Application Of Value And Risk Management Construction Essay

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The United Arab Emirates previously known as the Trucial Oman has the worlds sixth largest oil reserve. These are estimated at 98.2 million barrels which is 9.5 of the global total. Her primary export is crude oil which accounts for 81% of the export capacity. The UAE had a total of 6,511kilometers of pipelines as per the year 2006. This total includes pipelines selected for a range of products such as : condensate,520 kilometers; gas, 2,580 kilometers; liquid petroleum gas, 300 kilometers; oil, 2950kilometers; oil/gas/water, 5 kilometers; and refined products, 156 kilometers.(UAE July2007)

The underground construction of pipelines, oil rigs and oil wells pose risks to all the parties involved in the construction, those who are not directly involved in the construction project such as the general public as well as environmental risks.

Value and risk management are important elements in the construction sector. Risk is inevitable in any construction project while value is the degree of importance and the prospective requirement that is expected from a given project. Therefore value and risk management are significant aspects for the success of construction project (Alfaro 2011).

Risk can be defined as the exposure to the probable financial loss the physical damage of property as a result of the tentative association that results from the pursuing a particular strategy. The major undertaking of risk management approach can be done by methodically sub dividing it into three stages which include: risk identification, risk analysis and finally the risk responses. Value is the level of importance or magnitude that is placed upon a particular function, item or solution (Alfaro 2011).

The value management process has three fundamental levels. This include the determination of the functional needs of the project or any of its component parts; the identification of the possible options and the examination of the cost and value of each option so as to enable the optimal value selection.

In the United Arab Emirates, value management (VM) is commonly used to illustrate the overall structured, team-based attitude to any construction project. It looks at the value process from the initialisation of the project concept, designation, implementation as well as the operation phases of a project. It involves set of systematic and rational procedures, methodology and techniques to increase the project value throughout the existence of the facility. (Potts, 2008)

On the other hand, risk management (RM) involves compilation of several factors such as: the detection of preventative measures to reduce the chances of occurrence of a risk; better information dissemination to decrease uncertainty; deliberating on risk transfer through insurance; laying down procedures for managing risk stipends in cost estimates; establishing unforeseen events plans to counter the risks when they occur.

The main techniques and methodologies for value and risk management (RM) are pertinent for construction projects and recognize that indeed factual benefits can occur with their use. However a magic portion does not exist for the lucrative management of risk. Therefore a risk should be analyzed constructively, comprehensively and creatively. Therefore strict application of a collection technique, method or procedure is not supported (Potts, 2008).

The major categories of risk that are most probable to be faced by the client may arise from the capital project. These are potentially much more extensive than any additional construction costs. This could include the project risk which is mostly concerned with time and cost: the consequential risk which are the unplanned effects of project underperformance on the client's project; benefits risk are the effects of the project bring about more than the expected benefits; finally the effect on share price which is related to the public perception of the project. (Rawlinson, 1999)

The value management aspect is relevant to the construction sector as it reduces the precise causes of avoidable costs. These redundant costs can result from unnecessary aspects which provide no useful role; those that arise from unnecessary specification due to unreasonably expensive supplies/components); and cost of poor build ability (failure to regard construction repercussion during the design phase of the project. other costs may arise from avoidable life-cycle cost which regard to the failure to put into consideration the future operational costs; superfluous opportunity cost which is the cost of losing prospective revenue.(Arafa, 2010)

Value management techniques can be used in the construction industry in order to deliver the clients project requirements. The use of innovation can have a considerable effect on the overall outcome of the project. Innovative solutions need to be adopted at the earliest possible phase of a project. This is because for the opportunities to add value you must use of manufacturer's standard workings rather than modified products.

In the application of value management in timing is of the fundamental. The commissioning of any construction project should follow a cautious analysis of the project's requirements. Failure to perform this analysis will lead to problems at subsequent design and construction phases. Numerous projects undergo poor definition due to the lack of time and consideration at the initial commencing stages. This is expected to result in cost and time overruns, the user dissatisfaction and claims or unwarranted operating costs.

Value Management can facilitate in avoidance these problems and grope the arising opportunities as well as to bring other value improvement proposals and techniques for the project. Cost planning and management (CPM) is an important element in construction projects. It operates under three main functions this includes: providing a channel through which the actual budget and the timely manner in which the projects operations are carried out. This assists in pointing out any deviations from the actual project budget; it helps in developing a database of output versus the cost-performance facts for use in approximation of the costs of successive projects; finally it helps in generating figures for valuing any upcoming variations and alterations to the contract and possible claims for any additional payments (Ahmed, 1995).

The incorporation of CPM in the project helps to demonstrate that the cost savings and actual benefits can be made tenable by employing the value management approach. These benefits include building an understanding and consensus among the various stakeholders of the project. It also identifies the linkages of the client's value system as a starting point for authenticating a conceptual model (Gary, 2009).

Some of characteristics that are taken into account for an effective cost planning and management system include: a budget for the project laid down with a contingency data to be allocated on the decision of the senior responsible owner; forecasted costs that permit deliberation of all potential courses of action; the operation of the cost record keeping system should be cost-effective; costs against the forecasted costs to ensure conformity with the budget giving room for corrective action if need be and if feasible; the actual costs should be contested to variance analysis in order to determine the reasons for any deviation from the actual budget; the cost proposition of time and the quality should be integrated and put under consideration in the decision-making process.

Quantity surveying is an inevitable aspect of any construction project. The quantity surveyor (QS) is a crucial participant in any construction project. He is involved in the construction of the project from the early stages of inception to its completion. In some cases he may be involved in demolition in order to make critical changes. However, his main role is to ensure that the resources allocated to the construction of the project are used to the paramount advantage from the start to the completion of the project. This includes the ability to inter-relate technology and economics in order to add value to the financial and procurement management for the construction project. In addition he is relied upon to evaluate any complex problems that may arise and devise new proposals in the course of construction.

The project cost-control systems are applied in cost-value reconciliation used by building contractors and quantity surveyors in cost planning and management (Gary, 2009). His main role is to make external and valuation adjustments to the proposed project meet the following objectives; identify the significance of managing the that are risks coupled with innovative design; provide the appropriate training, advice and recommendations for the senior decision makers; application of value engineering to survey the scope so as to meet the requirement at the lower cost practicable; maintain a clear distinction between initial forecasts made at the time of the preliminary decision making stage to undertake the project, and subsequent forecasts incorporating concurring changes in costs; embark on a review of the building's utilization.

Risk and Value Management policy Guidance and Practice has several guidance that are used in the procurement stages of construction. Most of these guides came up following the recommendations from Latham report. The guides were issued to assist in construction projects.

The risk management study has an important role in the construction industry in the United Arab Emirates. It is applicable to all the stages of construction from the inception of the project to its completion. It has to address four key areas which include the establishment of a risk policy risk acceptance criteria, the establishment of a risk registers, the establishment of a risk registers and risk assessment.

Establishment of a risk policy will aid in indicating; the management strategy, scope and the risk objectives involved in the project. Risk acceptance criteria is established with the aid of common sense at reducing risks once identified, by ensuring that the risk is below a certain value.

Establishment of a risk registers will focus on pointing out the potential the hazards to the building activities which are expected to be involved in the project. It should also take into account all the risks identified in the building risk policy (Segal 2011).

Risk assessment will take into account; hazard identification, classification of the risks identified, ways of mitigating risks and details of the risks involved in the risk register. For risks which bear particular interests, a comprehensive risk analysis should be carried out comprising of the following; causes of the risks, an event tree examination of the impacts and full quantification of the risks involved (Segal 2011). This helps in evaluation of the cost benefit-ratio, in the enforcements of risk mitigation procedures.

Essential requirements for construction procurement, guide outlines, the role of the decision maker involved in investment, the role of the owner of the project and the project sponsor, including their responsibilities and training needed. The value for money in procurement sets out the framework the projects for value for money, risks involved and the value management systems.

Appointment of consultants and contractors guide governs the roles and responsibilities of consultancy method including details of appointments. Team working partnering and incentive ensures team work among all the participants. The procurement strategies outlines various procurement strategies such as public-private partnerships, design and constructing and framework agreements. The financial aspects of the project takes into consideration; the project budget and risk allowance. The whole life cost provides guidance on relevant information; that will enable the individual concerned with decision making on issues relating to procurement routes, make better decisions.

Professional Bodies Concerned with Value and Risk Management

The professional bodies which are related to value and risk management in the construction of oil related projects include; the Gulf Cooperation Council (GCC). The UAE's closest relations within the GCC are with its major trading partner, Oman. The GCC was created primarily in reaction to regional stability and security concerns, it also provides the economic and monetary policies of its members.

The UAE is a member of the Organization of Arab Petroleum Exporting Countries.

Abu Dhabi, the capital city of UAE joined the Organization of the Petroleum Exporting Countries. Under the UAE's constitution, each emirate has power over its own production and resource development. However Abu Dhabi became a member of the Organization of the Petroleum Exporting countries (OPEC) in 1967, but Dubai (UAE) does not consider itself component of OPEC or bound by its quotas.