Risk Management in Construction Projects

5089 words (20 pages) Essay in Construction

23/09/19 Construction Reference this

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Abstract

The construction procedure is inherently susceptible to to risks. Risk management is a crucial and essential part of project management on virtually all construction projects. Risk analysis is one of the core components of risk management that enables professionals to quantify and analyze risks that may pose potential threats to project performance in terms of cost, quality, safety, and time. This research was conducted to identify, and analyses risks associated with the redevelopment of London Bridge Station. A questionnaire was conducted to collect data. Risks affecting bridge construction project performance were identified through interviews conducted with engineers and managers involved with various construction projects. This research aims to investigate and analyze three main areas of the pre-construction stage of the project: the main processes, the risk record and the performance improvement. The objectives were to describe the main processes and the flow activities in each process, analyze the risk register of the main processes and argue the progress of the performance according to two issues: offsite construction and quality management. The results of this paper can help engineers, cost control managers, and project managers evaluate risks on their projects and avoid delays and cost overruns.


Introduction

The biggest redevelopment of its kind in Western Europe, London Bridge has been crucial to Network Rail’s Thameslink Programme that will transform north-south travel through London. The project has created two-thirds more space for passengers, enabling almost twice as many passengers to use Britain’s fourth busiest station every day. A redevelopment of this size has provided several construction and civil engineering challenges.

as an important infrastructure upgrade it also came with unmovable deadlines – which have been met on time. The ability to meet those challenges has been due to a complex staging process and management of the risks surrounding design and construction.

The identification of the difficulties and obstacles allows management to be clear and concise about the challenges encountered by the ERM program. Corrective actions can then be put into place to reduce their undesirable effect. Additionally, the drivers and obstacles revealed in this treatise can be used as a base for future research on ERM in construction firms. Hence, this study contributes heavily to global knowledge relating to ERM and allows management to overcome the challenges posed by the significant obstacles. This paper will discuss the drivers for ERM and obstacles affecting the adoption or implementation of ERM identified by literature. Some advocated solutions to the obstacles of ERM implementation are also suggested followed by methodological approach adopted and discussions of the findings and implications of the study. The final section concludes the study.

Background

The purpose of this thesis is to present an enterprise risk management analysis for the renovation of London Bridge station quarter and suggesting a treatment plan for different risks.

The following research questions was designed in order to fulfil the requirements of the thesis purpose Research Question

 (1): How to identify, assess, and treat risks according to enterprise risk management framework?

 (2): What are the suggestions for treating different risks to avoid failure?

Ultimately the goal of this thesis is to establish a clear and concise understanding of ERM in a general theoretical framework.

Suggest treatment plan for three (3) risks of (Severe, Medium, and high impacts) as an example of how to treat risks in hand for the redevelopment project.

Literature Review

There are studies that have reported the drivers for and obstacles affecting the implementation of ERM in numerous industries, including the Construction. This study shows thirty-one quantitative and mixed method approaches were reviewed and relevant for this study.

Table 2:

Authors, Year

Objective

Methods

Liebenberg & Hoyt (2003)

To identify the critical determinants of ERM adoption

Questionnaire, statistical analysis

Manab et al., (2010)

To measure the extent to which specific firms have implemented ERM programs 

Questionnaire

Wu & Olson (2009)

To explain the value of business scorecards to monitor organisational performance with respect to ERM.

Review of literature

Beasley et al., (2008)

To examines equity market reactions to announcements of appointments of senior executive officers overseeing the ERM processes

Questionnaire, regression analysis

Pagach & Warr (2011)

To identify parameters that can explain variation in the “ERM mix” adopted by firms.

Interviews

Gordon et al., (2009)

 To examine the relationship between Enterprise Risk Management (ERM) information content and firm performance

Reviewed drivers for ERM

Kleffner et al., (2003)

To determine the effect of ERM on business performance 

Questionnaire

KPMG (2010)

To investigate the critical drivers for ERM implementation

Questionnaire

Liu et al., (2011)

To investigate the influence of the drivers in the key areas of activities of an ERM program.

statistical analysis

Muralidhar (2010)

To identify significant factors driven by ERM movement.

Questionnaire

Narvaez (2011)

To identify the critical drivers for enterprise risk management (ERM) implementation

Questionnaire survey

Nocco & Stulz (2006)

To determine the drivers for ERM program

Questionnaire survey

Segal (2001)

To understand the link between the ERM implementation drivers with the RM practices

Interviews

Jablonowski (2001)

To develop an ERM framework for construction firms

Review of Literature

Table 2: Obstacles to ERM-literature review

Authors, Year

Objective

Methods

Merkley (2001)

To explore the implications of ERM for the management of strategic risks.

Questionnaire, descriptive statistics

Smiechewicz (2001)

To investigate the drivers for and hindrance to ERM

Review of literature

Chapman (2003)

To identify the critical success factors for effective ERM

Review of literature

Truslow (2003)

To uncover challenges and critical success factors for ERM

Qualitative approach

Barrese & Scordis (2003)

To provide Concepts and methods of ERM implementation

Review of literature

Schrøder (2006)

To address the deficit on integrated ERM practices. 

Qualitative approach

Weinstein et al., (2003)

To identify drivers for and hindrances to enterprise risk management (ERM)  

Review of literature

Funston (2003)

To evaluate the influence of drivers for and obstacles to ERM 

Questionnaire, statistical analysis

Kleffner et al., (2003)

To determine the effect of ERM on business performance

Questionnaire, statistical analysis

Chapman (2001)

To identify what obstacles companies, face in implementing ERM in Canada

Questionnaire survey

Skinner & Spira (2003)

To evaluate the impact of hindrances to ERM performance.

Questionnaire, statistical analysis

Prince (2000)

To evaluate factors hindering ERM implementation in construction firms

Questionnaire survey

DeLoach (2000)

To determine how the application of knowledge management processes can improve the implementation of ERM

Questionnaire survey

Weinstein (2002)

To analyse the potential barriers to implementing ERM at U.S. firms

Questionnaire, statistical analysis

Nielson et al., (2005)

To evaluate the relationship between drivers for and hindrances to ERM performance.

Questionnaire, descriptive statistics  Chi-square analyses

Bologa (2003)

To analyse the potential benefits of ERM)

Questionnaire, statistical analysis,

Levine (2004)

To provide solutions to overcome barriers to ERM implementation

Questionnaire, statistical analysis

2.1 ERM in Construction Firms

 In construction firms, ERM and Project Risk Management (PRM) are disciplines to managing risks at a different level, with different goals (Liu et al., 2011). ERM manages risks at the firm level and focuses on the operations, strategic, reporting, and compliance objectives of a firm (COSO,  2004); while PRM manages risks at the project level and focus on project objectives (Liu et al., 2011). In fact, project objectives are within the corporate objectives, serving as the key components of operational objectives of a construction project as the operation of a construction firm mostly depends on the construction projects that it is engaged in (Zhao et al., 2013a).  PRM is still essential and shouldn’t be viewed as a limitation to adopting ERM in a construction project. PRM has been viewed as one of the nine areas of project management knowledge (PMI, 2008), and is crucial to the success of projects and the survival of construction firms. Therefore, ERM cannot substitute the role of PRM.

Research Method

Strategies can support the researcher in gaining new insights into the phenomenon, develop new theories about the phenomenon and discover the challenges within the phenomenon under investigation. Yin (2011: 6-8) recommends that qualitative research represents the views and perspectives of people while offering an effective and productive way of conducting research. The case study research design was adopted to obtain data from past experiences of construction projects to depict RM practice in London and surrounding areas.

Based on the exploratory research questions chosen, a decision was made that an inductive approach would be necessary in gaining an understanding of complex RM issues to draw conclusions about the studied project patterns. According to Creswell (2007: 39), working back and forth between themes to create a complete set of ideas and engage participants, highlights the importance of an inductive process.

The P-I risk analysis model combines both qualitative and quantitative data (Nicholas & Steyn, 2011: 370; Taroun et al., 2011: 90). In Table 2, it demonstrates a simple 5×5 qualitative risk method where P x I = Priority Risk Factor (RPF). The green category where PI=0.1 to 0.6, risks require hardly any attention; yellow category where PI=0.4 to 1.0, risks require slightly more attention; the amber category requires a right amount of attention, while the red category requires maximum risk attention (2.5-4.5 RPFs).

 Table 2:  P-I qualitative risk analysis matrix

0.9

0.5

0.5

0.3

0.1

0.9

1.8

2.7

3.6

4.5

Very high

High

Medium

Low

Very low

0.7

1.4

2.1

2.8

3.5

0.5

1.0

1.5

2.0

2.5

0.3

0.6

0.9

1.2

1.5

0.1

0.2

0.3

0.4

0.5

1

2

 3 4

5

Very low

Low

Medium High

Probability

Very high

Source: Adapted from Schwalbe (2011: 439) and Nicholas & Steyn (2011: 373)

The impact value ranging from 0.1 (low) to 0.9 (high), Table 3 establishes how risks impact on quality, cost and time in a project. Subjective ratings can also be expressed as numerical measures between 0 (low/negligible), 0.3 (minor), 0.5 (moderate), 0.7 (significant), 0.9 (high), and 1.0 (catastrophic) (Nicholas & Steyn, 2011: 373).

Table 3:  An illustrated project risk impact values on project parameters

Impact Value

Impact

Quality performance

Cost overruns (percentage)

Time delays (months)

0.1 (low)

Minimal

Within budget

Negligible

0.3 (minor)

Small

1-10%

Minor slip (<1)

0.5 (moderate)

Moderate

10-25%

Moderate slip (1-3)

0.7 (significant)

Significant

25-50%

Significant (> 3)

0.9 (high)

Goals not achievable

>50%

Large slip

Adapted from Nicholas & Steyn (2011: 373)

Analysis

A 5-point Likert scale measurement instrument was employed to capture data for qualitative P-I grids and scatter diagrams, as a case study can also produce numeric data (Yin, 2011: 224-307). The interviewees were able to express their perceptions using a 5-point Likert scale measurement, where 1=Very low, 2=Low, 3=Medium, 4=High, and 5=Very high (please see Appendix). This strategy is supported by the literature where qualitative risk analysis methods such as P-I grids include numerical values (quantitative) being matched with the ratings (qualitative) (Nicholas & Steyn, 2011: 370)

In brief, three contractors for Public Sector clients were purposively selected. Professionals involved in each project were selected based on their recent exposure to risk management. The level of exposure to risk management practice provided the criteria for the sampling strategy; Therefore, construction managers, construction project managers, architects, quantity surveyors, contract managers and engineers were selected as interviewees for each case. Face-to-face and telephone semi-structured interviews were conducted. Mini- questionnaires were used as a basis to examine risks likelihoods, it’s impacts on the project and knowledge areas are perceived across the PLC, using a 5-point Likert measurement scale. This process is depicted in Figure 2.

Figure 2 shows the reviewed literature that provides the support for the research process in this multiple-case study. Questionnaire interviews were conducted among 13 project stakeholders including Project Managers, Architects, Engineers, Consultants, Quantity Surveyors and Construction Managers to capture the data by means of a Likert scale measurement instrument. The collected data were analysed using qualitative 5x5P-I risk analysis grids.

Discussion and Findings

The examined responses indicate that, in Case 1, the interviewees were convinced that the level of RM was very low, while in Cases 2 and 3, the P-I’s perceptions on the projects were found to be medium and near medium, respectively. Therefore, when all three are aggregated, the combined score is a low level of perceived RM practice (Table 4). Overall, the initiation stage generally displayed ‘very low’ score across three cases, the planning and design scored ‘medium’, and the execution stage produced ‘high’ and ‘very high’, this is shown in Table 4. The closeout stage scored a ‘medium’ score.

Finally, the interviewees perceived the risks’ P-Is to be ‘high’ and ‘very high’ at the execution stage. Most of the respondents regarded the initiation stage as immune from the risks.

Table 4: Combined interviewees’ average score of P-I across the projects’ PLC

Project stage

Very low

Low

Medium

High

Very high

Initiation

63%

0%

7%

17%

13%

Planning & design

32%

0%

47%

8%

13%

Execution

0%

15%

0%

53%

32%

Closeout

0%

0%

48%

26%

26%

Source: The researcher

Generally, all the interviewees in the three case projects believed appropriate consideration of risks, their likelihoods, and impacts on average was ok but left room for improvement. In these cases, their seems to be more of a focus on achieving the projects’ goals in a timely manner to avoid penalties this can leave projects more susceptible to risks. The interviewees claim that overruns are realised at the planning and design stages, (for example, detailed specifications) are usually overlooked at the design stage. This could result in random variation orders. Employers tend to be reluctant in promoting RM culture, according to six interviewees.

The nature of these findings is consistent with the studies of Yusuwan, Adnan and Omar (2008: 122), who contend that, despite project stakeholders’ exposure to risks, they still have confidence in old elusive concepts. Wang, Zhao, Zhang and Wang (2015: 165) affirm this scenario and argue that proper risk decisions warrant an active RM practice. For instance, variation orders cannot be avoided, as they are commonly accommodated in contracts – but first, their applications and limitations must be understood (Sunday, 2010: 102). In brief, it appears that stakeholders’ risk awareness and perceptions vis-à-vis the level of RM practice for these three projects was medium. Table 5 shows how the interviewees perceive the extent of RM about inhibiting P-Is factors in each case. Their perceptions point to a average level of RM across the three cases.

Table 5: Summary of findings

Research element

Case 1

Case 2

Case 3

Summary

RM perceptions

Low

High

Low

Medium

From this summary of findings it is indeed possible to produce a map of risks, which would enable decision-making in the companies regarding the risk response strategies to be established, such as: accept, when impact and probability of occurrence are low; control, when the impact is low but there is a high probability; transfer or share, when the impact is high but there is a low probability, (for example, hiring insurance or outsourcing practice); mitigate and control, when both the impact and the probability of occurrence are high (Mattie, 2007).

Conclusion

The fact that risks might occur in multiple perspectives, it appears that risk management (Traditional Risk Management) could not be managed as a separate approach. It needs to be integrated in a holistic manner. These factors were among the main cause of the emergence of ERM in late 1990s and could be argued as factors for companies to adopt or practice ERM. ERM offers a method to apply constant attention to risks that are rampant throughout the construction industry and sector such as the corporate sector. The target is to mitigate risks in order to protect the interests of the enterprise and shareholders. Even though it is impossible to identify all potential risks, risk managers apply a methodology that provides flexibility and adaptability to adapt the basic framework. Additionally, the methodology will suit the purposes and objectives of any project or endeavor while adhering to the guidelines and principles as established by upper management. An effective risk management policy will serve as the guideline to apply to all endeavors or projects as each project is unique and the risks vary accordingly. Hence, this will require the company to develop a plan that provides the flexibility necessary to be adaptable to most projects or endeavors that are initiated. This policy should be designed to adhere with the vision and values of the company while providing the most protection against threats as possible. The framework adjusted from the COSO framework (2004) of how a company can deal with risks by identifying, assessment and treating risk with different level of severity to avoid failure.

The results of this study illustrate fundamental problems facing public sector projects regarding the dynamics of construction risks. This study provided insights into the impacts of risks on projects and amplified their likelihood and impact at the building stage. According to the findings across the three cases, the most affected project areas were time, cost and procurement management.

The companies obtained good scores in the components of the internal environment and objective setting, corresponding to the initial levels of ERM; while in the essential components of ERM, risk assessment, and risk response, they presented medium to low scores. Consistent with this data, the companies showed better results in the components of the planning phase, in comparison with those of assessment.

Opinions expressed by construction companies’ strategies the most disturbing risks are those relating to lack of contracts available from public sector companies, because of this, there will be a notion of falling into a process of financial instability; another worry of the construction companies involves the risks associated with in the work culture which sometimes allows inefficiency to creep into their organizations. None of these kinds of risks are directly related to random events that can occur during the execution of the projects. It can be concluded therefore that, based on the information gathered, the construction companies in the context of this study have access to many opportunities for risk management improvement, in which it will be necessary for them to develop and implement formal systems of risk management.

Regardless of the finding of the case study objectives, there are indeed limitations to the conclusions. For example, only eight PMI knowledge areas were selected out of the total of 10. All other PMKAs were tested against RM.  This is essential to the study, while stakeholder management was left out from the study, due to the foreseeable narrow number of stakeholders involved in the PM offices.

The drivers and obstacles identified in this study may not be extensive or continue to hold true with the passage of time. Moreover, as the findings were investigated only in the context of construction firms, there is also geographical boundaries on the identification of the critical drivers for and obstacles to ERM implementation. Nevertheless, the implication of this study is just not restricted to construction firms because other firms or sectors can use the drivers and obstacles identified in this study to prepare their customized list of drivers and obstacles. For the time being, the findings of this study can be used as a base for future research on ERM in the CI. Therefore, this study contributes to global knowledge relating to ERM and allows the management to overcome the challenges posed by the significant obstacles.

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