Risk has always been inherent

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5.0 Project Risk identification and mitigation strategy

Risk has always been inherent in every human venture including construction, with its excessive risk constituents, making it one of the most challenging and dynamic industries. (Odeyinka, 1997) states that risks are defined as events that could arise and affect the critical factors of the project. Risk in a construction project is associated with three major principles, Time, Cost and Quality which has the direct influence on the project objectives. Risk management in construction projects is an important part of the management process of a contract firm. Risk management in construction is an ongoing process for identifying, evaluating and managing significant risks. Risk management approach should enable the contract firm to establish the systematic identification, quantification of all of the organization's business risks and the formulation of an effective risk management strategy to mitigate the potential loss.

In this report, a brief study on the various types of risks that arises during the construction phase is identified and the identified risks are assessed based on the severity of impact. Subsequently, responses to the risks in terms of risk mitigation strategies have been discussed in detail.

5.1 Risk Identification

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Risk Identification is a procedure where the potential risks, which could negatively affect the outcome of the project, are detected at the pre-planning phase. Risks in each construction project should be identified by the project management level through a series of expert panel discussions. Risk identification enables to prioritise the project risks in a construction project. To make sure that the project risk doesn't eat away the profit of the contract firm, it is essential for the contractor to identify the risks at the initial stages of a project and respond to it. Some of the major risks in the construction of M.Sc student centre are identified through a series of brain storming activity of the group members of this report.

5.1.1 Risk due to type of contract chosen (or) Type of procurement

The type of contract selected and the price setting of a project by a contract firm have a vital role in deciding the profitability of a business. The contractor is forced to include added mark-ups to commensurate market risks involved in different types of contracts, leading to different contract prices at the time of bidding. The decision on the bid pricing should fit into the overall strategy for growth of the contract firm, as well as the contractor's propensity to risk greater profit versus the chance of not getting a contract.

For example, in the case of a lump sum contract, client assigns all the risk to the contractor. It influences the contractor to produce a higher mark-up in order to take care of unforeseen contingencies. An overvalued estimate decreases the possibility of being a low bidder for the project. Higher the mark-up, less would be the probability of getting the job resulting in insolvency due to short of business. If the genuine cost of the project is underestimated, the underestimated cost will reduce the contractor's profit by that amount. Conversely, the tactic of bidding with very little mark-up in order to achieve high volume is also likely to lead to insolvency.

5.1.2 Tender risk

Risks are associated with checking each section of the build-up to make sure that the allowances given by the estimator are realistic. Even though the bid estimate is precise, strategic adjustments will be made in the bill of quantities. Depending upon the financial capability of the contract firm, overheads and profit will be spread among the different trade sections of the bid which can expose the contractor to risk once the contract is awarded.

5.1.3 Delay in letting contract (or) Possession:

There could be a possible danger to the contractor in terms of delayed possession of the contract by the contractor from the employer. It will result in the delay of mobilisation along with the potential financial loss to the contract firm by the amount of time it has got deferred.

5.1.4 Quantity risk

Assessment/Measurement of the quantity by the contractor at the tendering stage is essential as the mark up margins can be lost if the calculated quantities are measured wrongly or inaccurate.

5.1.5 Ineffective Sub-contracting & Supply chain management

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The success of a contract firm lies in the effective management of sub-contractor and supply chain operations during the construction phase. Sub-contractors and suppliers are vulnerable to sustain the tendering risks inherent in the tender. From the site visit report it is observed that for the development of M.Sc Student centre at Loughborough University, only a fewer number of contractors and suppliers were identified from the local region at Loughborough. It is important to mitigate this risk through an efficient flow of materials, labour and equipment through identified resources in closer proximity to the site location.

5.1.6 Technical risk

The technical risk posed due to the ineffective design, inadequate site investigation and improper specification at the tendering stage will have an impact on the operation of a project by the contract firm.

5.1.7 Risk due to construction method chosen

The choice of construction method chosen by the contract firm at the tendering stage would be very important in winning the contract. Estimator's choice of mechanisms would not be feasible once the contract is awarded. The presumed method of construction at the tendering stage will vary at the execution stage depending on the ground conditions, source of material available and local conditions.

5.1.8 Health & Safety risk

Health and safety risk arises from the impact of hazards in a construction project at a site. The construction work site is often a chaotic place with an incredibly high amount of hazards and accidents taking place. Some of the most common types of construction accidents include construction site falls, crane accidents, scaffolding accidents, fire accidents etc.

5.1.9 Force majeure or unforeseen events

Contract firm has to face risks due to unforeseen events like impact caused by nature, war, Government disputes etc. These risks are of low probability in occurrence, but if it happens it decreases the profit of the contractor tremendously.

5.1.10 Bidding Uncertainty

Competitive bidding of project is a major risk to the contract firm as it involves decision making under uncertainty. The trend in market demand largely influences the bidding decisions of a contractor, which is very much uncertain. The main objective of the contractor is to win the contract with a reasonable profit. To make the business reasonably profitable it is essential for the contractor to offer an appropriate price and not the lowest price. To ease out the uncertainty in bidding, contractors are forced to submit an "unbalanced bid" which has a greater propensity towards risk.

5.1.11 Demand risks

Demand risks play a vital role in ascertaining the business profit of the contractor. Unfavourable demand supply situations will result in the reduction of operating rates which directly influences the contractor's overall financial profile.

5.1.12 Financial risk

Construction projects cannot proceed without adequate financing, and the cost of providing adequate financing for a construction project can be risky for a contract firm. Unless an owner immediately covers the costs incurred by the contractor, contract firms face financing risks of their own.

5.1.13 Escalation/Inflation

The prices of materials are expected to rise during the construction phase of a project and the risk of changes in the economy become irregular. Escalations of material prices are very much un-predictable during the tendering stage which considerably reduces the contractor's profit at later stage of the project.

5.1.14 Liquidated Damages

Delay in the completion of a project will enforce the contractor to be liable for the compensation due to liquidated damages to the employer.

5.1.15 Environmental risks

The success of the project certainly requires the environment and the consequence of the project on the environment to be correctly assessed and modelled. The impact of the environment due to the construction of M.Sc student centre at Loughborough University can be described as follows:

a) Ground Conditions

Siteoccupies risk from sub-soil conditions and from the properties of each stratum, and the existence of ground water, faults, swallows holes. The difficulty of making clear allocation of liability for the consequences of "changed conditions" is a constant problem in construction contracts. It is essential to pre-asses the risks posed by these site conditions at the tendering stage by proper site visits.

b) Existing Services

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From the site visit it is observed that, existing services like Low Voltage (LV) cable, High Voltage (HV) cable and a gas line are located at the proposed site. It is important to either divert these lines or earthen it below the foundation. Also it is observed that the location of substation close to the proposed site could be a disturbance to the functioning of the site.

c) Physical obstructions

Site activities will gear up obstructions for the student and teaching community. Obstruction will be caused due to the transportation of the materials to the site due to the heavy vehicular movement inside the university premises.

d) Pollution

The execution of work at the proposed sites could gear up noise pollution, air pollution and health & safety issues to the student's community during the term times

e) Environmental Impact

It is required to slice down trees for the construction of the of M.Sc student centre. This will result in environmental impact issues from the environmental agencies.

5.1.16 Risks due to Schedule Constraints

a) Term Times

  • Autumn Term - 28 September 2009 - 11 December 2009
  • Spring Term : 11 January 2010 - 26 March 2010
  • Summer Term : 26 April 2010 - 18 June 2010

b) Exam times

  • January - February & May - June

c) Christmas Holidays

d) Easter Holidays

e) Extreme winter Period

It is hard to get the productivity from the labours and the sub-contractors during these constrained periods.

5.2 Risk Analysis

Risk Analysis is the process of estimating and evaluating the magnitude and probability of occurrence of the identified risk and the severity of impact. Most construction risks that are associated with construction are controllable if they are assessed properly. Loosermoore et al. (2006), examines that, it is feasible to conduct a risk analysis proficiently without any use of mathematical analysis. It is quite clear from the statement that subjective perception of the risk purely depends on the insight of the individual on the project as a whole.

5.3 Risk Response

Risk response is the final stage of the risk management process. Having identified and analysed the risks it is essential for the contract firm to respond to the risks in the following ways:

  • Transfer of Risk - Transfer the risks to the party which is best positioned to manage the risk.
  • Acceptance of Risk - Accept the risks which could not be transferred and insure it.
  • Avoidance of Risk - Avoid the risks which are unacceptable

5.4 Contingencies

Contingency levels vary greatly depending upon the risks involved in a project. The contingency of risk has to be balanced with their specific contractual, financial, operational and organizational requirements of the contract firm. Risk contingencies are employed in the tender to guarantee the return to the contractors even during the occurrence of a potential risk.

Contingency levels are often set arbitrarily by convention. Thompson & Perry (1992), examine that risk is dealt in an arbitrary way on construction projects, and that the practice of adding a 10% contingency. Taking in to account of all the possible risks for the construction of M.Sc Student centre, for which the impact of the risk is difficult to assess at this pre-construction phase, a 10% contingency of the total construction costs should be allotted at this pre-construction phase, which would cover all the costs incurred by the accepted risks i.e., the risks that cannot be transferred or the risks that cannot be avoided.

5.5 Insurance

Risks of potential impact and which has to be accepted by the contractor should be insured. It will allow the ultimate losses to get transferred to the insurer using conventional insurance risk transfer method

References:

  • ATKINSON LAW, (2001) Risk Allocation in Construction Project [online]. [Cited on 05 Jan 2010] < http://www.atkinson-law.com/cases/CasesArticles/Articles/Risk_Allocation.htm>
  • COOKE, B. (2009) Construction Planning, programming and control. 3rd edn, Sussex: Wiley-Blackwell.
  • CIVIL ENGINEER LINK, Construction Risk Management [Online]. [ cited on 03 Jan 2010]
  • BUNNI, N., 2003, risk and Insurance in Construction, 2nd edn, London: Spon Press
  • HARRIS, F., McCAFFER, R., EDUM-FOTWE, F., (2006). Modern Construction Management, Oxford: Blackwell
  • LOOSEMOORE, M., RAFTERY, J., REILLY, C., HIGGON,D., 2006. Risk Management in Projects, Abington, Oxon: Taylor & Francis.
  • MURDOCH, J.R., HUGHES, W., (2008), Construction Contracts, 5th edn, Abingdon: Taylor & Francis
  • SMITH, N.J., (1999), Managing Risk in Construction Projects, 1st edn, Oxford: Blackwell Science Ltd.
  • ODEYINKA, H., (2000), An Evaluation of the use of insurance in managing construction risks, Construction Management and Economics.