Site Loader

CHAPTER 1

 

1.1
The nature of the construction industry

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!


order now

 

There are many different
descriptions of the construction industry, drawn from different specialist
disciplines. This vagueness is compounded by the fact that the construction
involves such a wide range of activity that the industry’s external boundaries
are also unclear (Murdoch and Hughes, 2000). For example, the term
“construction” can include the erection, repair, and demolition of
things and diverse as houses, offices, shapes, dams etc. Construction is
difficult to comprehend fully because the relationships between the parts are
not always clear and the boundaries of the industry may be characterized as:

 

·      It is
fragmented

 

·      It is sensitive
to economic cycles

 

·      There are
extraordinary diversity of professions, specialists and suppliers

 

·      It is largely
affected by external environments

 

There is no other industry that
requires the proper application of business practices much as construction
industry. The many variables and complex relationships that exist between
variables that must be considered in the process of building a construction
project necessitates sound business practices and decisions. The coordination
and use of many types of labor skills, materials and equipment that are used to
build a project require daily application of proper business practices. The
variable environment surrounding the construction project complicates the
decisions to be made concerning the use of labor, materials and equipment.

 

 

 

 

 

 

1.2
Management in Construction Projects

Management in construction industry
has generally been characterized as being weak, insufficient, nebulous,
backward and slow to react to changing conditions.

The reason why the construction
industry has been slow in applying management procedures that have actually
proven effective in other industries are because

·      Construction
projects are unique

 

·      Construction
projects involve many skills largely non-repetitive in nature

 

·      Projects are
constructed under local conditions of weather, location, transportation and
labor that are more or less beyond the contractor’s control.

 

·      Construction firms,
in main, are small operations, with the management decisions being made by one
or two persons.

 

·      There are
special problems in construction

 

·      The future cannot
be forecasted

 

·      Construction is
a high-risk business.

 

 

Also the Industry is usually not able
to employ the brightest of minds due to it being a secondary industry in any
economy. The Lack of bright management talent in the industry even further
increases the problem when it comes to effective management.

 

1.2
Management in Construction Projects

Management in construction industry
has generally been characterized as being weak, insufficient, nebulous,
backward and slow to react to changing conditions.

The reason why the construction
industry has been slow in applying management procedures that have actually
proven effective in other industries are because

·      Construction
projects are unique

 

·      Construction
projects involve many skills largely non-repetitive in nature

 

·      Projects are
constructed under local conditions of weather, location, transportation and
labor that are more or less beyond the contractor’s control.

 

·      Construction
firms, in main, are small operations, with the management decisions being made
by one or two persons.

 

·      There are
special problems in construction

 

·      The future cannot
be forecasted

 

·      Construction is
a high-risk business.

 

 

Also the Industry is usually not
able to employ the brightest of minds due to it being a secondary industry in
any economy. The Lack of bright management talent in the industry even further
increases the problem when it comes to effective management.

 

 

 

1.4
Typical Risks on a Construction Project

 

·      Occurrence of
accidents to operatives on site causing physical injury.

 

·      Failure to
complete within the stipulated design and construction time.

 

·      Failure to
obtain the expected outline planning, detailed planning or building
code/regulation approvals within the time allowed in the design program.

 

·      Unforeseen
adverse ground conditions delaying the project.

 

·      Unexpected rise
for labor and materials due to change in priorities during execution by owners.

 

·      Force majeure.

 

·      Failure to
complete the project within the client’s budget allowance.

 

·      Loss to the
contractor caused by the late production

 

 

 

It is important to distinguish the
sources of risk form their effects. Ultimately, all risk encountered on a
project is related to one or more of the following

 

 

·      Failure to keep
within the cost budget/forecast/estimate/tender.

 

·      Failure to keep
within the time stipulated for the approvals, design, construction and
occupancy.

 

·      Failure to meet
the required technical standards for quality, functions, fitness for

 

purpose, safety and environment
preservation.

 

 

The effect of adverse events will be
financial loss. The task of professional advisors, contractors and suppliers is
to identify the discrete sources of risk which cause to failure occur, and to
develop a risk management strategy that provides for the most appropriate organizations
to carry that risk.

 

1.5
Risk and Uncertainty

 

Risk is defined as the exposure to
loss/gain, or the probability of occurrence of loss/gain multiplied by its
respective magnitude. Events are said to be certain if the probability of their
occurrence is 100% or totally uncertain if the probability of occurrence is 0%.
In between these extremes the uncertainty varies quite widely.

Risk
= Hazard × Exposure

 

 

1.6
Objectives

 

The objectives of this study are:

 

1.   Identifying key
risk factors that could stand in front of construction processes by reviewing
the literature and through the additions that could be made by the industry
practitioners, i.e. contractors and owners.

 

2.   Investigating
the severity and the allocation of each identified risk factor according to the
perspectives of contractors and owners.

3.   Examining the
risk management actions efficiency that are applied in the industry
(contractors and owners).

                                                                                        

 

 

 

 

 

 

Chapter 2

RISK MANAGEMENT IN BUILDING PROJECTS.

 

2.1
Introduction

 

The construction industry has changed
rapidly over the past few years; companies are faced with more risk and
uncertainty than ever before. Clients expect more, most importantly, they do
not want surprises, and are more likely to engage in litigation when things go
wrong. Risk management has become an important part of the management process
for any project. Risk in construction has been the object of attention because
of time and cost overruns associated with construction projects. This chapter
reviews the literature concerning some of risks faced in the construction
industry, some of analysis techniques and risk response practices.

 

2.2
Causes of Risk as Threats

 

There exists no comprehensive study
explaining the causes of risks among construction companies, moreover research
covering the subject matter has tended to identify the symptoms rather than
causes, a number of authors have attempted in their studies to ascertain the
causes of threats in the construction industry, Kangari (cited in Rwelamila
& Lobelo, 1997) ascribed the high threats to:

 

·      A highly fragmented
industry.

 

·      Industry highly
sensitive to economic cycles.

 

·      Fierce
competition as result of an over-capacitated market.

 

·      Relative ease
of entry.

 

·      Management
problems.

 

·      Trading
including:

 

o     Competitive quoting.

o  Outsize projects.


High
gearing.

 


Resistance
to change.

 

·      Accounting,
where inconsistencies occur in the financial data generated for management.

 

·      Increase in
project size.

 

·      Unfamiliarity
with new geographic area.

 

·      Moving into new
type of construction.

 

·      Change in key
personnel.

 

 

2.3
Causes of Risk as Threats

 

There exists no comprehensive study
explaining the causes of risks among construction companies, moreover research
covering the subject matter has tended to identify the symptoms rather than
causes, a number of authors have attempted in their studies to ascertain the
causes of threats in the construction industry, Kangari (cited in Rwelamila
& Lobelo, 1997) ascribed the high threats to:

 

·      A highly
fragmented industry.

 

·      Industry highly
sensitive to economic cycles.

 

·      Fierce competition
as result of an over-capacitated market.

 

·      Relative ease
of entry.

 

·      Management
problems.

 

·      Trading
including:

 

o     Competitive quoting.

o  Outsize projects.


High
gearing.

 


Resistance
to change.

 

·      Accounting,
where inconsistencies occur in the financial data generated for management.

 

·      Increase in
project size.

 

·      Unfamiliarity
with new geographic area.

 

·      Moving into new
type of construction.

 

·      Change in key
personnel.

 

These sources of risk
relate to project-specific and non-project-specific risks, as both these types
of risk need to be considered when identifying the risks in a project or a
process. The institution, assisted by the project team, need to define the
boundaries of these sources and to break down these sources into detailed risk
elements. This will allow a common understanding amongst those attempting to
identify the risks in a project.

 

The division of risks
into source elements can be difficult. It also creates the potential for
increased personal subjectivity. It can also lead to the possibility of
“double-counting” some risks by attributing the same risk to more
than on source. This may, however, beneficial in understanding the
relationships between risk sources and elements (Estate Management Manual,
2001). The obvious problem with categorizing risk, apart from the cultural
perceptions noted by the royal society report, is that there is a danger of
confusing sources, causes, effects and fields of study for the risk domain. A
source approach to risk categorizations is shown in Figure (2.1). It is
proposed that the risks can be considered with respect to six categories:
financial and economic, political and environment, design, site construction,
physical and Environmental factors . While the list of potential risks in every
category is neither complete nor exhaustive, it does represent the majority of
typical project risks and demonstrates the advantage of a logically developed
classification scheme (Enshassi & Mayer, 2001).

 

2.4 Risk Analysis

 

Risk analysis, a
component of the risk management process, deals with the causes and effects of
events which cause harm. The aim behind such analysis is a precise and
objective calculation of risk. To the extent that this is possible, it allows
the decision making process to be more certain (Estate Management Manual,
2002). The essence of risk analysis is that it attempts to capture all feasible
options and to analyze the various outcomes of any decision. For building
projects, clients are mainly interested in the most likely price, but projects
do have cost over-runs and, too frequently, the ‘what if’ question is not asked
(Flanagan & Norman, 1993).

Risk analysis involves
assessing the identified risks. This first requires that the risks are
quantified in terms of their effect on cost, time or revenue. They can be
analyzed by measuring their effects on the economic parameters of the project
or process. In terms of risk response, three general types of response can be
identified (Estate Management Manual, 2002):

 

·      Risk avoidance
or reduction.

 

·      Risk transfer.

 

·      Risk retention.

 

The use of risk analysis
gives an insight into what happens if the project does not proceed according to
plan. When active minds are applied to the best available data in a structured
and systematic way, there will be a clearer vision of the risks than would have
been achieved by intuition alone (Flanagan & Norman, 1993).

 

2.5 Methods of Risk
Analysis

 

The analysis of risks
can be quantitative or qualitative in nature depending on the
amount of information available (APM, 2000). Qualitative analysis focuses on
identification together with assessment of risk, and quantitative analysis
focuses on the evaluation of risk (Chapman, 2001). Indeed there may be so
little information about certain risks that no analysis is possible. Table
(2.1) summarizes the various techniques used for risk analysis.

 

Table 2.1. Various risk analysis
techniques, adapted from (Ward and Chapman, 1997)

 

Risk
Analysis

 

 

Qualitative

 

Quantitative

a.

Direct
judgment

e.

Probability
analysis

b.

Ranking options

f.

Sensitivity
analysis

c.

Comparing options

g.

Scenario analysis

d.

Descriptive analysis

h.

Simulation analysis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

A.
Qualitative Risk Analysis

 

Lowe (2002) introduced a definition
for the qualitative assessment of risk involves the identification of a
hierarchy of risks, their scope, factors that cause them to occur and potential
dependencies. The hierarchy is based on the probability of the event and the
impact on the project. In qualitative risk analysis risk management acts as a
means to registering the properties of each risk (Kuismanen, 2002). Qualitative
risk analysis assesses the importance of the identified risks and develops
prioritized lists of these risks for further analysis or direct mitigation. The
management team assesses each identified risk for its probability of occurring
and its impact on project objectives. Sometimes experts or functional units
assess the risks in their respective fields and share these assessments with
the team (Office of project management process improvement, 2003). Components
of risk analysis were introduced by Kindinger and Darby (2000):

 

·      List
activities, tasks, or elements that make up the project.

 

·      Identify
applicable risk factors.

 

·      Develop
risk-ranking scale for each risk factor.

 

·      Rank risk for
each activity for each risk activity.

 

·      Document the
results and identify potential risk-reduction actions.

 

 

·      Qualitative risk ranking guidelines

 

A method to systematically document
the risk for each qualitative risk factor identified in Figure (2.4) is needed
to perform a consistent evaluation of risk across the different project or
program activities. To make this possible, qualitative definitions of risk factors
are defined for three categories of risk (none/low, medium, and high). A simple
example of a completed evaluation is shown in Figure (2.5).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Funding constraints

 

 

 

Prioritization uncertainty

 

 

 

Under funding potential

 

 

 

FUNDING

 

 

 

RISK

 

Escalation
sensitivity

 

 

Productivity uncertainty

Labor
rate uncertainty

COST

SCHEDULE

Area/Facility availability

Equip & material $ uncertainty

Personnel availability

RISK

RISK

Estimate
completeness

 

 

Equipment/material availability

 

 

 

Adverse
environmental conditions

 

TECHNICAL

 

RISK

 

Rework potential

 

 

Technology maturity

 

 

Design & construction methods maturity

 

 

Performance
requirements severity

 

 

Infrastructure
Needs

 

 

Design data availability

 

 

 

 

 

 

 

Figure 2.1. Qualitative Risk Factor Ranking Criteria, adopted from
(Kindinger & Darby, 2000)

 

 

System

 

Element              Element             Element

 

A                       B                      C

 

 

 

 

 

Risk
Factor

 

I

 

II

 

III

 

Activity Total

 

 

 

 

 

 

 

Risk Factor

A

B

C

Total

Low (1)

Low (1)

High (3)

5

Medium (2)

High (3)

Medium (2)

7

Low (1)

Low (1)

High (3)

5

4

5

8

 

 

Figure 2.2. Risk Factor Evaluation,
(Kindinger & Darby, 2000)

Uses
of Qualitative Risk Analysis Results

 

 

Qualitative risk analysis results
are used to aid the project management team in three important ways (Kindinger
& Darby, 2000):

 

·      The qualitative
risk analysis factor rankings for each project activity provide a first-order
prioritization of project risks before the application of risk reduction
actions. This general ranking process is shown in Figure (2.5).

·      The more
meaningful, result from conducting a qualitative risk analysis is the
identification of possible risk-reduction actions responding to the identified
risk factors. Risk reduction recommendations are often straightforward to make
when the risk issue is identified.

 

·      The final use
of the qualitative risk analysis is the development of input distributions for
qualitative and quantitative risk modeling. The integrated qualitative and
quantitative risk analysis is shown below in Figure (2.3).

Post Author: admin

x

Hi!
I'm Sonya!

Would you like to get a custom essay? How about receiving a customized one?

Check it out