Overview Risk Management On Construction Company Construction Essay

Rapid industrialisation has brought in its wake several problems. One of them is industrial risk, which is taking newer and newer forms ever. With mechanical, electrical, chemical and radiation hazards besetting the industrial world, the ‘Risks to Life, Limb, Health and Wealth’ are common in this sphere of economic activity. Risks are present in every corner and under every stone. Industrial risks may arise while handling, storage or because of operational errors and violation of accepted safety procedures. The industry, therefore, has to be always prepared for such eventualities. An industrial risk is the one that may affect several areas within the factory or may cause serious injuries, loss of life, and extensive damage to property and disruption to manufacturing activities. Such risks may occur in any industry in spite of best efforts to prevent them. The suffering and damage as a result of the accident is determined by the potential for loss surrounding the event. However, the risk can be largely avoided if effective action is taken as per pre-planned and practised procedures, utilising the combined resources of the factory and outside emergency services.

The construction industry has changed rapidly over the past ten years and some companies are faced with more risk and uncertainty than before. Clients are more likely to engage in litigation when things go wrong. Risk in construction has been the object of attention because of time and cost overruns associated with construction projects. Risk can be defined as an uncertain event or condition that, if it occurs, has a positive or negative effect on a project objective.

As the conclusion, most construction company have to analyses their project to eliminating a specific threat, usually by eliminating the cause. The project management team can never eliminate all risks, but specific risk events can often be eliminated. Other than that, from the analysing, it can reduce the expected monetary value at risk events by reducing the probability of occurrence (e.g., using new technology), reducing the risk event value (e.g., buying insurance), or both.

Objective

Risk Management on Construction Company

Most of consultants help business owners and entrepreneurs develop the business objectives necessary to achieve the organization’s service, social, profit and growth goals by interviewing the principal leaders. Talking through the vision for an organization helps the leaders vocalize where they want the organization to go. A business objective provides a specific, measurable, realistic, action-oriented and time sensitive statement that, once achieved, propels the organization closer toward meeting one of its goals. The business’ goals and objectives form the foundation of its business plan. Business owners can follow the same process on their own to develop workable goals, objectives and actions to help their business succeed.

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There are 2 objective categories in Construction Company which are short term objective and long term objective. Short-term refers to one-year goals and objectives. For instance, if the goal is to open a real estate business, some short-term objectives include obtaining a realtor’s license, renting office space and purchasing a computer and MLS subscription. Long-term refers to three to five year goals and objectives. Following the real estate start-up example, these may include sales goals and objectives in terms of number of properties sold or dollars, and opening a second office location. One objective for meeting a sales goal of 24 homes in the second year of business would be advertising to reach a larger clientele.

As the conclusion, the main objective of risk management is to protect the property, earnings and personnel of the organisation against losses and legal liabilities that may be incurred due to various risks. It minimises cost of the risk and maximises the pro¬tability. The accidental risks may not only result in unexpected costs to a company but threaten its survival altogether. Thus, it is essential for the management to do some exercise to know about the possibility of a ‘risk event’, sources of such event and impact of such event beforehand and consider ways and means of preventing, reducing or minimising the loss .

Terms of Reference

This report is about the research on issue that relates to Risk Management in Construction Company. The research is focusing on Industrial Construction Company.

The report about the research was requested by Miss Kwan Jing Hui. This report is prepared by five students undergoing the subject Corporate Risk Management in Multimedia University Cyberjaya who is Erda Nurakma Binti Zharani, Muhammad Adi Arzri Arshad, Thania Nasiha Md Shariam, Nurul Farahin Husin, Tiara Citra and Nur Atiqah binti Adam. We will like acknowledge Ziestech Company because the cooperation that they have been given to us in the process of completing this assignment. This report is submitted on 16 January 2013.

Methods

In this report about Risk Management in Construction Company, we are using two methods using the primary data and secondary data. The primary data is based on the interview that we have done based on an industrial construction company that we have chosen for more understanding in the research. The company that we have chosen is the Ziestech Company where we trying to get more information to support our research. We create a short questionnaire to understand more about the risk management of the company. On the other hand, we are doing our research also using the secondary data where we found some journals and other sources that can be helpful to support our purpose in completing this report.

Findings

Based on Research : Risk Management on Construction Company

Risk Management in Construction Industry

Risk in construction project is highly related to type of risks that may delay the performance of the project itself. In order to eliminate risks, in construction project should have effective risk management as mentioned by Lee Chun Siang and Azlan Shah Ali (2012). Effectiveness of risk management basically depends on how the project leader identifies and construct anticipation actions to risk that may occur during the life cycle of construction project. In addition, risk have to be analysed and listed out throughout project life cycle, otherwise poor risk management would affect in low performance of project. Refer to effective risk management, it enables to determine assessment of project risk, as well as control potential barrier to the success of the project completion. Construction project’s value sometimes reflects to its risk management. Variable risks that related to construction project make it different from other industry. It’s due to various variables such as engineering, procurement, technical (The Association of Project Management, 2000).

In Malaysia, construction risk management has not been a priority and shows bad reputation based on Hamimah Adnan et al (2008). An attitude from contractor that attend to make simple project, fast process and less expensive methods while they identify risks. Even though in construction industry, its projects might be different from project to project, that’s why risk identification also might be different. For the project leader, personal experiences, training speciality on risk management would be needed. However, Norazian Mohd Yusuwan (2008) found that Malaysian Construction Company is not paying much attention on reporting, reviewing and monitoring its risk management activity and still consider unfamiliar method among Malaysian Construction Company. Limited knowledge for risk management in construction project again related to limited budget and they found it will only add for operational cost of project. There is different treatment related to risk management that based on size of Construction Company. Most of companies that is stable in financial status, well known in public, and hold a big construction project that will have formal risk management.

Relationship Between Risk Management And Project Performance

Maintain good performance during the project activity in construction will result in less risky for the project and closer to its successful. However, if happen to have failure in risk management it will cause increase in operational & financial cost, capital structure amendment, delaying for building activity, overrun budget / higher risk in insolvency, lost in cash inflow, bad quality for final product possible to redo work after completion and many more (Sundararajan 2004). Various potential factors in construction project activity according to Flanagan and Norman, 1993; Akintoye and MacLeod, 1997; Smith, 2003, there are long period, complicated processes, abominable environment, financial intensity and dynamic organization structures. These variables of risk management hold important rule and reflects how the project’s performance will be. Researchers found construction project performance determinations can be concluded to cost, time and safety (Chen et al., 2000; Shen, 1997; Tam et al., 2004).

People Involve in Construction Project

According to one of construction insurance for the Construction Design & Management (CDM) 2007, players who involved in construction projects are clients, CDM co-ordinator, designers, principal contractors, contractors and workers. Property developer, and company who has construction project consider as clients. CDM co-ordinator will be chosen to lead the project and as advisor on health and safety issues during project time. Next is designers such as engineers and architects who prepared for building drawings in and out. Person in charge to plan, manage and co-ordinate health & safety while project is happening will be the principal contractors. Contractors are people who involved in business construction i.e. civil engineering, mechanical, electrical, demotion & maintenance companies. Lastly, workers are anyone who directly carries out the work during project construction, i.e. plumber, electrician and scaffolder.

Risk Faced By Construction Industry

There is no line item on a construction company’s income statement titled “Cost of Risk,” but this is actually one of the industry’s largest and most volatile expense items. Some construction companies pay 5 per cent or more of their gross income for risk related costs. In an industry with tight profit margins, effectively managing risk can sometimes make the difference between making a profit or not, and in some cases, the survival of the business. There are many kinds of risks faced by a construction company. One of the examples is economy slowdown. Recessions usually happen where there is a widespread drop in spending. Recession can give a very big impact to construction companies. This may be triggered by various events, such as a financial crisis, and external trade shock, and adverse supply shock or the bursting of an economic bubble.

The other risk face by Construction Company is increasing competition, where, economic growth is the increase in the amount of the goods and services produced by an economy over time. Economic growth is generally distinguished from development economics. The other factor is that increasing in population can get same ideas or product from different people. The same construction will increase in competition such as quality, price, quantity and etc. The other risk the construction company faced is regulatory or legislative changes. Regulatory changes are controls imposed on a company by an authority (usually the government) that generally restricts the “natural” direction in which the company is moving.

Legislative Authority or the power to make laws at the Federal level is vested in the Parliament, which comprises the Yang di-Pertuan Agong, the Senate and the House of Representatives. Other than that, Construction Company also facing the risk of injuries to the workers. Occupational injury rates among construction workers are the highest among the major industries. While several injury control strategies have been proposed by various organisations, their effectiveness for reducing the rate of injuries in the construction industry remains uncertain. Cash flow risks also one of risk that Construction Company faced. Some company’s available cash will not be sufficient to meet its financial obligations. That is because of the any mismatch asset or quality in the constructions.

In construction site, managing the work in time is necessary to avoid any delays and for the company’s and investors good. However, employees sometimes forget to put safety first, by doing “short cut” and due to this result in accidents. Examples of common fatal accidents are falling from fragile roofs, ladders & scaffolds, being stuck by excavators, lift trucks, collapsing structures.

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Based on reported data below from Malaysia Ministry of Human Resource period 1994-2008, major accidents caused in construction held the fifth position on last 2008. Numbers of accidents finally had decreased in 2008 as its lowest number within 12 years.

Scope of Policy and Coverage in Construction Industry

For purpose of this assignment, we will touched on the two types of risks faced by construction companies, that is, third party liability claims and injuries to workers and on how the insurance policy works to minimized possible monetary loss to the company.

Third party liability claims can be in two forms, amongst others:-

Claims made by the party whom have awarded the contract to the construction company. It can be a government or private company contract. One of the conditions in the contract agreement will be that the contractor must issue a performance bond to the awarder. Performance bond, normally in the form of an insurance policy gives an undertaking to the awarder of the contract that they will pay the amount stated in the policy in the case that the contractor fails to complete the contract or breached the specifications of the contract. In Malaysia, performance bond is normally within the range of 2.5% to 5% of the contract value.

The other type of a third party claims is where claims made by a third party be it an individual or a company to the contractor due the suffering incurred by them which arise from the contract implementation, for example, damages to their property, sound pollution and also loss of earnings. There is normally no specific percentage on the coverage. However, it will be decided by the contractor base on his assumption on possibility and probability of its happening by looking at the nature of the job.

Referring to Department of Occupational Safety & Healthy Malaysian, below are Occupational Acts summary:

Factories and Machinery Act 1967.

2. Employees Social Security Act 1969.

3. Occupational Safety and Health Act 1994.

4. Occupational Safety and Health (employer’s safety and health general policy statements) (Exception) Regulations 1995.

5.  Occupational Safety and Health (control  of  industrial major accident hazards) Regulations 1996.

6.  Occupational Safety and Health (safety  and  health committee) Regulations 1996.

7.  Occupational Safety and Health (Classification, Packaging and Labeling of Hazardous  Chemicals) Regulations 1997.

8. Occupational Safety and Health (Use and Standards of Exposure of Chemicals Hazardous to Health) Regulations 2000.

9.  Occupational Safety and Health (Notification of Accident, Dangerous Occurrence, Occupational Poisoning and Occupational Disease) Regulations 2004-NADOOPOD.

Relation to current practice in Construction Industry in Malaysia

Construction industry indeed one of the highest accident occur not only Malaysia but all over the world. Construction is one of the valuable asset to our nation since it brings Malaysia through the world by the recognizance of our building such as Petronas Twin Towers which is one of the highest building in the world, Kuala Lumpur International Airport, and Formula One Sepang circuit. This construction is an important part of our economy; it helps our economy by attracting the investors to invest in our country. News reported that incidence of injuries and fatalities rates are high in Malaysia. The company may lose their valuable employees if this frequently occurs.

Employer’s responsibility to ensure the health, safety and welfare of their employee

The quote of “safety first” is a common quote that used to ensure that every employee aware of their safety while working. There are several or awareness that have been given to ensure the health, safety and welfare of their employee. This is to ensure the company will be able to complete their project on time. When one of their employees injured while performing their work, it is considered as a liability for their company causing their work in progress slowing down. The amount spending for the purpose of safety is beneficial as the consequences are the company would enjoy an effective safety than suffering with the cost. There are several current practices to reduce the risk of accident.

There are several effects that the company can get when they ensure the health, safety and welfare of their employee. This can be seen by the company can reduce the accidental cost, when they doesn’t have to pay huge amount of money to pay for their employee if accident occur at their working place. The company will enhance the image of company by showing that their company is aware of their employee’s and following the rules of (Occupational Health and Safety Assessment Series) OHSAS 18001. The company also can increase their business opportunity which can be seen when their workers are efficient to finish their project on time. Increase overall profit of project were also the benefit of ensure the safety and health of workers this can be seen when there’s no accident occur on their employee, the workers operation run smoothly and employer doesn’t have to pay more on accident and get more profit instead.

Companies can refer to the authority such as Department of Safety and Health (DOSH), National Council of Occupational Safety and Health (NCOSH), National Institute of Occupational Safety and Health (NIOSH), Construction Industry Development Board Malaysia (CIDB) and Local authority about the safeness.

Construction Industry Development Board Malaysia (CIDB)

For example like Construction Industry Development Board Malaysia (CIDB) under the government was established by Act 520 of Lembaga Pembangunan Industri Pembinaan Malaysia Act 1994 in July 1994 as a statutory body under the jurisdiction of the Ministry of Works Malaysia, with CIDB they offered a provide training for the construction companies. The board ensures the company with the responsibility of coordinating the needs and wants of the construction industry, planning the direction of the Malaysia’s construction industry, addressing the pertinent issue and problems faced by the construction industry, making recommendation in the formulation of policies for the construction industry

Department of Safety and Health (DOSH)

The board will ensure that their customer would be provided sufficient information on safety and health. Their responsibility are responsibility of administrating and enforcing related to occupational safety and health to ensure that safety, health and welfare of people at work as well as others are protected from hazards resulting from occupational activities in the various sectors which include manufacturing; mining and quarrying; construction; agriculture, forestry and fishing; utilities (gas, electricity, water and sanitary services); transport, storage and communication; wholesale and retail trades; hotels and restaurants; finance, insurance, real estate and business services; public services and statutory authorities.

National Council of Occupational Safety and Health (NCOSH)

The board was established under Section 8 of Occupational Safety and Health which is their responsibility is to

Investigate and make report and also to recommend to the Minister any matters whatsoever related to the objectives of OSHA.

To amend or make any change deem necessary for legislations of OSHA.

To improve administration and enforcement of OSH legislation.

To foster cooperative consultation relationship between management and workers with regards to OSH and well-being of workers.

To resolve any particular problems related with OSH and well-being of workers consist of women, handicapped and other group of people in the society.

To formulate adequate methods and procedures of controls at workplace for chemical industry.

To analyze statistics related to occupational fatality and injury which happen at workplace

To provide facilities for health care a workplace.

To foster development plans and public acceptance of good industrial codes of practices related to OSH.

National Institute of Occupational Safety and Health (NIOSH)

The board main vision is to be the ‘Leading Centre of Excellence’ in Occupational Safety and Health. NIOSH’s responsibility is providing training; consultation services inseminate information and conduct research and development to employees, employers and those responsible, either directly or indirectly in the field of occupational safety and health.

Example of companies following the health and safety management guidelines

Occupational Safety and Health Management System (OSH-MS) guidelines promotes a safe and healthy working environment by providing a framework that helps organizations to consistently identify and control health and safety risks, reduce the potential for accidents, aid legislative compliance, and improve overall performance.

Sime Darby Engineering Sdn Bhd, oil and gas construction industry which practiced the OSH guidelines they are fully concern on the safety health and environment. This company is certified by ISO 9001 OHSAS 18001 and others. Their main objective is to establish a safety and health committee to upgrade the level of occupational safety and health in their company. They are committed to comply with all relevant environmental, safety and health legislation, prevent pollution and accidents, minimize usage of hazardous materials, chemicals and gases, and minimize release of pollutants to air, water and land. , reduce consumption of natural resources., reduce, reuse and recycle of waste, promote environmental, safety and health awareness to all employees, clients, sub-contractors, suppliers and visitors

Sustainable Construction practices in Malaysia

Several efforts has been given to the construction industry which it lead several changes. Construction waste causes environmental problem towards Malaysia such as water pollution, environmental pollution and others. The concern toward environment has been given only less attention before this however with the increasing awareness of global environment has lead the construction to increase the protection and sustainable towards our environment. This practice may lead to the structure which will enhance our life’s quality, protect the environment and at the same time maintaining a balance between growth in economy and preserving the natural resources and ecosystem.

Problems in current practice of Malaysian Construction Industry

Malaysian construction industry depends heavily on unskilled foreign labor worker as they considered as cheap, widely available and flexible. Majority of construction industry choosing this way as this might lead to a problem such as insufficient, slow and labor intensive.

Growth of policy in Insurance Market of Construction Company

Based on daily routine of a firm activity, they might encounter numerous kind of risk on during performing their job. The risk can be predicted before it might actually happen but the firm can’t assume that all risk can be eliminated. Thus it comes to consideration of firm to have a proper way to manage their risk. There are three main insurances coverage in today’s construction industry, which are:

Contractor’s All Risk Insurance.

Contractor’s All Risk insurance is precisely designed for the purpose of managing risk against any loss and damage during the construction work takes place. This kind of insurance covers any loss related to works, construction plant and any damage arising from the construction process. It a simpler word, this type of insurance policy helps to manage against unforeseen and accidental physical loss or any damage happens to the property during the period of insurance. Contractor’s all risk Insurance is best to cover all works executed by the contractor whether it is temporary type of work or construction type of work that takes a longer period to accomplish.

The basic Contractor’s All Risk insurance gives protection coverage whether under construction period or maintenance period against:

Material damage during the work under construction

Loss and damage towards contractor’s machinery, plant and equipment.

Loss and damage on principal’s existing property.

Third party property damage or any bodily injury happens during the contract of work.

The insured parties include the principal, main contractor and the sub-contractor. Examples of types of construction project that can be insured under Contractor’s All Risk Policy are:

Civil works such as dams, power plants.

General building construction such as industrial, halls, stadiums and residential.

Towers, silos

Railway line, roads, tunnels, bridges.

Electrical equipment installation.

Other miscellaneous work.

Bonds / Insurance Guarantee.

Bonds are widely being used and almost every interaction between inter-personal and inter-corporation use it to guarantee the project accomplishment. The insurance company actually works as a middle person between the two parties because the fact that insurance companies are financial institutions. Thus interference of insurance companies in bonding businesses can generate other type of business such as Contractor’s All Risk, Public Liability and Workmen’s Compensation policies. There are few features of bonds, which are;

Once bonds are given, it can’t be cancelled until its expiry date.

Most of government project demand bonds and are worded, thus bond need to be issued by the contractors to satisfy the requirement of tender. Furthermore the demand of bond in such way enables the ability to invoke the bond by the holder without any reason and explanation. Any demand nevertheless any dispute or protest by the insurer, contractor or any third party needs to be settled by the insurer.

Workmen’s Compensation Insurance

This policy is being design to give protection for any employee insured against injury, accident or any disease caused from the employment. The employer is the one who need to pay such compensation based on the law set up in the schedule of the policy and common law.

Demand for workmen’s compensation insurance usually comes from: –

Contractors who are required to have insurance under the requirement of contract with the Principal.

Employers that are having foreign workers which are not eligible to contribute to SOCSO but because of (a) above, they usually include these workers in their insurance based on the wage roll of 15% of total contract value. The employer or their sub-contractor should also take note that they are also required to be under the provision of the Workmen’s Compensation.

Findings

Based on Interview : Risk Management on Construction Company

In this part of findings, we refer to an industrial construction company that has been involved in this industry for a long time. Ziestech Enterprise has been kindly to provide the information needed about their risk management. The company located in Kulim Kedah. Basically, they are an electrical industrial construction company that offer customer electronic and air conditioner service. The manager, Mr Arshad Bin Tasselim has been exposed to us the risk management that company has applied for the workers and business.

Ziestech Enterprise is a company that can be categorized as industrial construction. The company has been in the industry almost 10 years. Ziestech Enterprise has been humble in the industry where they have started small then eventually they had grown to become a very successful electrical industrial construction company. Based on our interview session with Mr Arshad, he explains that the company is very high skilled in electrical and wiring for the industrial construction where they have the ability to involve their business in handling heavy electrical job. Furthermore, to perform this kind of task, the company require a very special certificate such as Wireman from Suruhanjaya Tenaga Malaysia.

As an electrical construction company, Mr Arshad is aware that their company is facing a very high risk especially the workers safety. The operational task is related with electrical usage and appliances, where they might face the risk of having accident, loss, damage or injury during the construction works takes place. The industrial task is far more dangerous because the workers are exposed to a very high voltage. Mr Arshad explains more about the usage of electrical equipment that has been used in industrial works where it involves with 240V to 450V. Workers that involved in this kind of job, they will be supervised by the expertise that has been hired by the company.

Mr Arshad is very aware with the risk that their facing every working day. Ziestech Enterprise is well prepared in managing the risk and decided to buy some of the insurance policies that can reduce the level of riskiness in performing the task. Mr Arshad explains more about the loss and damage during the construction work for example damage to machinery,plant or third party damage that has been insured by Contractor’s All Risk. The company also concern about the workers that may injured and accident during performing tasks where they pay for Workmen’s Compensation to insure the employee. Risk management is very beneficial for the company and the current insurance coverage satisfy the needs for the Ziestech Enterprise.

Conclusion

Risk Management in Construction Industry can be very beneficial to the companies that are applying this because the internal organizations such as staff, supervisors, middle and senior management have a heightened awareness of risks within their work environment. In addition, risk can be identified, assessed and controlled in accordance with the legislative requirements of OHS Act. Besides that, risk management becomes a part of the organizational corporate culture. It reduces the severity of an accident results in an associated reduction in pain and suffering. Moreover, risk management also reduce in the severity and incidence of workers’ compensation claims, leading to a reduction in associated and hidden costs (such as loss of staff morale, loss productivity, etc.).

To conclude, it is a known fact that risk management is a very important tool to be applied by companies in order to ensure their survival. Both the contractor and the insurance company try their level best to reduce their own risks. Wrong judgment may be a fatal blow on the survival of the company.

Recommendation

The construction industry is a vehicle