Importance Of Risk Management In Projects Construction Essay

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'There are risks and costs to a programme of action, but they are far less than the long-range risks and costs of comfortable inaction'- John F. Kennedy.

Risk Management (RM) has become an important aspect of today's modern world fare. Risk is involved in every project irrespective of its size and scope and has affected projects from small to large and from national to international. And therefore, RM is used as a tool to identify, analyse and address such risks. All researchers of construction projects agree that risks must be managed in its initial stages because in its unlikely outcome it can affect the project objectives in terms of cost, time and quality. A lot of research work has been conducted to develop a scientific formula for risks but until now they have failed in their endeavours because risk is not a discrete value. However, almost all organizations are using RM policies and strategies in their projects which have improved the success chances of their projects. The research work is still continuing and the researchers are developing different techniques and strategies for RM. And they all agree that the RM process must be conducted in three stages as risk identification, risk analyses and risk response.

1.2 Risk Management (RM)

RM is an important aspect of the project management and it is used to control risks in projects. The main objectives of the RM are to identify, assess, monitor and respond to risks in a simple and practical way. RM is helping organizations worldwide for providing guidance to develop and implement strategies for controlling the risks (Mills, 2001).

According to the Project Risk Management Handbook (2003)," RM is a systematic approach of planning for identifying, assessing, responding and monitoring for project risks'.

RM is a complete guidance which helps in the decision making by using different tools, techniques and processes. RM helps the project managers in maximising the chances of project success and minimising the chances of project failures. The RM will have a good effect on the project if it is conducted at the start of the project and is continued till the end of the project.

According to Mills, (2001) the project risks must be managed in an efficient and effective way because it can affect the project objectives in terms of cost, time and quality.

1.3 RM in Construction Projects

The construction industry has a very bad reputation in terms of risk management due to its risky, dynamic and challenging nature. A lot of construction projects fail in achieving its budget, schedule and quality objectives. Among the many reasons, the quality of materials, productivity of the plant and labour and the variations in weather conditions are responsible for the failure of construction projects (Mills, 2001). According to Hayes, R., Perry, J., Thompson, J. (1986) many of the construction projects fail due to the management attitudes towards risks. The management either ignores the risks or deal with it in a conventional way i.e. in most of the projects they allocate a 10% to 15% contingency quota in budget which is not an effective way of managing risks. Burchett (1999) considers the RM to be an important pillar of the decision making for managing risks because uncertainty and risks hinders the project objectives and affect the performance, cost, quality and productivity of the construction projects.

According to Taggart (2007) construction companies worldwide have realised the importance of the RM and most of them have established separate departments for RM which deal with the budget, schedule, quality and health and safety issues of the projects.

Construction companies around the world have been benefitted from the RM and more and more emphases is given on the RM to be adopted in the organization culture. Godfrey (1996) has argued that the RM processes have helped the decision makers in taking informed decisions.

1.4 RM and the Project Management

RM has become an important aspect of the project management and is widely employed for managing risks in construction projects. According to Chapman and Ward (2004) the RM is carried out in projects on the basis of common sense evolved through experience, knowledge and instinct. And still the RM is not considered as an integral part of the discipline of project management but one the nine aspect of the project management which is used as an additional tool for solving projects related risks.

1.5 The Importance of the Research Topic

The construction industry plays an important role in the economy. It has a great share in the employment and the GDP growth of a country. Only in Pakistan it employs about 9% of the whole labour (Farooqui, R et al). According to Mills, (2001) construction projects are very risky and require a great deal of management to achieve its objectives in terms of cost, time, quality and safety. And according to Thompson. A & Perry. G, (1998) organizations which have a systematic process of controlling projects risks are able to complete their project in time and within budgets.

In short, the success of the construction industry is highly dependent upon the successful involvement of the RM processes in such projects. And as I am doing my research on the RM in Pakistani construction projects (P&D Pakistan) where this concept is like an alien and most of the organizations are unaware of the benefits of the RM.

1.6 Research Question

Construction projects are risky and can fail to achieve their cost, time and quality objectives. This research investigates that which steps in RM process are important to remove the risks and uncertainties from the construction projects in order to achieve its objectives?

1.7 Hypothesis

The hypothesis is that a there exists a direct relationship between the project objectives and the effective risk management. The hypothesis will be tested by conducting literature review and a questionnaire survey.

1.8 Objectives of the Project

The objectives of this research project are as follows;

To investigate the concept of risk and uncertainty in construction projects.

To assess the application of the formal risk management processes in construction projects.

To investigate the techniques those are used for the identification of risk, its analysis and its mitigation in construction projects.

To discuss the current risk management strategy and techniques adopted by P & D Pakistan.

Analyse and compare risk management strategy of P & D Pakistan with other similar organisations.

To give my sponsor recommendations and a proposed strategy.

1.9 Contents of the Research

1.10 Summary

This chapter covers a general idea about the research and develop the knowhow of the RM and its process, the aims of this research, the research question, the hypothesis and also gives an outline of this research.

Chapter 2

Risk and Uncertainty in Construction Projects

2 Introduction

"The revolutionary idea that defines the boundary between modern times and the past is the mastery of risk…." Peter Bernstein

In this modern world of globalization uncertain events such as recessions, booms, wars, climate change, technological changes and competitive markets pose greater risks and affect the human life from every aspect. With no exception, industries have also been affected from such risky events and they are trying and coming up with different techniques to minimise its influence on its long and short term objectives. This chapter basically deals with the concept of risk and uncertainty and the related literature. And also covers the various types and classification of risks.

In the ongoing discussion about risk and uncertainty, the concept of risk will be investigated first and the concept of uncertainty will be discussed later in this chapter.

2.1 Risk and Uncertainty in Construction Projects

In common language the words uncertainty and risks are used interchangeably i.e. the 'risk is uncertainty' and the 'uncertainty is risk'. But if both the words are defined properly from projects perspectives, a differentiation can be made between them (Jam and Lars, 2002).

According to Holmes, (2002) uncertainty and risk affect the successful completion of projects and hinder its objectives in terms of cost, time and quality. According to Zou, P., Zhang, G., and Wang, J. (2007) the construction projects are very complex with special features such as complicated processes, unpredicted environments, long periods, dynamic organizational structures and financial intensity and such complexities generates enormous uncertainties and risks. Successful projects are those in which risks and uncertainties are properly managed with its early identification and assessment in the project feasibility stage. By assessing the impacts of the risks and uncertainties, contingency plans can be formulated and that will improve the chances of the projects being completed in its time, cost and quality parameters.

2.1.1 Risk

Definition

The term risk has been defined by various authors and some of the definitions are given as follows;

Risk is perceived as the potential for unwanted or negative consequences of an event or activity; a combination of hazard and exposure (Zou, P., Zhang, G., and Wang, J. 2007).

Risk is defined as the chance of an adverse event depending on the circumstances (Mills, 2001).

Risk is the probability of occurrence of some uncertain, unpredictable and even undesirable events that would change the prospects for the profitability on a given investment (Kartam, S., and Kartam, N. 2001).

Construction project risks are mainly depend upon the culture, age and gender. As per gender, men are considered as more risk taker than the women. Likewise with respect to age; young managers are considered to be more risk takers than the senior/old managers and cultures of the overseas countries pose many risks than the host country culture. The management of the projects must identify the risk, the probability of occurrence and its impact on the project objectives in any cases (Smith, N., Merna, T., and Jobling, P. 1999).

According to El-Sayegh, S. (2007) project risks are those risks which if occurs has a negative or positive effect on one of the project objectives i.e. cost, time, quality and scope.

According to Hillson, D. (2001) the risk being an umbrella term has two possible options;

Threats - this option of the risk has negative impacts on the projects;

Opportunity- this face of the risk refers to the positive impacts of the projects.

According to Mills, (2001) the impact of risk can be calculated from a simple mathematical equation;

RI= L * C

Whereas, RI= Risk Impact; L= the Likelihood and C= the Consequence.

2.1.2 The types of risk

Different authors have mentioned different risks of the construction projects in their research work on construction projects which are mentioned as follows;

Zou et al, (2007) has identified the following risks related to construction projects;

Risks related to project cost overrun: these risks include various risks such as inaccurate estimation of the project budget, uncertainty about the material price and availability, unavailability and the increase of cost of the labour, problems with suppliers and subcontractors, variations in weather conditions, changes in interest and currency rates, project's management excessive interface, political problems, and problems of local regulations and corruption.

Risks related to time delays: these risks are mainly associated with poor definition of the project scope, complex nature of the projects, wrong planning and scheduling of the projects, variations in designs, inaccurate material and engineering estimates, shortage of equipment, material and skilled labour, poor productivity of the labour and sudden fluctuations in weather.

Risks related to the quality of projects: these risks are as a result of repetitive changes due to errors, inaccuracy in the project design, problems related to the availability of the experienced project designers, short time for tendering, using low quality materials, poor processes of construction and less care for meeting the project standards and specifications.

Risks related to the health and safety: these risks are due to poor safety regulations, unawareness of safety, no record keeping of the incidents, unorganized operations, poor layout and site conditions and harsh weather conditions.

Risks associated with sustainability of the environment: such risks are of two types i.e., direct and indirect risks. Direct risks of the projects include emission of harmful gases, dust, wastes, noise and indirect risks include risks which does not seems to be as a direct result of the projects but those have a long time affects on the environment such as the exposure of the contaminated materials.

However, Aleshin, A. (1999) has classified the project risks into mainly two groups such as external risks and internal risks which are as follows;

External risks: - these risks also known as uncontrollable risks include changes in the custom and tax regulations, political instability and the fluctuations in the currency. The project participants have no control on these risks and these are mainly due to the unstable economies of the countries. External risks have a negative impact on the project objectives and its affect is of the macro-economic nature. The American experts have argued that the negative effects of these risks can be avoided by introducing 'Grandfather's clause' in the project contact by which the authorities guarantees that all the changes in the legislation will not be reflected in the project after the contract is signed.

Internal risks: - these risks are also known as controllable risks which occur within the boundaries of the projects. Such risks are mainly related to the project processes and can be assumed by one of the project actors who can best handle it.

2.4 The Classification of Risks

Edward and Bowen. (1998) as sighted in Ling, F., and Hoi, L. (2005) have classified risks mainly into two groups i.e. natural and human. Natural and human risks are further classified in to different sub-groups. The natural risks are beyond human control and it can have a bad impact on the objectives of the construction projects. While human risks

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