Theory Of Risk Management In Construction Construction Essay

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The construction industry has verity of uncertainties. Some of the factors usually carrying risks include the size and complexity of the project, location, design change and uncertainty of the ground condition (Thompson and Perry, 1992). The major role of the project management is the management of risk towards the successful completion of the project.

Risk management helps the project managers to have better understanding about the project's threats which may significantly affect the project objectives including cost, time and quality. It is the fact that decisions taken at the early stage of the project can have significant impact on the projects target. The more effective risk management can be achieved if it is applied at the early stage of the project and it should be continues throughout the life of the project.

Some of the risks common to construction sector are inflation, defective design, delayed decisions, unexpected ground condition and etc. It is not difficult to anticipate the typical and common risks of the project based on the previous experience, but it is necessary to assess the impact of the risk on the project objective. For instance, the level of impact of similar risks on the different projects may vary. Hence it is necessary to identify the source of the risks and analyze it for every project as risk by its nature specific to projects.

Risk is not always threats for the project (Thompson and Perry, 1992). Risks can sometimes beneficial to the party who can manage it effectively. Sometimes contractors after making the required risk analysis, they may use the risk itself as a profit making mechanism. Contractors need to execute risk analysis before going to tendering to come up with reasonable estimate for risk response. Besides, the probability of giving inflated allowance for every risk by the contractors that have not made risk analysis is more likely high. Hence, risk analysis is one of the factors that help the contractors in the preparation of reasonable tender amount and to succeed in tender competition.

The effect of the risk on the project can be minimized as appropriate risk management is applied for every project based on the information from risk analysis. Risk analysis should be continues process for the whole life of the project. This process includes the identification of source of the risk, analysis of their impacts to the project target and then the adoption of the appropriate response to reduce and control the significant risks (Thompson and Perry, 1992).

The result of identification and analysis of risk may need important measures by the project management including redesign, more detailed design, alternative contract strategy or different method of construction in order to minimize the impact of the risk on the project's objectives (Thompson and Perry, 1992).

It is common phenomena in the construction sector that too many projects overrun both cost and time targets. The excessive time and cost overrun sometimes can invalidate the feasibility of the project and affects the resource utilization. Despite its clear importance, risk analysis and risk management is not common in the construction sector particularly in developing countries (Thompson and Perry, 1992). This is because of the lack of awareness and various reasons. This research mainly focused on the practical implementation of risk management in developing countries particularly in Ethiopia road construction sector.

One of the major purposes of the risk management strategy is to ensure that all the likely occurrence of risks allocated to the contracting parties (SMEC 2008). To this end the clients need to ensure that the bidding documents should include terms and conditions that clearly indicate the responsibility and ownership of all risks allocated to the contracting parties. Contractors also need to take into account their risk responsibility in the preparation of their tender.

The availability of proper risk management planning in the project is essential to the success of the overall risk management process and project. One of the major objectives of this process is to increase the project's risk awareness for all those involved with the project so that they may contribute to it (SMEC 2008). The risk management plan gives high priority for risks that have significant impact on the project. It includes all the required resources that will be used to manage the risk on a project and the methodology to be followed. The risk management plan will provide categories of risks and definitions of the probability and impact of the risks that have been identified.

Risk Identification

Risk analysis involves identification of the critical risks affecting the projects objective. The process also includes the analysis of the probability of occurrence of risk and the level of impacts on the projects target. This process should be carried out at early stages of the project and should be continues for every project stages to maximize the risk control mechanism of the project and ensure the completion of the project on time and budget.

The process of identification of risk can be facilitated as the project divided into broad categories from which risk might rise. This breakdown of the project activities is called risk breakdown structure (RBS). The availability of subdivision of the categories facilitates further identification of risk of the project (SMEC 2008).

The identification of risk uses information from previous project experience, related studies and researches, and etc. Revision of previous project documents help to indicate risks of the project. Besides, brainstorming, interviewing project participants and checklist of risk compiled from previous experience used for identifying the projects risks. Risk identification leads to qualitative analysis and subsequently to quantitative analysis (Thompson and Perry, 1992).

Quantitative risk analysis, the most sophisticated technique, helps to assess the probability of the occurrence of each risk and its possible consequences in comparison to project's target cost, time and quality (Thompson and Perry, 1992). There are two most useful quantitative techniques for analyzing risks; sensitivity analysis and the probability analysis. The first one deals with risks independently and has no attempt to estimate the probability of the occurrence. The sensitivity analysis used to identify the most sensitive and critical risk towards which the management need attention in order to minimize their effect on the project's target. The probability analysis used to specify the probability of occurrence for each risk and analyze their aggregate effect on the project's target.

The outputs of the quantitative analysis of risk effects on the project include the probability of achieving the project objectives (cost, time and quality) that were originally set. The result can be used by contractors and employers the amount contingency may be required to respond for the probable risk and to achieve the project objective.

Risk can be managed through contract arrangement (Thompson and Perry, 1992). The terms and conditions of the contract usually used to allocate risks between contracting parties. Risk responsibility and ownership should be allocated to the party who is in the best position to respond. It is also common to share the responsibility of and ownership of risk between the contracting parties to optimize the efficiency of the risk management.

There are number of contract arrangements (such as design build, design bid build, management contracting, construction management, BOT, BOOT, etc) usually used to manage the project's risks. The terms of payment also used to allocate financial risk between the contracting parties such as fixed price or re-measurement. Every contract arrangement allocates risks in different way (Thompson and Perry, 1992). The selection of contract arrangement is usually aim to respond for the critical risks of the project based on the client's requirement (Edwards, 1995). Some of the contract arrangements are more effective to handle the specific type of risk. For example in design build contract arrangement, risks related to the design are transferred to the contractor.