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Risks are involved in all stage of the construction project. The construction risks will arise within the contract period and it may cause the Contractors failure to keep within the cost budget, failure to complete the work within the completion date and failure to achieve the quality requirement of work (Flanagan and Norman, 1993, p.8)Â². The Contractors have the responsibilities to bear for the risks that arise during the construction period (Flanagan and Norman, 1993, p.183)Â². Once the contract has been signed, the contractors have the responsibility to perform the project either the project is continue for better or for worse until the project is completed (Sayers, 1997, p.1)Â³. Consequently, the Contractors cannot simply tender for a project without consider those risk that involved in the project. As a result of not recognized the risks, it may cause the Contractors to lose money or become bankrupt.
The risk has the capacity of eroding profit and moving the project from a profit making into a loss-making venture. A Contractor can make a profit or loss at the end of the project is depending in how accurately the risks have been assessed. Thus, the Contractors have to consider the risk factors that involved in the project in order to make a decision on whether or not to tender the project. The tender price will be influence by the risk factors. The construction risks will cause the estimated tender sum difference with the actual cost of project. Therefore, during tendering for a project, a Contractor has to consider the risks factors that may occur during the construction stage in order to ensure they have the capability to carry out the work and making a profit margin at the end of the project.
1.2 Aim and Objectives
This study aim is to understand the importance of managing the risks during tender stage. In order to achieve the aim, the following objectives are conducted to support the aim:-
To determine the construction risk that may occur within the contract period that faced by the Contractors.
To illustrate the consequence of the risk where the risks does not be managed at the tender stage.
To identify the approach of managing the risk that faced by the Contractor.
Risk are involved in the all stage of a construction project due to the construction process period are long, the process are complicated, and costly. A risk can be managed, reduced, transferred, shared, and accepted, but it cannot be ignored (Dallas, 2008, p. 5)Â¹. Moreover, the risk has an impact over the construction objectives which in term of cost, time, quality, safety and health and environmental (Flanagan and Norman, 1993, p.8)Â². Thus, before the Contractors are going to tender for a project, they have to identified all the risk that face by him to measure the impact that against by him. In order to dealing with the risks, a risk management processes are recognized as a systems process which assists the Contractors to manage the construction risks. Risk management is one of the systematic ways to manage the risk or unwanted event which influence the outcome of the project. According to Smith et al. (2006, p.2)â´, undertaken a risk management process in tender stage can assist the Contractors to minimize the impact of the risk and making a better decision over the risk. By conducted the risk management process, it can assist the Contractors have the better understanding over the risks or problem. The risks will involve in each of the tender stage. During the estimating process, the risks factors will influence the tender price. The estimators have to ensure the risks are well pricing into the tender price. Consequently, the risk management process has to be conducted in the tender stage due to the risk management process can assist to make right decision over project.
1.4 Scope of study
This study is focus on how the Malaysian private Contractor managing the risk before signed the contract for a project. The area of research is focus on Malaysian private Contractor. The scopes of this study including finding out the different type of the construction risk which may occur within the contract period and the consequence of those risk against the Contractor. A suitable approach of managing the construction must be provided in order to identify, analyze and response those risks. The questionnaire survey will conducted in order to enhance this study. This study will only focus on the group of the Malaysian private Contractor.
1.5 Research Methodology
In this research, the main research methods used to complete this research are the literature review and data collection through the questionnaire survey which among the Malaysian private Contractors. The literature reviews in this research are conducted to support the objectives of this study. The resources of the literature review are from the books, journal articles, and internet sources. In order to achieve the objectives of this study, the literature review has focusing on the potential construction risk that encountered by the private Contractor, the effect to the construction against the Contractor and the approach of managing the construction risk that are required to carry out by the Contractor.
Furthermore, the questionnaire survey will conducted among Malaysian private Contractor to enhance this study and achieve the objectives of this study. The questionnaire survey sent to the Contractor through either by hand, email and post. The main purpose of conduct the questionnaire survey is to obtain the information from the focusing groups of Malaysian private Contractors in order to investigate the construction risk that faced by them, the effect of construction risk among them and how the Contractor manage the construction risk. After the collected data from the questionnaire survey has been collected, then the collected data will be summarizing, arranging and analyzing by using the SPSS software. Moreover, a clear interpretation of the result will be conducted to support this study.
1.6 Structure of the Dissertation
This study contains of 5 chapters and each of the chapter had summarizing as follows:
Chapter 1: Introduction
This chapter highlights the main reason that the Contractors have to carry out risk management during the tender stage. The aim and objectives and background of this study has determined in this chapter.
Chapter 2: Literature Review
This chapter discussed on the potential risk that encountered by the Contractor, the consequence of construction risk against the Contractor, importance of managed risk in tender stage, and the approach of manage the risk in tender stage and construction stage.
Chapter 3: Research Methodology and Questionnaire Structuring
This chapter identified the method and material that used in this study. The research method of this study will be well interpreted in this chapter.
Chapter 4: Data Analysis
This chapter summarized, arranged and analyzed the collected data and conduct a clearly interpretation on the result of the collected data.
Chapter 5: Conclusion
This chapter summarized the outline and the finding of this study, and recommend on this study for future research.
Dallas, M. F. 2006. Value and risk management: A guide to best practice. UK: Blackwell. p.5.
Flanagan, R and Norman, G. 1993. Risk management and construction. London: Blackwell. p.8, 183.
Sayers, P. 1997. Competitive tendering, management and reality: Achieving value for money. London: E & Fn Spon. p.1.
Smith, N.J., Merna, T. and Joling, P. 1999. Managing risk in construction project. Oxford: Blackwell Science. p.2.
CHAPTER 2: LITERATURE REVIEW
2.1 Overview of various type of risks in construction project that faced by Contractors
This chapter discussed on the potential risk that may occur during the contract period. The definition of risk and the various types of the risks and its consequence over the project will be discussed on this chapter.
2.1.1 Definition of risks
Risks that involved in the construction project can be described as the probability of occur something or occur some unwanted or unfavorable event which that will has an impact over the project (Mostata Ghadak Zadeh, 2010, p.9). Flanagan and Norman (1993, p.8) emphasized that, risk is an uncertain event the may cause a construction project failure to keep within the objective of project which in term of cost, time, quality, safety and environmental sustainability. Moreover, Begum Ongel (2009) stated that, risks can be described as the unforeseen event that might be occur in the future and may have negative consequences over the project objectives. The construction risk can be described as an uncertainty or probability of occurrence of something that has an impact over the project outcome as shown as Figure 2.1.
Figure 2.1: The Concept of the risk (Source: Merna and A-Thani, 2008, p.8)
Merna and A-Thani (2008, p.13) suggested that, the risk can be described into 3 categorized:-
Known risk- The known risk can be described as the risks that happen every day on construction industry. Basically, the known risk will be the variation work and the inflation in construction resource costs. Those known risk will cause the additional work needed to be carry out and delay for the work. If the known risk has happen in the construction stage, then those work will usually covered by the contingency sum of the contract.
Known unknowns- The known unknowns are the risk event that can be predicted or foreseen. The effect of the known unknowns and their probability of occurrence will be easily to be known.
Unknown unknowns- The unknown unknowns are the risk that cannot easily be predicted. Generally, those events that cannot be easily foreseen are the force majeure event.
2.1.2 Type of risk in tender stage
According to Odeyinka et al (2006), the risk sources in the construction industry that are occur during the tender stage are including the estimating risks, design risks, tender evaluation risks and the competitive tendering risks. Moreover, Cooke and Williams (2009, p.123) mentioned that, the risk factors that require to consider by the Contractors during the tender stage are including the tender risks, quantity risks, subcontractors risks, design risks, programme schedule risks, method risks, health and safety risks, and documentation risks.
18.104.22.168 Design risks
Poor design can cause the Contractor's bid be influenced and affecting the ability to win the project. The Contractors have the responsibility for the quality of work.
22.214.171.124 Estimating error risks
During the preparation of the tender price, the estimators may estimate wrongly or make some mistake on quantities of the work. Thus, this will influence the accuracy of the tender price. According to Cooke and Williams (2009, p.123), the Contractors are require to assess the accuracy of the quantities in the bills of quantities. In case of the quantity error is done in the bills, the Contractors have to accept the error and bear for the losses after the contract award to the Contractors.
126.96.36.199 Competitive tendering risks
In traditional tender process, the tender will awarded by the lowest bidder. Many of the Contractors will try to lower down the tender price in order to winning the bid. In this case, the Contractors may not have sufficient resource to complete or carry out the work. Consequently, lose the profit margin.
188.8.131.52 Documentation risks
According to Cooke and Williams (2009, p.125), clarity of tender documentation is important. The Contractors requires referring the tender documentation such as the drawing and specification carefully in order to price accurately. Cooke and Williams (2009, p.125) stated that, the Contractors require to refer to the tender documentation very carefully in order to assess implication of onerous contract term, clauses deleted from standard contracts, high levels of liquidated damages, unrealistic contract period, possible innovation of the design and contract bonds and guarantees required.
184.108.40.206 Method risks
The Contractor's choice of construction method is one of the important decisions during the tender stage. Cooke and Williams (2009, p.125) mentioned that, the Contractor's choice of construction method can win the contract but it may cause risks over the project. One of the example is that the type of the earthwork support required may be require more expensive earthwork support to support the foundation in case of week site condition.
220.127.116.11 Subcontractors risks
18.104.22.168 Health and safety risks
2.1.3 Type of risks in construction stage
The construction risks are the risks that occur during the construction stage. According to Nafisah Binti Abdul Rahiman (2006, p.24), the construction risks are the unforeseen or unwanted events that occur within the construction period. Flanagan and Norman (1993, p.) stated that, the risk are involved in the construction project due to the construction activities process are taken long duration, complicated, influenced by environment factor and costly. According to Boussabaine and Richard (2004, p.180), the construction risks has an affect the over the cost, time and work quality of the project. During the construction stage, the Contractors have the responsibility to bear for the risk. Thus, the Contractors are requiring focusing on the construction risk that may face by them in order to reduce the effect against them. Boussabaine and Richard (2004, pp.181-184) mentioned that, the construction risks that face by the Contractors during the construction period are including the availability of resources risks, industrial disruption risks, productivity of labour and plant and machinery risks, safety and health risks, performance of subcontractor risks, poor workmanship risks, schedule programme accuracy risks, capability of the contractors risks, materials or components risks, site condition risks, unfavorable weather conditions risks, quantities of work risks, price inflation risks and etc.
22.214.171.124 Risk due to the availability of resources
The availability of material, labour and plant and machinery will influence the construction cost be increased. The price of the material, labour and plant and machinery are expensive in the condition of those resources are not readily available in the area of the construction site. It may require the extra transportation fees to deliver the material and plant and machinery to the construction site. Moreover, when the certain labour is not readily available in the area of the construction site, it may require employing them from an area where such labour is available.
126.96.36.199 Risk due to industrial disruption
The industrial disruption risk may occur due to the strike action among the labour. The strike event may occur when the labour is unwilling to follow any matter that instruct by the Contractor. In this case, the construction work will be delayed and cannot be completed within the completed date. Consequently, the Contractors suffer the losses of paying for the cost to settle down the strike event and pay the liquidated damage over the delayed work.
188.8.131.52 Risk due to the productivity of labour and plant and machinery
The productivity of labour and plant and machinery is important due to it may caused the work be delayed. The Contractors can provide the training for the labour to increase labour's productivity and provide adequate maintenance for the plant and machinery to ensure the plant and machinery operate efficiently.
184.108.40.206 Risk due to safety and health
The safety and health risk will occur due to the impact of hazards which involved in construction site. Risk of accidents is occurring during the construction period and that cause the personal injury. The Contractors are required to compensate for the labour in case of the labour are injured during carry out the construction work. The Contractor has the responsibility to ensure the construction site is safety. Consequently, the Contractors have to comply with the Occupational Safety and Health Act in order to reduce the accident risk during the construction stage.
220.127.116.11 Risk due to the subcontractor's coordination
In case of the subcontractors are fail to coordinate the work plan correctly, it can lead to work be delayed and cost be overrun. Moreover, the specialist subcontractor's work can account a high percentage of the overall capital cost. Thereby, the effect of the specialist subcontractors are fail to coordinate the work on the overall project is of a greater magnitude.
18.104.22.168 Risk due to poor workmanship
The poor workmanship can cause the quality of construction work is not meet with the standard requirement. A Contractor has the responsibilities to ensure the construction work is meet and according to the contract requirement. In case of the quality of work are not meet with the standard requirement, the Contractors may require to reconstruct the work and to rectify the work by his own cost.
22.214.171.124 Risk due to project programme accuracy
Sometime the process of the actual work will not keep within project schedule and plan. Failure on scheduling the time, unforeseen delay in material delivery, plant and labour availability will lead to cost overruns and work be delayed.
126.96.36.199 Risk due to capability of the contractors
The Contractors have to ensure he has sufficient capital and resource in order to carry out the work. The Contractors must consider the size of the project in order to ensure that he has sufficient resource to carry out the work of the project. Besides, the Contractor must ensure that the type of project is the work that he has the experience and he has performed the similar type of work in the past. This is to ensure the Contractors can carry out the project successfully.
188.8.131.52 Risk due to the materials or components
The Contractors have the responsibilities to ensure the works meet with the quality requirement. Failure in maintain the components of the work can lead to expensive maintenance cost. Thus, the Contractors have to ensure the quality of the material and be careful on selecting the material.
184.108.40.206 Risk due to differing site condition
Sometime the actual site condition may different with the expectation condition. The type of the earthwork support may require support by an expensive foundation as the ground condition of site is weak. An investigation of the site condition should be conducted in order to reduce the differing site condition risks.
220.127.116.11 Risk due to unfavorable weather conditions
Weather is an unforeseen risk during the construction period and it will cause delay of work. Moreover, the adverse weather will damage the components and element in the construction site. Thus, the Contractors should provide regular updates of weather in order to ensure the work plan can be altered due to the adverse weather condition can interrupt the work programme.
18.104.22.168 Risk due to quantities of work
The Contractors has to bear for the loss due to the quantity in the bill of quantities is not accuracy. It will cause the construction cost and time overrun if the quantity work is subsequently reduce (Cooke and Williams, 2009, p.123). Moreover, the differences between the actual and planned work will lead to cost and time be overrun.
22.214.171.124 Price inflation risks
The price inflation is means a persistent rise in the price of the construction resources such as the cost of material, transportation fees, cost of labour and cost of plant or machineries. The inflation on the price of construction resources is difficult to forecasting. During the recession, the price of resources may be increased and this may cause that the Contractors to losses a lot of money.
126.96.36.199 Design risks
The design risks are the risks that involved in a concept design or a detailed. According to Jackson (2010, p. 313), the Contractors are responsible for the design and in those cases it is critically important that design risks are given serious review and consideration in the overall risk mitigation plan. The design risks may influence the Contractor's ability to construct the project on time, within budget, and within the quality requirement. To continue with Jackson (2010, p. 314), the design risks that may faced by the Contractors are including the followings:-
Poor quality and inadequate of the design drawing or specifications
The information and detail of drawing and specification that needed to construct the construction works are not completed, inaccurate, or unavailable. The Contractors are require to obtain the drawing or information from the Architect, thus, delay on work be occurred.
Noncompliance with the design standard
The design of the project does not meet with the standard requirement, building code or the other regulations. In case of the Contractors are build according to the design the not meet with the standard requirement, building code or the other regulations, it may cause the Contractors fail to keep within the quality of the works.
Changes in design standard or regulation requirement
The regulatory requirement in place at the commencing of the project may change during construction stage.
Variation on design
The Client changes the design during the construction stage. The contractors are require extra time carry out the variation work, thus, delay on time.
Inaccuracies associated with supplemental design information.
The information of the soil report, environmental report and etc that provide by the Architect to the Contractors is not accurate.
Latent design defects affecting Contractor's warranty
Defective design details that result in flawed construction after occupancy of the facility such as a roof flashing leaks because of poor design.
Jackson (2010, p.314) stated that, The Contractors are require to do some background investigation about the Architect and Engineer before tender the project which in case of the Contractors not familiar with the Architect or the Engineer who designed the project. This is to ensure that the quality of works that the Architect or Engineer produces in order to reduce the design risks.
188.8.131.52 Political risks
According to Jackson (2010, p.317), the political risks can be described as third-party risks which the Contractors are usually have least amount of control over it. Although the Contractors are aware that the political risks are exist, but there is no ways to accurately predict how various jurisdictions and agencies will act. Contractors are required try to anticipate the political risks that may affect the ability to fulfill the expected contract requirement before submit a bid. According to Jackson (2010, p.317), the political that involved in the construction project are including the followings:-
Changes in law
Change in sales tax or other tax structures that increase in sales or use taxes will impact material costs
Constraints on the accessibility and employment of expatriate staff
184.108.40.206 Environmental risks
Environmental risk is an important issue that the Contractors are requires to concerns due to it may influence the cost and time of the construction project. The material and chemicals that used at the construction project may cause the pollution over the surrounding area. Moreover, the environmental risks are the risks that the Contractors have less control over it. According to Jackson (2010, p. 319), the environmental issues that can influence Contractor's budget and schedule planning which are including the followings:-
Environmental permits and approvals
The environmental permits and approval are cannot be getting on the planned time due to the environmental permits and approvals are delayed or require more time to negotiate than expected.
Hazardous materials or site contamination
The unknown hazardous materials or site contaminates be found after the construction work has commenced.
The unknown artifacts are founded or an unknown burial site or cemetery is unearthed during the construction period, that may requiring the construction work to stop.
The project has known or unknown endangered species sightings that will require protection and special care during construction.
Wetlands, coastal protection or flood plain issues
Wetlands, coastlines or flood plain are require the special protection, thus can influence the construction approach.
According to Osborn and Schreyer (1988, p.1), before the construction project commencing, the Contractors are require to appreciate the potential for additional costs due to the existence of hazardous substances and other environment concerns.
220.127.116.11 Financial risks
According to Jackson (2010, p.317), the financial risks can be described as the risks that associated with the Contractor's own financial position. The Contractors are required to maintain sufficient working during project execution, thus the financial standing of the Contractors are require be good. The financing risks that faced by the Contractors are including the followings:-
Contractor's cash flow
In case of the Contractors have insufficient of the credit can cause delays in supplying the material, late payment to subcontractor. It may cause the construction work be delayed and the subcontractor not willing to carry out the work.
Interest rate increases
In case of the borrowing money from bank by the Contractors to fund the project, once the interest rate is increased it would have an adverse effect on the project.
Insufficient Client funds
If the Clients is unable to make payment on time to the Contractors, then it will causing the Contractors do not have sufficient cash flow to fund the project.
Subcontractor or supplier bankruptcy
In case of the bankruptcy of the subcontractors or suppliers, the Contractors are requiring to hire another subcontractors or suppliers to take over the job. Thus, it may cause delays, cost overruns for the project.
2.2 The importance of managing risk in tender stage
This chapter discussed the various reasons for the Contractor to managing the risk in the early stage of the project which at the tender stage and the consequences of the risks that against the Contractors.
2.2.1 Why should the risk be managed at the tender stage
According to Boyce (2003, p.6), during the tender stage, a risk management should be undertaken in order to look at the potential problem on preparing an attractive bid on time, to winning the project, and to consider whether or not the project can be completed successfully. By providing the risk management process during the tender stage, the potential risk and problem can be identified and forecasted. Thus, a mitigation risk plan can be conducted to avoid and reduce arise during the construction stage.
A risk management process has to provide at the tender stage which when there is still has a possibility for fundamental changes of any decision (Anna Klemetti, 2006, p.24). To tender for a contract will costs a lot of money and therefore the Contractors cannot simply accept to bid a contract without consider of any risk factors and profit potential in the project (Cooke and Williams, 2004). Boussabaine and Richard (2004, p. 181) emphasized that, the Contractors has to bears and take on the risk that occur during the construction stage. Thus, this is important for the Contractors to aware of all the construction risks that faced by him before the contract is being signed.
The main objectives of the construction project will likely to be influence by the construction risk (Smith et al., 2006, p.2). The risks will cause the Contractors failure to keep within the cost budget, failure to complete the work within the completion date and failure to achieve the quality requirement of work (Flanagan and Norman, 1993, p.8).As a result of this, the Contractors need to recognize the risk involved in the project and manage the risks at tender stage in order to ensure the objectives of the project are achieved over the contract period.
Moreover, the Contractors have to make the right decision on whether or not to tender the project. Once the contract was signed, the Contractors have to bear for all risk that involved the project until the project is completed (Sayers, 1997, p.1). The Contractors will face two risks during they tender for the project which are the risk of losing the project and the risk of winning the project (Boyce, 2003, p.9). Once the Contractors have winning the project, the Contractors have started to perform the contract. In case of awarded a project that is difficult to be completed or managed, it may cause the Contractors suffer for losing their financial or reputation (Boyce, 2003, p.9). According to Smith et al. (2006, p.94), the risk management process can help the Contractors to concern on the decision of to or not to bid for the project. Consequently, the decision that make by the Contractors are very important due to the risks may cause the Contractors to lose money or become bankrupt.
During preparation of the tender price, the risk will influence the accuracy of the tender sum. The estimating risk can cause the Contractors to lose money or become bankrupt in case of the tender price was pricing wrong. The risk has the capacity of eroding profit and moving the project from a profit making into a loss-making venture. A Contractor can make a profit or loss at the end of the project is depending in how accurately the risks have been assessed.
Smith et al. (2006, p.2) mentioned that, the risk management provides a better reviewing, understood, consideration over the project issues. To continues with Smith et al. (2006, p.94), a lack of understanding the risk may cause the Contractors pricing the tender price wrongly and as a result of this the additional cost will required to pay by the Contractors.
Smith et al. (2006, p.193) suggested that, the risk management is used in the project due to it provide the following benefits:-
To assist Contractors to aware of the risk that involved in the project and impact of the risks. Thus, the Contractors can focus on minimizing the risk or try to allocate risks to the other parties.
To assist the Contractors to provide better decision over the potential risks or problem.
To provides a better understanding of the risks or problem.
To provide a better understanding over the project detail. This may assists Contractors to provide the realistic plan in term of programme schedule and cost estimate.
To gives knowledge of the risk in projects. This may allow assessment of contingencies that actually reflect the risks and also tend to discourage the acceptance of financially unsound project.
To provide the better management over the major risks that involved in the project.
According to Burtonshaw-Gunn (2009, p.21), the risk management can assist the Contractor on the following:-
To plan and taken necessary action to reduce the risk before the risk has been occur and assist the Contractors to dealing with the potential problem that involved in the project.
To monitoring the potential impact of risks by reviewing the action plan, and provide and manage adequate financial and schedule contingencies for risks.
Furthermore, the risks will influence the tender price. A risk management has to be conducted in tender stage in order to ensure the tender price is pricing correctly. The risk factors should be considered by the estimators during preparation of the tender price. A risk analysis has to be conducted in order to help the estimators to pricing for the risk and adding the contingences allowance or increase the profit margin to cover the risks. Through the risk management process, the estimators can reviewing the risk factors and pricing the risk included into the tender price and therefore reduce the negative consequence of risk that faced by the Contractors.
2.2.2 The consequence of construction risk against Contractor
The construction projects are risky and the risks have negative consequences on the project. Burtonshaw-Gunn (2009, pp.11-12) stated that, by ignoring the construction risks will cause the construction cost overrun, work be delayed and failure to achieve the quality of the work. To continue with Burtonshaw-Gunn (2009, p.12), the consequences of the risks over a project may also cause the Contractors to loss of reputation, Client tend to terminate the contract with the Contractors and cause the personal or organization liability. Flanagan and Norman (1993, p. 49) mentioned that, the construction risk has a consequence over the project which including the follows:-
Fail to keep within the construction cost,
Fail to complete work within the completion date,
Fail to achieve the quality of work or not meet with the contract requirement,
Damage to the property or injury to a labour.
18.104.22.168 Fail to keep within the construction cost
The risk has the capacity of eroding profit and moving the project from a profit making into a loss-making venture. Consequently, the Contractors will lose a lot of money and profit margin at the end of the project. In case of the Contractors have no sufficient financial capitals or resources to carry out the work, it may cause the Contractors fail to keep within the contract cost budget. Moreover, the tender price will influence by the risks factor. The risks such as the market condition risks, design risks, quality risks will cause the cost be increased. Smith et al. (2006, p.94) emphasized that, a lack of understanding the risk may cause the estimator pricing the tender price wrongly. According to Andrew and Raden Kusomo (2004), the tender cost will different with the actual cost of the project. The differences of the tender cost with the actual cost have cause the Contractors suffer for the pay additional cost for the project.
22.214.171.124 Fail to complete work within the completion date
The risks that occur during the construction process will cause the construction work be delayed. According to Flanagan and Norman (1993, p.183), when the work is delayed and cannot be completed at the completion date, the Contractors have to pay for the liquidated damage to the client. There are many of the risks will cause the work be delayed which including the risks of performance of subcontractor, labour and equipment, adverse weather. For the adverse weather which occur during the construction period, will damage the components and element in the construction site.
The Contractors have the responsibility to complete the contract within the specified date. Boyce (2003, p.79) mentioned that, delay on the work can be cause the additional costs, payment be delayed, negative cash flow and affect the operation and the Client will tend to suspending the payment to Contractors and terminate the contract with the Contractor. If the Contractors fail to complete the contract on time, the Client can terminate the contract with the Contractor. The Contractors need to compensate liquidate damage to the Client for his financial loss suffered if the work cannot be completed on time.
126.96.36.199 Failure to keep within the quality of work
The risks that influences the quality of work is included the poor workmanship and the type of the material be used. Those risks will influence the quality of the work be not meet with the standard requirement. The Contractors have the responsibility to ensure the quality of the work is meet with the standard requirement. In case of the work are found be not meet with the requirement, the Contractors will require to pay for the extra cost to rectify the work by his own cost.
2.3 The approaches of managing the construction risk
This chapter discussed on the methods of managing the construction risk that faced by the Contractor. A simplest approach of risk management system has been discussed in this chapter in order to assist the Contractor to manage the risk during tender stage.
2.3.1 Risk management
Risk management can be described as a process of dealing with the uncertainty and trying to achieve the best outcome for a project. Brook (2008), risk management is the process which carries out to identify, analyze, plan, manage and reduce the project risk. Risk management is the systematic way which conducted to control and reduce the risk. Mostafe Ghadak Zadeh (2010) mentioned that, risk management is the system which provided to identify the risk of a project and taken necessary action to manage the risk. Ainon Basar et al. (2011, p.13) described risk management as a activities that conducted to identify, evaluate and analyze the loss exposures and managing the risk by selecting the most effective technique to reduce their impact. Consequently, the risk management can assist the Contractors to managing and reducing the effect of the risks during the tender stage.
2.3.2 Risk management process
A simplest approach of risk management system processes can be used by the Contractors in order to manage the risk during the tender stage. Kajsa Simu (2006, p.23) stated that, the simplest approach of risk management system processes are consist of the risk identification, risk evaluation, and risk response as shown in the Figure 2.2.
Figure 2.2: Simplest approach to risk management system. (Source: Kajsa Simu, 2006, p.23)
188.8.131.52 Risk Identification
Begum Ongel (2009, p.18) stated that, risk identification can be described as a process of identifying or determining the potential risk which may occur on the project. The risk identification is the process to list out the source and type of the risks that involved in the project (Flanagan and Norman, 1993, p.46).
Flanagan and Norman, (1993, p.47) suggested that, when undertaking the risk identification process the source of risk and effect of risk has to identified. By deciding the effect of the risks, the question of dependence between the variables has to be considered which are shown in the Figure 2.3.
Figure 2.3: Risk identification process (Source: Flanagan and Norman, 1993, p.47)
After the source of risk has been identified, the next step is to identify the consequences of the risks. Fewings (2000, p.196) stated that, by identify the consequences of the risk will has the benefit on making decision on how the risk be response. The consequences of the risks can be categorized into controllable or uncontrollable (Flanagan and Norman, 1993, p.49). The controllable risks are described as the risks that are able to managed and controlled. For the risks of defective of material, lack of coordination between client and Contractors, design discrepancies, and delay in getting the require document can be consider as the controllable risk. Moreover, the uncontrollable risks are the risks that are unable to be managed such as an unfavorable weather and unforeseen circumstances (Flanagan and Norman, 1993, p.49).
Risk analysis process is the process to analyze those risks which has been identified in the risk identification stage. Smith et al (2006, p.46) emphasized that, the risk analysis process is important due to it can assist the Contractors to has better understanding and awareness on the impact of risks. The risk analysis is the process of evaluating the risk impact over the project. By carrying out the risk analysis process, the impact of the risk can be analyzed and categorized into acceptable level and unacceptable level. For those acceptable risks, the Contractor will accept it due to it does not have much impact over the project or the Contractors are able to manage the risks. On the other hand, the risks that are under unacceptable level, the Contractors have to transfer to the other party or has bear for the risk by themselves. By carrying out the risks analysis, the risks can be well responded and managed.
184.108.40.206 Risk Response
According to Begum Ongel (2009), the risk response is the process of manage the risk either to transfer to another party or to remaining it. Risk response processes are categories into risk retention, risk reduction, risk transfer and risk avoidance which as shown in Figure 2.4.
Figure 2.4: Risk Responses (Source: Flanagan and Norman, 1993, p.61)
According to Flanagan and Norman (1993, pp. 62-65), the risk response can be categories into:-
Risk retention- The risk retention is mean that the Contractor has decided to take on the risk or accept the risks. The Contractor will retained the risk due to he is able to manage the risk, unable to transfer the risk to another party or unable to avoid the risk. Moreover, if the risk is under the acceptable level, then the Contractor can accept the risk.
Risk transfer- The risk transfer means that the Contractor has shifting the risk to another party. The Contractor can transfer the risk to the subcontractor or insurer. Thus, a risk premium will be charged by the party who take on the risk. By transfer the risk to the subcontractor, the Contractor will require to include an allowance in sub-contractor's price to cover the risk transferred to him.
Risk reduction- Risk reduction means that when the Contractor is deciding to take on the risk, the measure should be adopted to reduce the impact of the risk. One of the ways of risk reduction is to share risks with other parties such as joint venture with other Contractor.
Risk avoidance- Risk removal means that to remove the activity that encounter by the risk. If the level of the risk under an unacceptable level, the Contractor should deal with it by remove the activity with which the risk is associated.
2.4 Method to manage the risks in tender stage
According to Boyce (2003, p.6), during the tender stage, a risk management should be undertaken in order to look at the potential problem on preparing an attractive bid on time and to winning the project, and to consider whether or not the project can be completed successfully. The risk management should be conducted in the different stage of tender stage in order to ensure the risk can be well managed. The risk should be well managed from the stage of invitation to tender, preparation of tender, tender adjudication, and after award the contract.
During the Contractors are invited to bid for a project, the Contractors should first to consider to bid or not to bid for the project by conducted an initial view over the risks that involved the project. Moreover, during the preparation of tender, the risk analysis should be conducted in order to ensure the tender price be priced accuracy and cover the risks. The tender adjudication can be considered as an important stage to decide whether to submit or not to submit the bid. Once the contract is award to the Contractor, the Contractor has to conduct the project risk management in order to avoid and reduce the risk be occurred.
2.4.1 Managing risks during the stage of invitation to tender
According to Boyce (2003, p. 9), bidding for a contract consist of the risks of losing the competition and risks of winning the contract. By losing the contract, the Contractors were wasting time and money to bid for the contract. By winning the contract, the Contractors need to perform the contract and bear for the risks. In case of winning a project that is difficult to complete than expected, the Contractor's finances and the reputation will be suffered. Consequently, before the Contractors decide to prepare the bid for the project, the Contractors need to consider the risk factors to ensure not to wasting time and money to tender for a risky project.
220.127.116.11 Making decision of to bid or not to bid
Once the Contractors are invited to tender for a project, the Contractors have to consider whether or not to bid the project by reviewing the risk factors. According to Boyce (2003, p. 13), in order to making decision on whether or not to bid for the project, the Contractors can review the risks factors to making the decision which including the followings:-
Competitor risks- How do the competitor's product compare with the Contractors? How do the competitor's price compare with the Contractors?
Requirement risks- How complex is the project? Are the Contractors familiar with the type of project?
Bidding resources risks- Do the Contractors have team people available to carry out the bid? Have the Contractors got the sufficient money to bid for the project?
Partners risks- Do the Contractors want to bid in a team? Can team members defect to the opposition?
Subcontractor risks- Do the Contractors need the Subcontractors? Are the subcontractor single source? Do the Contractors have time to get and negotiate formal proposals?
Prime contract award risks- what validity must the Contractors offer? How does this fit in with the Contractor's long term resource plan?
Prime contract risks- Can the Contractors reject or comment on the team and conditions? What are the risks do the Contractors contain?
To continue with Cooke and Williams (2009, pp. 194-197), the Contractors can consider the following point in order to decide to accept the tender or to reject the tender:-
Type and size of project risks- Is it the type of the project with which the Contractor has experience? Is the Contractor able to carrying out the work? Is the contract too big for the Contractor to undertaken?
Location risk- Does the location of the site is proximity to office? Is the location of the site is located at the Contractor's trading area? Is the location of the site causing any problem on delivery of material and the availability of labour?
Availability of resource risks- Does the Contractor has the sufficient financial resources to undertake the project? Does the site management term, consultant and subcontractor are available and is sufficient in order to help the Contractor to carry out the work?
Working Capital risks- Is the Contractor has the sufficient working capital in order to fund the project?
Tender documentation risks- Is there any quantity risk placed on the Contractor?
Market factor risks- What are the market condition in relation to the availability of work? What is the current level of bank interest rates? How is the current government policy and will it affect the project?
Term and condition of contract risks- What are the payment conditions, insurances requirement and the standard form of contract used in the project?
Tender period risks- Does the Contractors have sufficient time to carry out the work?
Degree of competition risks- How many Contractors are invited to tender for the project?
Furthermore, Hillebeandt (2000, p. 162) suggested that, in deciding to bid for the project, the most important factors that are required considering by the Contractors for the decision whether to or not to tender the project are including the follows:-
The need for work
The number of competitors tendering
Contractor's experience in such project
Project type and size
Type of contract
Past profit in similar project
Risk involved owing to the nature of the work
Availability of resource
After the risk factors were identified, the risk assessment process should to conducted in order to consider whether to or not to bid for the project. The Contractors should conduct a risk assessment to analyze each risk factor and determining whether the risks are under acceptable level or unacceptable level. According to Jackson (2010, p.311), the Contractors can scale the risk by rating for the risk into the acceptable or unacceptable level.
Jackson (2010, p.311) suggested that, after the Contractors analyze the risk, he can start to decide whether or not accept the project by making decision on the following points:-
Contractors to reject the project due to the risk are unacceptable.
Contractors to accept the project but increases the profit margin and add contingencies sum to the tender price to cover the risks during preparation of tender price.
Contractors to accept the project but transfer the risk to subcontractor but require to adding an allowance in subcontractor's price to cover the risk transferred to him.
If the risk factors are under acceptable level, the Contractors can accept the work but the Contractors has to allow the risk included into the tender price by increasing the profit margin and adding the contingencies sum to the tender price or to transfer the risk to the subcontractors. Moreover, if the project consists of many unacceptable risks then the Contractors should not to bid for the project.
2.4.2 Managing risks during the stage of preparation of tender
The risks have the capacity to influence the accuracy of the tender price. In preparation for the tender price, the Contractors require to forecast the risks that may occur within the contract period in order to price the risks include in the tender sum. Andrew and Raden Kusomo (2004) suggested that, the risk identification and assessment process must be taken in the process of estimating the tender price. This is to ensure the contingency allowances are included in the tender price. Moreover, Pilcher (1992, p.255) mentioned that, the Contractors have to make an allowances during preparing the tender to cover the risk.
18.104.22.168 Forecasting the risks
During preparation for the tender price, estimators require to forecast the risks in order to price the risk include in the tender sum. Hillebrandt (2000, p.161) stated that, the Contractors are require to forecast the expected change in prices over the life of the contract. In the cost estimating process, the estimators have to provide a detailed analysis of cost. According to Akintoye and Skitmore (1990, p.3), the risks factors that influence the tender price are including market condition, availability of materials and labour, transportation fees, location of site, site condition, ground condition, size of project, and storey height of project. Moreover, Cooke and Williams (2009) mentioned that, the site condition will influence the tender price in the following factors:-
Existing building on site- The site condition may different with the condition that expected in the contract. Thus, the additional cost are required due to increasing of site demolition works.
Ground conditions, site topography and groundwater level- The accuracy of the tender price will influence by the ground conditions, site topography and groundwater levels. If the ground condition of site is very week, then it may require an expensive foundation than the expected to support the building. Moreover, if site contain of any contamination then it will require the site emendation therefore the cost of site clearance will be more expensive. The topography of site means that either the site is flat or sloping or concise of bushes and trees. Generally, the site clearance for the sloping site will be more expensive then the flat site. An estimator needs to follow the actual site condition to pricing for the tender.
Site access- The access roads of the site will influence the movement of the plant and equipment to site. In case of the access road of site is not convenience, it will require more transportation fees to deliver the material or the plant and equipment to the site.
Distance to local tips for the disposal of material- The location of the site will influence the fees of depositing the material. If the distance of site is too far with the local tips then the fees will be increase.
Availability of existing site services- The tender price will also be influence by the existing services. The Contractor need to ensure that the site is serving for water, electricity supply and the drainage and sewerage work is around the site. Therefore, the estimator needs to consider that site services in order to price the tender.
22.214.171.124 Collection of information
During preparing a tender, the estimators are requiring to collect the information in order to pricing for the tender correctly. According to Ashworth (2008, p.318), the estimators need to get the information by including the followings:-
Visiting to the site- The estimators are require to visiting to the site in order to pricing according to the actual condition. The information that can be getting during the site visiting are including the topography of the site, ground conditions of site, the availability of existing services pipes, the need for temporary roads and any site access difficulties, the needs of the security such as fencing the site perimeter, hoardings, securing guards, nature and use if any adjacent building, the need of the demolition work, site accommodation and material storage locations, the availability of labour and materials, and the special difficulties such as the restrictions that might be imposed, for example, on the use of tower cranes and other similar mechanical plant.
Visiting to the Consultants offices- In order to collect the sufficient information to prepare the estimation, the estimator has to visit to the office of the different consultants in order to discuss the detail of the project and get more information for preparing the tender.
Receipt of quotation and examinations,
Meeting with the contract manager- This is to determine a preliminary programme, construction methods and plant requirement
126.96.36.199 Analysis for the risks
After the risks were identified, those risks should be well analyzed in order to provide a plan to manage the risks. According to Boyce (2003, p.19), the risk analysis should be conducted during preparation the tender in order to allow the allowances made in the price to cover the potential project risks. Lock (2004, p.108) mentioned that, the risk can be classifying into the different categories which including into the followings:-
Risks that occurred during commencing of the project
Risks that occurred during the execution of the project
Risks that can affect the final stage of a project
Risk that can occur at any time in the project.
The types of the risk also require to be analyzed in order to pricing for the risk and avoid the risk. Boyce (2003, p.20) suggested that, the risk can be categorized into the follows:-
Risks that are able to be passed to the Client under the contract
Risks that are able to be passed to the Subcontractors under the term of purchase order and subcontract
Risks that are able to be covered by the insurance
Risks that that will be taken by the Contractors but for should have feasible plans be existed in order to avoid the risks if such risks are arising
For the remained risks that excluded in above table, a risk analysis of the impact of the risks and the probability of the risks should be carried out in order to pricing for the risks into the contract sum. The analysis of the impact and probability of the risks should be carried out in order to assist in pricing the risk into the tender sum correctly.
According to Westland (2006, p.81), the impact of the risks can be categorized into the followings:-
Risks that have insignificant impact over the project.
Risks that have minor impact over the project.
Risks that have measureable impact over the project.
Risks that have significant impact over the project.
Risks that have major impact over the project.
Table 2.1: The category of the impact of risk (Source: Westland, 2006, p.81)
According to Westland (2006, p.81), the probability of the risks can be categorized into the followings:-
Risks that are highly unlikely to occur based on current information, as the circumstances likely to trigger the risks are also unlike to occur.
Risks that are unlikely to occur. However needs to be monitored as certain circumstances could result in the risks becoming more likely to occur during the project.
Risks that are likely to occur as it is clear that risks may eventuate.
Risks that are very likely to occur, based on the circumstances of the projects.
Risk that are highly likely to occur as the circumstances that will cause the risks to eventuate are also very likely to eventuate.
Table 2.2: The category of the probability of risk (Source: Westland, 2006, p.81)
188.8.131.52Pricing for risks
After analyzed the impact and the probability of the risk, the next stage is to pricing the risk into the tender sum. According to Boyce (2003, p.21), by reviewing the impact and the probability of the risks the risk can be priced into the tender sum.
Level of impact
Level of probability
Ignore the risks in pricing, but plan to avoid the risks if it arises or deciding not to bid the contract.
Ignore the risks in pricing but keep the risk under constant review in risk management to ensure it does not arise.
Demand a provision in the price, but if the impact is very low, it is unlikely to be noticeable in the swings and roundabouts of contract performance.
Not have a pricing provision made for the risks.
Table 2.2: The category of the probability of risk (Source: Boyce, 2003, p.21)
According to Boyce (2003, p.21), for the high impact and high probability risks, that need to be ignored in pricing because of it have the impact is high and having a notional value. Therefore, there is no purpose in including a 5% or 10% of contingency to the tender price. The high impact and high probability risks should well planned and avoided if it arises or be not to bid for the contract at all. Moreover, for the high impact and low probability risks, it can be ignored due to the risks is not expected to arise. But such risks should keep under constant review in risk management during the construction stage in order to ensure such risks not to occur. Furthermore, the high probability and low impact risks should include a contingency provision in the tender price. But in case of the risks having a low impact over the project, it is no need to include into the tender price. For the low impact and low probability risks, that needs not to have a pricing provision made for such risks.
184.108.40.206 Risk mitigation plan
For the risk that cannot be priced in the tender sum or including the contingency provision to cover the risk, the risk mitigation plan should be conducted to plan to reduce and avoid the risk be arise. Thought the risk mitigation plan, the Contractors can to transfer the risk to others, share the risk with another party to minimize the exposure and taking necessary action against the risk.
During the tender stage, the Contractor should well analyze for all risk in order to decide on how the risk can be managed. The Contractors can try to transfer the risk to subcontractor or client. By transfer the risk to the subcontractor, the Contractor will require to add on an additional allowance in subcontractor's price in order to cover the risk that transferred to him. In the case of the risk is excluded from the Contractor's contractual responsibilities or the unforeseeable risk such as force majeure event, the Contractors can claim from the client (Brook, 2004, p. 237). If the risks are unable to transfer to the subcontractor or client, the Contractor will require taking on the risks. Moreover, if the risks are under the acceptable level, then the Contractor will accept the risks. However, the Contractor has to reduce the impact of the risk by remove the activity in the situation of the level of the risk under an unacceptable level (Brook, 2004, p. 237).
According to Jackson (2010, pp.322-323), a risk mitigation plan can include the followings:-
The Contractors can choose to not to take the project in case of the project are too risky and difficult to completed successfully. For the high impact and high probability risks, the Contractors can choose to not to take the project or provide risk prevention action to reduce the impact of the risk over the project.
The risk transfer is to shifting the risk to another party such as subcontractor and client. Jackson (2010, p.323) stated that, the Contractors can choose to subcontracting work to the specialist contractors who have expertise on the work to undertaking the plumbing, electrical, curtain wall and etc in order to reduce the risk.
Some of the risk can be transferred to another party on payment of a fee or premium through covered by the insurance. The Contractors can pays the insurance company a premium to cover the risks. The Contractor's all risk insurance cover can provide protection during the works until the project is completed. The insurance can cover the project work progress against fire, storm damage, theft and malicious damage.
The risk sharing is to sharing the risk exposure with other parties. This is usually when a Contractor is partners with another contractor in a joint venture. According to Lock (2004, p.114), in case of the project consist of high risk, then the Contractors can look for one or more external partners to undertake the work as a joint venture. Risk sharing can reduce the impact of failure on the individual company in the partnership.
The risks that have impact is not likely to be serious effect over the project and the Contractors have the ability to control over such risks, then such risk can be accepted by the Contractors. In case of the risk is cannot be pass to the other party, the Contractors may require to take on the risk.
According to Lock (2004, p.114), the contract can having some sort of escape clause which give the Contractors opportunity to pull out of the contract or levy extra charges on the client if the unplanned even happen that is not the Contractor's fault. An example of the risk limitation is that the provisional sums in the cost estimates.
2.4.3 Managing risks during the stage of Tender Adjudication
Boyce (2003, p.24) emphasized that, once the bid is completed, a risk review should be conducted before submit the bid in order to decide whether to or not to submit the tender and ensure that all risks has been identified, analyzed and mitigation plan have been conducted.
220.127.116.11 Final risk review
During the tender adjudication stage, the Contractors require conduct the final risk review before the tender is submitted to ensure that all part of works is done in correctly. The risk review should be considering the financial, other implication that any business would need to assess and check for the submission tender. This is important to check the submission tender to ensure allowance given by the estimator are realistic and