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Risks are involved in all stage of a construction project. The construction risks will arise within the contract period and those construction 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). Moreover, the Contractors have the responsibilities to bear for the risks that arise during the construction period (Flanagan and Norman, 1993, p.183). Once the contract has been signed, the contractors have the responsibility to perform the project either the contract is continue for better or for worse, in sickness and in health, until their natural or unnatural conclusion (Sayers, 1997, p.1). Consequently, the Contractors cannot simply tender for a project without consider those risk that involved in the project (Cooke and Williams, 2004). As a result of not recognized the risks, it may cause the Contractors to lose money or become bankrupt.
Furthermore, 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 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, before the contract is being signed by the Contractor, risk management process will assist Contractor to aware of the potential risks and implication of the event occurring and therefore the Contractors are able to assign contingency sum and well planning for it. The construction risks will cause the estimated tender sum difference with the actual cost of project (Andrew and Raden Kusomo, 2004). 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 manages the construction risks at tender stage. In order to achieve the aim, the following objectives are conducted to support the aim:-
To determine the construction risk that faced by the Contractor within the contract period.
To illustrate the consequence of the risk where the Contractor does not 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). 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). The risks that faced by the Contractors are including the financial risks, legal risks, political risks, social risks, environmental risks, communications risks, geographical risks, geotechnical risks, construction risks, technological risks, demand or product risks, completion risks, supply risks and force majeure risks (Smith et al., 1999, p.45). Thus, before the Contractor are going to tender for a project, he has 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), 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 conducting the risk management process the risk can be identified, analyzed and responded.
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.
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.
CHAPTER 2: LITERATURE REVIEW
2.1 Overview of the construction risk that faced by the 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 will be discussed on this chapter.
2.1.1Definition of risk
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. (Merna and A-Thani, 2008, p.13)
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. (Merna and A-Thani, 2008, p.13)
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. (Merna and A-Thani, 2008, p.13)
2.1.2 Type of risk that faced by the Contractors
According to Odeyinka et al (2006), the risk sources in the construction industry that are occur in the tender stage are including the estimating risks, design risks, tender evaluation risks and the competitive risks.
Design risks- When the design is changed, there will require to make adjustment to the over the estimation rate.
Estimating risks- During the preparation of the tender price, the estimators will may mistake on quantities.
Tender evaluation risks-
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.
To continue with Odeyinka et al (2006), the risks factors that are involved in the tender stage are including the follows:-
Site condition risks
Inclement weather risks
2.1.3 Construction risk
Construction risks are one of the major risks that have to be considered by the Contractors during the tender 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) stated that, the risk are involved in the construction project due to the construction activities process are taken long duration, complicated, influence 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, when the Contractors are carried out the construction work, they are require to 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 as follows:-
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.
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 due to pay for the cost to settle down the strike event and pay the liquidated damage over the delayed work.
Risk due to the productivity of labour and plant and machinery- The low productivity of labour or plant and machinery has lead to delay in the construction work and require the additional cost to complete the work.
Risk due to safety and health- The safety and health risk are 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. Thereby, the Contractor has the responsibility to ensure the construction site is safety.
Risk due to the performance of subcontractor- The performance of the subcontractor will influence the construction work be delayed in case of the low performance of the subcontractor.
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 this case, the Contractors may require to reconstruct the work and to rectify the work by his own cost.
Risk due to schedule programme accuracy- Sometime the actual work will not keep within project schedule and plan. The project programme are not accuracy due to the risks are cause the work be delayed or over the construction budget. The Contractors will fail to keep within the planned time and work will be delays.
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.
Risk due to the materials or components- The Contractors have the responsibilities to ensure the works are meet with the quality requirement. Thus, the Contractors have to ensure the quality of the material and be careful on choosing the material.
Risk due to the 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.
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 consider the weather condition to ensure the works are no interrupt by the weather.
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).
Risk due to price inflation- 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 increase and this causes the Contractor loss money.
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
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 tender 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 and conducting the risk management in tender stage.
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). A risk management can assist the Contractors to understand the potential risk that involved in the project. Consequently, the Contractors can carry out the risk management in tender stage in order to making a right decision on whether or not to tender for the contract.
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 to bid that make by the Contractors are very important. The Contractors are requiring conducting the risk management in tender stage to make right decision by better understanding the risk involved in the project.
The main objectives of the construction project will likely to be influence by the construction risk (Smith et al., 2006, p.2). 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.
Smith et al. (2006, p.2), the risk management provides a better reviewing, understood, consideration over the project issues. To continues with Smith et al. (2006, p.94) emphasized that, 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. Contractors have to provide the risk management process in tender stage to avoid failure to keep within the objectives of project.
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 Simon and Burtonshaw (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.
188.8.131.52 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 (IMCA, 2006).
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.
184.108.40.206 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.
220.127.116.11 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.
2.4 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. The simplest approaches of risk management system processes are including the risk identification, risk evaluation, and risk response.
2.4.1 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.
2.4.2 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)
18.104.22.168 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.
22.214.171.124 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.
2.5 Managing Risk in Tender Stage
This chapter discussed on how the Contractors managing risk at each stage of the tender stage. The general information of the tender stage is identified at this chapter. A Contractor has to managing risk in each stage of the tender stage which including managing risk at the stage of decision to accept to tender, managing risk at the stage of preparation of tender, managing risk at the stage of tender adjudication and managing risk at the stage of award of tender.
In the traditional procurement project, the Contractor is only appointed after the entire tender documents are well prepared. Based on the Royal Institute of British Architect (RIBA) Plan of Work (2007), the Contractor will be appointed into a project at the pre-construction stages which are the Stage G of RIBA Plan of Work. In Stage G of the RIBA Plan of Work, the Contractor will be invited to bid for the tender. The Contractor is then being awarded the contract in the Stage H of RIBA Plan of Work. Furthermore, in design and build contracting project the Contractor will be appointed at the design stage (Stage C of RIBA Plan of Work).
Basically, the type of the tendering will be categories into open tendering, selective tendering and negotiated tendering. The contract will be awarded to the tenderer who are submitted the lowest bid. The open tendering is based on the method of advertisement inviting any eligible Contractor to price the tender document. The selective tendering will be carry out by a number of tenderer who are considered as suitable for the work and have good track record for the work. Moreover, the negotiated tendering will invite only 1 or 2 tenderers to price the tender document.
2.5.1 Tender Process
The tendering is the process of the work that carries by the contractor in order to award a contract. The Contractor has to price all the items of one contract by prepare the bills of quantities which according to the tender drawing and specification (Chinyio, E., 2011). The tendering will carry out to select a suitable Contractor for a construction project. The tender processes are including the invitation to tender, preparation of tender, tender adjudication and award of tender. The Contractor will carry out the different task during each of the tender stage. The Contractor has to ensure the work is carrying out within the period of preparing the tender. Before submitting the tender, the Contractor has to make sure the tender sum is accuracy.
According to Rosmayati Mohemad et al (2010), the tender processes are including the following:-
Invitations to tender- The Contractors are invited to tender after all the tender drawing and specification are well provided. During this stage, the Contractor will receive the letter of invitation to tender and the instruction to tenderers. Once the Contractors are receiving the letter of invitation to tender, they are require to decide whether or not to bid for the project.
Preparation of tender- Once the Contractors has decided to bid the project, they are require to prepare the bills of quantities according to the tender drawing and specification or other detail of the project.
Tender adjudication- The tender adjudication is the stage that to evaluate all the work before submitting the tender. This is the stage to let the Contractor carry out final review for all of the works.
Submission of tender- After the tenderer has completed tender for the project, they will require to submit within the time of submission.
Award of tender- After the tender has been submitted, the contract will awarded to the tenderer who bid the lowest bid. Once the contract is awarded to the Contractor, the Contractor will require performing the work.
2.5.2 Managing risks during the stage of Invitation to tender
Once the Contractors are invited to tender for a project, the Contractors has to consider whether or not to tender the project by reviewing all the risks that involved in the project during the tender stage. Thus, the risk identification process and risk assessment process should be conducted at tender stage. According to Jackson (2010, p.311), risk identification process should be begin conducted at tender stage when the Contractors is invited to tender for the project. The Contractors has to identify the risk involved in the project and analyze whether the risk is under the acceptable level or unacceptable level to making decision on accept the project or reject the project. Jackson (2010, p.311) emphasized that, conducting the risk identification and risk assessment process in tender stage can assist the Contractors to assess the risks and make a better decision over the risks.
In this stage, the Contractors will identify the risk factors in order to making a better decision. According to Hillebeandt (2000, p. 162), 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
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
The Contractors can be reviewing the risks to making the decision. Cooke and Williams (2009, pp. 194-197) mentioned that, the Contractor need to be 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?
By reviewing the above factor, the contractors will identify and analyze the risks factors into acceptable level or unacceptable level. Jackson (2010, p. 311) suggested that, after the Contractors analyze the risk into acceptable or unacceptable level, he can start to decide whether or not accept the project by making decision on the following points:-
Contractors to accept the project but increases the profit margin and add contingencies sum to the tender price to cover the risks.
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.
Contractors to reject the project due to the risk are unacceptable.
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. If the project consists of many unacceptable risk then the Contractors has to reject the work.
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.
2.5.3 Managing risks during the stage of preparation of tender
Once the Contractors have decided to tender the project, the Contactors have to identify the risk factors that affect the accuracy of the tender price. 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. Pilcher (1992, p.255) mentioned that, the Contractors have to make an allowances during preparing the tender to cover the risk.
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.
In the cost estimating process, the estimators have to provide a detailed analysis of cost. Cooke and Williams (2009) mentioned that, the site condition will influence the tender price in the following factors:-
Existing building on site- The existing building on site will influence the tender price due to the increasing of the site demolition work.
Ground conditions, site topography and groundwater level- 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 to support the building therefore the foundation price in the tender need to according to the ground condition of site. 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.
This is important for the estimators to visit to the site in order to investigate the site condition and ensure the pricing the tender correctly. Ashworth (2008, p. 318) suggested that, in order to collect the sufficient information to prepare the estimation, a 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.
During preparation of tender price, the estimators are requiring to pricing for the risk. To pricing for the risk, the types of the risks have to be categorized in order to pricing the risk correctly (Boyce, 2003, p.20). Boyce (2003, p.20) suggested that, the risk can be categorized into the follows:-
Risks that are able to passed to the client under the contract
Risks that are able to passed to subcontractors under the term of purchase orders and subcontracts
Risks that are able to cover by insurance
Risks that the contractor will carry but for which feasible plans exists to shed the risks if and when they should materialize
Table 2.1: The category of risk for pricing the risk (Source: Boyce, 2003, p.20)
According to the above table, the risks are categorized into 4 categories. By categorized the risk into different category, it may help the estimator to pricing the risk correctly. Thus, estimators can increase the profit margin to the tender price in order to ensure the risks are covered in the tender price.
2.5.4 Managing risks during the stage of Tender Adjudication
Once the estimator completed pricing for the tender price, the Contractor require conduct the final review before the price of tender is submitting. This is the stage of considering that all part of works is done in correctly. During the final review, all the risk factors have to be identified, analyzed and responded. The final review of the work are including reviewing the project report, conditions of the contract, market condition, current workload, construction risk and the reputation of the client and consultants. The final review is important before submitting the tender to ensure allowance given by the estimator are realistic.
According to Brook (2004, p. 237), the issues that must be considered in the final review stage are as follows:-
Contractor's working capital- This is to ensure the Contractor has sufficient capital to fund for the project.
Contractor's resources- This is to ensure the Contractor has sufficient worker, management term to carry out the work.
The market condition- This is to ensure the market condition in relation to the availability of work, current level of bank interest rate, and the current government policy will not to influence the project.
The reputation of client- This is to ensure the attitude of the client are not affect the project and can able smooth running of a project.
In this stage, the Contractor will 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 is 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).
Before submit the tender, a risk analysis process will require carrying out in order to allow a contingency sum to assign based on the potential risk (Peurifoy and Oberlender, 2002, p. 57). According to Smith et al. (2006, p.94), the Contractors add the contingencies to the tender price in order to cover the construction risks. The contingency sum should be added to tender price in order to dealing with the uncontrollable risks. The contingencies can be described as a risk premium that pays by the client for allocating construction risks to the Contractors. To continue with Smith et al. (2006, p.94), "The risk allocation strategy employed can have a major effect on the Contractor's tender for a project, particularly when the project is perceived as high risk by the Contractors"