Risk management process

INTRODUCTION

BACKGROUND OF STUDY

Construction professionals need to know how to balance the contingencies of risk with their specific contractual, financial, operational and organizational requirements. In order to achieve this balance, proper risk identification and risk analysis is required. The risk management process entails identifying construction risks and exposures, and formulating an effective risk management strategy to mitigate the potential for loss.

Many construction professionals look at risks individually and do not realize the potential management approach will enable a firm to identify all of the organization’s business risks. This will increase the probability of risk mitigation, with the ultimate goal of total risk elimination.

Risk will most likely affect the cost of the construction. The concept of quality cost is to quantify the total cost of quality related to the efforts as well as deficiencies. The general perception of the quality cost was that higher quality requires higher cost. Thus, larger investment in prevention drive even larger saves in quality.

As we know, defects or failures in constructed facilities can result in very large amount of costs. Even with minor defects, re-construction may be required. Therefore, any risk should be managed properly in the early stage in order to get the value for money in one construction.

PROBLEM STATEMENT

Quality cost is the sum of all costs a company invests into the release of a quality product. In construction industry, quality product on the quality cost can be defined as the construction that will give value for money for all the parties involve.

Lundvall and Juran (1994) considered that once the quality cost had been identified and when reduced, many associated costs could be reduced as well. A cost of quality system in construction is bound to increase is important because COQ-related activities consume as much as 25 percent or more of the resources used in companies (Ravitz,1991). The value to a company when conducting a quality cost analysis is to focus on its processes and their measurement and non-value adding activity to highlight waste in terms of monetary unit of analysis and pinpoint potential improvements (Roden and Dale, 2000).

According to Adel El-Samadony, Hany El-Sawah and Mohamed Ibrahim Farrag (2006), the construction industry is being viewed as one with the poor quality emphasis compared to other sectors like manufacturing and service sectors. Many criticisms have been directed to the construction industry for generally shoddy workmanship. No matter how clever or elaborate the design of a structure is, any construction project will ultimately be judged on the quality of the finished product.

Moreover, it is not only the final product that is subject to criticisms but the processes, the people, the materials etc are under pressure for better quality in construction (Hendrickson,1998). All this criticisms shows how unimportant the construction teams take note on the quality of the building. It is at least equally important to ensure that the design and construction teams are devoting their full energies to project success and are motivated to work together with this aim.

The construction industry has numerous problems in getting quality performance as a result of the complicated nature of the industry. Therefore, as one of the growing industries, the quality of services is important in order to gain the trust from client to ensure the country’s economic growth will increase continually. Any action in construction stages that can decrease the volume of risk is deemed to be needed to ensure that the construction itself have the ability to satisfy customer`s requirement (Chris Hendrickson, 1998).

AIM

The aim is to find the relationship and effect of risk management on quality cost in construction

OBJECTIVE

1. To determine the issues surrounding the implementation of risk and how it affect the quality cost in construction/
2. To identify organization’s practice in the past in dealing with issues of risks and its management.
3. To develop a risk management system that can control the quality cost in construction.

RESEARCH QUESTIONS

Three research questions shall be used to gain the objective and aim as mention above. The questions mainly discuss are:

1. How risk identification affected the quality cost in construction?
2. What procedure is needed in order to control the risk before and after the construction?
3. Did the organization in Malaysia really care about the risk management? And why?
4. What is the impact of quality cost in construction

RESEARCH METHODOLOGY

1. Theory and literature work

2. A theory and literature surveys was carried out using texts, journals, conference proceedings, dissertations as well as computer network in order to explain and examine the relationship and effects of risk identification of quality cost in construction industry. The theory and literature reviews of general risk management and quality cost were first being examined and reviewed. This will have to go through the following studies such as:

   • Defining the research problem.
   • Reviewing the most significant study that is relevant to the topic.
   • Apprise the relation of the current situation of work with the study.
   • Gather the information around the study.
   • Conclude the findings with the scope of study.
3. Questionnaires

4. Questionnaires are sent to large firms in Malaysia and they will only be analysed if the feedback is 30% or more. These questionnaires include a list of relevant question to the research. Conclusion is made after analysing the responses.

SIGNIFICANT OF IMPLICATION OF STUDY

Quality control and safety represent increasingly important concerns for project managers. Defects or failures in constructed facilities can result in very large costs. Even with minor defects, re-construction may be required and facility operations impaired. Increased costs and delays are the result. In the worst case, failures may cause personal injuries or fatalities. Accidents during the construction process can similarly result in personal injuries and larger costs.

Indirect costs of insurance, inspection and regulation are increasing rapidly due to these costs. A Good project manager will try to ensure that the job is done right the first time and that no major accidents occur on the project.

As with cost control, the most important decisions regarding the quality of a completed facility are made during the design and planning stages rather than during construction. It is during these preliminary stages that component configurations, material specifications and functional performance are decided. Quality control during construction consists largely when insuring conformance to this original design and planning decisions.

Thus this study shall give more knowledge on the relationship between the risk identification and the cost of conformance to the parties involves. The effect of non-conformance in quality leads to time and cost overruns in projects. Thus, in order to improve the performance of projects it is necessary to identify the causes and costs of poor quality.

OVERVIEW OF CONTENT

Dedication

Acknowledgement

Abstract

Abstrak

Table of contents

1. Introduction
1. Background of the study
2. Problem statement
3. Research aim and objective
4. Research methodology
5. Significant of implication of study
2. Risk management
1. introduction
2. Risk in construction industry
3. Risk management
1. Risk identification
2. Risk analysis
3. Risk responses
4. Conclusion
3. Quality Cost
1. Cost of quality in construction
2. Area of cost of quality in construction
1. Non-conformance
2. Conformance
3. Type of cost of quality
1. Cost of prevention
2. Cost of appraisal
3. Cost of internal failure
4. Cost of external failure
4. Conclusion
4. Research methodology
1. Introduction
2. Research methodology
1. Selecting research topic
2. Writing research proposal
3. Reviewing literature
4. Data collection
3. Data analyzing
4. completing dissertation writing
5. Analysis of research
1. Introduction
2. analysis of section A
3. analysis of section B
4. analysis of section C
6. Conclusion and reccomendation

References

CHAPTER 2

LITERATURE REVIEW

INTRODUCTION

Risk is the uncertainty of outcome. It can be define as the treat or probability that an action or event adversely and will beneficially affect an organizations ability to achieve its objective. Any professional construction need to be aware with risk in construction project as it will be harmful to all parties. They need to know how to balance and control all the rick occurs within the construction.

Usually risk tends to occurs when there is a change that needs to be done in construction project. For years industry has had a very poor reputation for coping with the adverse effect of change, with many project failing to meet deadlines and cost and quality targets.

According to Martin Loosemore (2003), risk is best define as a potential failure event which is uncertain in like hood and consequences and if occurs can affect the company`s liability to achieve its project ability. As Edward L. (1995) define risk as a multiple cost of hazardous consequences and its possibility of occurrence. He added that hazardous event can befall any organization and have adverse effect on the organizational financial well being. Hazard might be physical such as fine or theft which affects directly, occupational injury or illness to employees which will probably reduce output or also injury or damages to third parties which might happen due to non-compliance with statutory regulations.

RISKS IN CONSTRUCTION INDUSTRY

Risk in construction is an object that attracts the attention to most because time and cost overrun is associated with the project construction (Tee Siew Siang, 2000). Tee Siew Siang (2000) also divided risk into natural risk and human risk. Natural risk is an unpredictable event that occur outside human agencies or system which can be divided into weather system (typhoon, wave, etc) and geological system such as earthquake, volcanic eruption etc. Whereas, Abdou(1996), divide risk into 3 group; construction finance, construction time and construction design and addressed these risk in detail in light of the different contractual relationship existing among the functional entities involve in the design, development and construction of a project.

Bufied (1987), describe risk in construction industry as a variable of process of construction project whose variation result in uncertainty as to the final cost, duration and quality of the project. While Low Sui Pheng et al. (2008), stated that risk occurs in a situation when decision are made knowing the probability of risk event. Variation usually concern with changes that is normally regarded in term of its adverse effect on project cost estimates. In extreme case, the risk of these time and cost overrun can invalidate the economic case for the project, turning a potentially profitable investment into a loss-making venture [Nigel J. Smith, Tony Merna, Paul Jobling (2006)].

According to Patrick X.W. Zou and Guomin Zhang (2007), risk was usually spread through the whole project life cycle and many risks occur at more than one phase. Construction phase is the most risky stage followed by the feasibility stage. Construction industry is always a subject to more risk than any other industry due to the unique features of construction activities such as long period, complicated process, abominable environment, financial intensity and dynamic organizational structures [Flanagan and Norman (1993) ; Akintoye and Macleod (1997) ; smith, (2003)].

In any construction project each of three primary targets of cost, time and quality will be likely to be subjected to risk and uncertainty. Therefore, a good risk management system is required to ensure that the construction can be done with the minimum potential of risk thus resulting in the quality of cost as well as giving the satisfaction and value for money for all the parties especially the client.

Construction is one of the most risky jobs which is usually male dominated, dirty, dangerous, unattractive, environmental destructive and unprofessional (Loosemore, et.al. 2004). In nowadays newspaper, often reported about project disaster, the pollution that the world must face, the death of the workers, financial loss that client have to suffer and many more. Such cases are most likely to happen due to ineffective risk management system or do not implement it effectively ( Loosemore, 2000).

Often reported about construction failure is newspaper, articles and journals. Anthony Mills, 2001 stated that construction industry has a very poor reputation for managing risk; often the major project fails to meet datelines and cost targets. Therefore, a proper process of risk management is needed to ensure the probability for the project to be failed can be minimized. As according to K.C.Lam et al. (2007) risk management is an important tool to cape with such substantial risk in construction industry by:

• Assessing and ascertaining project viability
• Analyzing and controlling risk to minimize loss
• Alleviating risk by proper planning
• Avoid dissatisfactory project and enhancing profit margin

RISK MANAGEMENT

With rapid advancement in construction industry, an increased number of uncertainties are bound to occur as inevitably increase the perceived risk (Vicknayson, 2002). Furthermore M.J. Mawdesley (2002), also added that risk management was produce to response to the increasing uncertainties which provide the client with a project executed within the time frame contracted, within the tight budget and complemented with the specified quality.

Richard B.Carlett (1998) believed that risk management is a hallmark of development economy. There are several underlying assumptions or belief about risk management:

1. Risk management evolved into a profession and a set of concept applicable most functional area in business admin.
2. Risk managers perform their professional duties in relative isolation
3. Risk manager do not have authority commensurate with their responsibility
4. Risk manager spend a disproportionate amount of their time on insurance issues.

Managing risk means minimizing, controlling and sharing the risk and not merely passing them off onto another party (Nabil and Saried, 1999). Basically, risk management goal is to produce a plan to follow in order to execute the rest of the activities in risk management process, the plan is develop through a series of meeting with team and key stakeholders of the project (Shaukat and Milton, 2002).

Risk management is an action that reduces the impact or probability of less favorable outcome associated with preferred strategies where it actually depends on the risky opportunity, the characteristics of the firm evaluating , as well as the circumstances in which the firm finds it. Decreasing the probability of the most negative outcome will actually reduce the downside risk (K. Chelse and Bodility, 2000)

According to Patrick X.W. ZOU et al. (2007) risk were prioritized according to their significant of influences on typical project objectives in the term of cost, time, quality, and safety as well as environmental. Start with focusing on what to be achieved in one project; risk management process builds to an understanding to what might put goals in jeopardy and what should be done to ensure success. Risk management aims to identify and quantify all risk to which the business or project is exposed to ensure a conscious decision can be taken to manage the risk correctly (Flanagan R and Norman G, 1993).

Flanagan and Norman (1993), also added that there are three ways classifying risk; by identifying the consequences, type and impact of risk. In addition, Patrick X.W. Zou et al. (2007) describe a systematic risk management are normally divided into risk identification and risk classification, risk analysis and risk response where risk response include retention, reduction, transfer and avoidance.

According to Vicknaysum T. and M.J. Mawdesley (2002), there are four steps of risk management consists of risk identification, risk analysis, risk response and risk monitoring which define the whole concept of risk management as “a continuously monitored integrated formal process for defining objectives, identify resources of uncertainties, analyzing uncertainties and formulating managerial response to produce an acceptable balance between risk and opportunities.

Managing risks in construction project has been recognized as a very important management process in order to achieve the project objectives in term of time, cost and quality as well as safety and environmental sustainability. Risk management can be described as “a systematic way of looking at areas of risk and consciously determining how each should be treated. It is a management tool that aims at identifying sources of risk and uncertainty, determining their impact and developing management responses” (Uher, 2003).

It has been clearly stated by Daniel Atkinson (2001) that risk management deals with change, therefore, any tools can be a guide or a checklist which must continuously be re-examined and refined in any construction project. It is important that risk management is adopted throughout the project life cycle to allow the review the procedures in the light of experience.

An effective risk management method can help to understand not only what kind of risk is faced, but also how to manage these risks in different phases of a project. It also has been recognizing as a necessity in most industry today, and a set of technique have been developed to control the influences brought by potential risks (Schuyler, 2001).

The benefits of risk management can be summaries as follow:

• Project issues are clarified, understood and considered from the start.
• Decision are support through analysis
• The definition and structure of the project are continually monitored
• Clearer understanding of specific risk associated with project.
• Build up historical data to assist future risk management procedure.

Finally, it can be conclude that the formal risk management process usually divided into three main stages: risk identification, risk analysis and risk response.

Risk identification

Risk identification is done to identify and categorize risk which risks have the potential that can affect the project. It will usually begin after the risk management plan is constructed and continues throughout the project execution. Basically, risk identification will documents these risks at a minimum, produces a list of risks that can be assigned to a team member and tracked throughout the project development and delivery process. (Uher, 2003).

There are several tools and techniques for risk identification that have been highlighted by Elyse (2007):

According to Redmill (2002) propose of risk identification is to prevent the event that can go wrong and lead to breaches of safety. Whereas, Clark et al. (1990) stated that identification of risk is not a risk unless it is management problems because risk is a factor that can jeopardize the successful conclusion of a project causing cost overruns, time overruns and under-specification.

Risk identification is actually an essential first step in risk management. It allow risk item to be separated from others as clearly stated by I. Manelele and M. Muya (2008) identifying and planning for uncertainties risk is the best way to achieve project objectives. Identification of risk involves managing potential future event that could affect the decision objectives. Therefore, Martin Loosemore et al. (2006) stated that good identification ability is form from the main companies, thus every construction firm should have a manager that:

1. Able to recruit people with creative abilities.

2. By employed more creative people who excel in finding problems, finding new perspective of solution, willing to take risk and able to learn from failure will increase organization`s creative ability which can help the organization to detect risk in such early stage of the construction period.

3. Train people to work more creative

4. Every one have their own ability, to train them to be more creative is basically a hard thing to do. Creative training helps staff to find fact, problems, idea, and solution as well as overcome resistance during the implementation. If every staff were able to think out of box, any risk can be avoided. And they will also be ready to face such unforeseen risk which is the main contribution in destroying a quality of one product. Therefore, cost of prevention for quality can be increase thus decreasing the late defects.

5. Create organizational culture and structure

6. Organizational culture provides people with high degree of control over their job. Therefore, workers will be more confident to experiment with new ideas and will be able to develop the idea without fear and failure. Such culture help create risk awareness by spending some time at the project and try to find for the better solution that can minimized the risk.

Real risk in any project are the one that usually fail to identify which conduct to cost overrun and re-construction of the building( Tee Siew Siang, 2000). Therefore, various techniques were obtained such as checklist, bug listing, flow chart, inspection and etc. Frame, 2003 recommended by including brainstorm session with firm`s personal that focus on novel risk sources instead of conventional area to make identification of risk more effectively. Such action can eventually increase the cost of prevention of the quality of total construction whereas prevention is better than cure.

Moreover, in construction industry, variation is most hard thing to be avoided. Variation was basically due to the absence of risk management. According to Dawood (1998) systematic risk management enables the early detection of risk as risk identification involves identifying the source and type of risk.

Risk Analysis

Today’s business world involves a risk of some kind: customer habits change, new competitors appear, and factors outside your control could delay your project. Formal risk analysis and risk management can help you to assess these risks and decide what actions to take to minimize disruptions to your plans. They will also help you to decide whether the strategies you could use to control risk are cost-effective.

Risk analysis is basically done after risk identification process where after a list of risk has been identified. Such risk need to be assessed and analyzed. According to Perry and Hayes( 1985), risk analysis is limited when use in construction industry outside the large project. Risk analysis will usually quantify the impact a risk will have on project cost, schedule and quality. Basically, it will gather either historical data files or expertise of experienced personal to analyzed information that has gathered. Risk analysis involves the understanding or quantification of the effects of potential risks. Tee Siew Siang (2000) stated several purpose of risk analysis:

1. Ascertain/ assume/ estimate the effects and chance of occurrence of each factor.
2. Determine the overall relationship between those factors which threaten and promote project objectives.
3. Determine the significant of the individual factors to the total outcome.

Risk analysis usually comprises the following activities:

• Assessment of consequences
• Assessment of probability
• Determination of risk and establishment of priorities

Risk response

After the identification process, response must be implicit in order to describe the impact of identified risk. According to Ward, S.C. (1999), risk response is a preliminary consideration of responses that offer some clues to the relative importance of identified risk. Whereas, Edward L. (1995) stated that risk response includes transferring risk to who fulfill such requirement:

1. Ability to undertake hazardous task
2. Willingness to rake the risk
3. Financial capability if the risk event occurs
4. Continued existence and adequate finance during period of liability.

Risk responses are basically refers to how the risk should be managed either by transferring or retaining it (Flanagan and Norman, 1993). Where K.C.Lam et al (2007) identified risk responses as a process of formulation of a management strategy leading to identifying action owners and the risk management plan.

There are several types of responses that need to be considered once the risk has been identified and analyzed. Types of response will basically depend on the attitude that the firm might adopt to avoid the risk completely and seek to eliminate all possible source of risk. According to Lui Sui Pheng et al (2008), responses can be divided into:

1. Immediate response : alteration is done so that risk is immediately mitigate or eliminate
2. Contingency response: provision is made in the plan for a cause of action that will only be implemented.

As stated on above figure, risk allocation/ risk transfer is one of the risk responses actions. Zulhabri Ismai and J.V.Torrance Abudullah (2006) stated that risk allocation is a process of apportioning individual risk relating to project and services delivery to the party best placed to managed each risk. An efficient risk allocation is crucial in order to enhance project performance by way of reducing cost, time and improve quality of complete works which risk allocation can help to reduce the impact of cost of failure in term of quality of the product. (Chapman et al, 1995).

Moreover, Delmon (2005), considered that efficient allocation of risk will generally result in a more successful and profitable project and will benefit each of the parties involves. Therefore, the total cost of quality can be minimized and the extra money can be used to upgrade the construction process. Zulhabri Ismail and J.V.Torrance Abudullah (2006), also added that to ensure efficiency of risk allocation, risk should be placed to the professional that control the main economic or to the person that have ability to manage and minimize the risk.

Any risk occurs before or during the construction process should be reduce to an acceptable level which also known as risk-free environment. It can be easily achived by applying a safeguard which can remove vulnerability or protects against one or more specific treats. John Uff and A.Martin Odams (1995) identified 4 basic strategies as follow:

1. Avoidance

2. Applying safeguards that eliminate or reduce the remaining uncontrolled risk for vulnerability will prevent the exploitation of the vulnerability. It can be accomplishing trough:

   • Application of policy
   • Application of training and education
   • Countering treats
   • Implementation of technical security control
3. Transference

4. It is the shifting risks to other areas (assets, processes, organisations) which can be accomplish by:

   • Rethinking
   • Revising deployment model
   • Outsourcing
   • Purchase insurances
5. Mitigation

6. It reduces risk by means of planning and preparation to handle the damage cause by the exploitation of the vulnerability. Mitigation will usually depend upon the ability to detect and respond to an attack which is done as soon as possible.

7. Acceptance

8. By understanding the consequences and accept the risk, it can help to control the risk effectively. Usually it requires a sign-off latter.

Construction risk is hard to be eliminated but it can be transferred or shared from one party to another. A proper risk response come to assume prominence because risk identification and risk allocation action have a clear bearing on risk handling decision. Mills (2001) stated that the productivity, performance, quality and cost of the project are mostly affected by the risk. Therefore, a proper risk action is needed to reduce the impact of adverse conditions, as it can increase efficiency and effectiveness in management. Once the risk has been identified, assessed and analyzed, a properly action (allocation) is need to be done in order to control and prevent the occurrence of harmful consequences (Bunmi, 1997).

CONCLUSION

All often the risk is either ignored or dealt with arbitrary way. The greatest uncertainty usually occurs in earliest stages which could cause extra cost and loss of financial return. Unforeseen condition usually produce large claim which remain in dispute after completion. A proper risk management procedure is required to ensure such cases can be eliminated from construction industry.

Risk management involve identification of preventive measure to avoid risk and reduce effect, the proceeding stage by stage to reduce uncertainty, controlling risk allocation and managing risk allowance in cost estimates, programmers and specification. Risk management do not remove all risk from project but it was produce to aim for managing risk most efficiently and controlling them from becoming worse.

Risk can usually affect overall project cost overrun as time is money. Therefore, many clients are likely to expect to complete a project as quickly as possible without considering the order of nature and construction activities. As a length schedule undoubtedly wreck project cost benefits, thus minimize risk help work to be done in a good timing and help avoiding cost overrun. Moreover, quality played an important point in client`s thought. Within the tight budget, the completion of construction is deemed to be followed with a specification of agreed quality. By controlling all risk that might or already happened, the cost of overall quality can be properly measured.

Chapter 3

COST OF QUALITY

COST OF QUALITY IN CONSTRUCTION

Quality is the most important thing in construction industry as it represent company`s work that can attract more buyer and customer. Kenneth H. Rose(2005) seen quality as a set of character that fulfills all requirement needed by the client. Quality may have impact on market share; hence indirectly on production volume as well as unit cost (T.F. Burgess, 1996).

Quality is viewed as arising from several things such as overall finale products, products that are free from d