associated with corporate social responsibility. Housing developers in the UK puts emphasis on how they can provide a quality, sustainable living to both internal and external stakeholders. A risk-based approach was developed, aspiring to ensure that the built communities should have positive economic and social impact not just for the dwellers themselves but also for who live around them. Housing risks, however, are community dissatisfaction with development, quality of design and layout, failure to maximize local and economic social development through schemes and increasing requirement to build affordable housing.  

Associated risk factors also include risks which included quality of work and service, control of subcontractors, training for staff and failure to maintain communication with customers. Code of Practice and Code of Conduct basically apply to the operation of the house developers in the UK. Environmental risks are also evident relating to government legislation including waste legislation, climate change, water supply and use, pollution incidents and sustaining biodiversity. The housing developers acted through applying Code Level 3 which is the Code for Sustainable Homes’s (CSH) provision for materials where concern issues are environmental impact of materials and responsible sourcing of materials both for basic elements and finishing elements (Department of Communities and Local Government, 2006).

References

Adcock, S 2002, Managing Risks in Property Exposure via Valuations/Appraisal Assessment.

Chan, A P C & Chan, A P L 2004, Key performance indicators for measuring construction success, Benchmarking: An International Journal, vol. 11, no. 2, pp. 203-221.

Department of Communities and Local Government, 2006, Code for Sustainable Homes – A step-change in sustainable home building practice, Communities and Local Government Publications, Wetherby, West Yorkshire.

Engdahl, F W 2008, The Financial Tsunami Part IV: Asset Securitization – The Last Tango.

Lewis, J P 2002, Fundamentals of project management: developing core competencies to help outperform the competition, AMACOM Division, American Management Association.

Lindahl, G and Ryd, N 2007, ‘Clients’ goals and the construction project management process,’ Facilities, vol. 25, no.3/4, pp. 147-156.

Planning and Delivering Writing Projects using Project Management 2003, Society for Technical Communication.

Senaratne, S and Sexton, M G 2009, ‘Role of knowledge in managing construction project change,’ Engineering, Construction and Architectural Management, vol. 16, no. 2, pp. 186-200.

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