Risks and Uncertainties in Construction Projects - Essay Example

Risks and uncertainties in construction projects are inevitable. Claims on construction projects involve the and the contractors. They have to be prepared for the uncertainty of the construction projects. The risks and uncertainties associated with a particular project may be specific to that project, nevertheless, the identification of major risk factors has been the subject of study in the construction industry. This essay will examine what constitutes risks and uncertainty in the construction industry and then discuss this concept from the point of view of the client and the contractor. Risk is the possibility of suffering loss or harm and the impact that risk has on the involved party (AbouRizk). The severity of risk is measured by calculating the product of the likelihood of occurrence and magnitude of the impact. Uncertainty, as per CII (1989), is the gap between the information required to estimate an outcome and the information already possessed by the decision maker (cited by AbouRizk). It is virtually impossible to avoid all risks although it is possible to reduce or transfer them. Dealing properly with risks can make the difference between success and failure of any project. Risk management is of importance but both contractor and the client have to be aware of these risks and be able to manage them. Risk management procedures in the early stages of the project, helps to analyze and anticipate the risks, thereby reducing the problems and the risks associated with project. The major project risks include costs escalation, time for completion and construction delays, changes in the scope of the project, geotechnical and site related problems, weather and force majeure conditions, negligence in design and construction (Shapiro, 2004). The major sources of dispute on construction project include incomplete scope definition, inappropriate contract type, poor communication, and unrealistic applications. The construction projects operate with very tight margins and neither party is willing to take risks as even well-run construction projects can be complicated and inherently risky (LegalWeek, 2006). Negotiations for construction projects often boil down to who would take on what risks and at what costs. Clients want to pass on as much risk as possible to the contractor and look for fixed price but the no contract can be based or closed on fixed price. Events and situations can be outside the contractor’s control; the client could also ask for changes mid-way through the project. Certainty on price places significant risks on the contractor and since most construction projects work on 3% margin, the contractor would be left bare profits in case of escalations. The client always seeks the best quality, aesthetics, capacity, and functionality at minimum costs. Then contractor wants to spend the minimum resources and meet the minimum scope of work. A contract binds the contractor and the client with the risks and uncertainties each one has to be prepared for. Any claim in the construction industry is based on the terms of the contract. Hence, the contract should take into account the identified risks. For instance, fixed price contracts end up in claims, specially for complex design projects which have construction duration in excess of three years. Economic price adjustment on the other hand allows for controlled price escalation. The contractor has a limit to which he can carry the price escalation and any amount above that is passed on to the client. The design of the construction is an important area. The client would benefit by awarding the total contract for design and construction to one single contractor. This reduces the potential for argument regarding the source of construction problem. The client may lose control over the design of the construction and a gap is generated between the client’s objectives and the design process. A single contractor implies single point of communication, whereas if the two contracts were awarded to two different people, each would try to pass on his responsibility to the other and in the process, the client suffers. The client is normally not very educated in the design process and hence a consultant could help bridge the gap between the expectations of the client and the final project. Project completion is often delayed and in the mean time, the costs escalate. The client needs to regularly evaluate the contractor’s performance against a set of objective goals. To ensure timely completion of project, the client can offer incentive to the contractor but the goals should be realistic and challenging. In case of failure, the contractor would be penalized. The contractor, on the other hand, needs to safeguard his own interest as far as the scheduling is concerned. They should incorporate appropriate scheduling and monitoring techniques enabling them to assess the progress on a daily, weekly or monthly basis. Incentives related to performance bonus in the construction projects bring positive results as far as maintaining costs and schedule are concerned. To reduce disagreements and disputes, constructability analysis or value engineering is performed during the planning, designing and procurement process. This helps to mitigate problems and claims during construction. This is the interest of the contractor especially if the design contract has been given to someone else. This helps to identify errors, omissions and impractical design details, which if recovered later could adversely affect the cost and schedule of the project, thereby resulting in loss to the contractor. To avoid disputes in the costs and the schedule of the project, the contractor should submit monthly invoices along with a report and claims if any, regarding the performance of the work. The client on his part evaluates performance regularly. Involving a consultant is beneficial for the client. A monthly progress report is prepared by the consultant which is sent to the contractor for review and approval. If on the basis of this report, the contractor makes no claims, he loses the right to make any claims pertaining to this report in the future. The client himself would be incompetent to prepare this report, which is where the consultant plays, and important role. Changes in the scope of the project, unexpected indirect costs, overheads and overtime, affect the smooth implementation of the project. In mutual interest, the client and the contractor should have guidelines to determine the impact costs in their contract. Thus, when change orders are priced and negotiated, both are in a position to incorporate hard costs (labor, equipments and materials), and impact costs. A settlement can easily be reached on both sides for final adjustment. When there is a change in the scope of the project, the contractors include ‘reservation of rights’ to allow themselves the opportunity to make claims for additional money or time to complete the project. This clause is necessary for the contractor, as he may not get an opportunity to assess the increase in the time and cost once the scope of work changes. It is the contractor’s responsibility to inform the client within a designated period, after which the contractor’s claim would hold no value. The fact that ‘reservation of rights’ clause is important is evident from the contract between Wembley and Multiplex as cited by Legal Week. Multiplex, the contractors blame the Football Association (FA) for the time and cost overrun on design changes whereas FA retorts that nothing was changed. Geotechnical risks involve the effect of wind, waves, current, temperature or earthquakes. It could also be due to changes in the soil conditions for instance, existence of ground water, faults, swallow holes, or even the presence of capped reservoirs or methane (Atkinson, 2001). Allocation of liability in such conditions becomes difficult in construction projects. The economic environment may differ depending on the terms of the contract and consequently the risk on the side of the contractor is also altered. The risk differs depending on the contract. There can be two types of contract – lump-sum contract or the cost-plus-fee contract (Roxbury). The economic environment in two cases differs. In the lump-sum contract, work as defined and as required by the contract documents has to be completed within the contract time stated in the agreement. The contractor has to be complete the work as it was intended. In the cost-plus-fee contract, the client pays the contractor the actual cost plus a fee to cover the overheads and the profit. In this case, the client takes the greater portion of the risk and the contractor very little, while the reverse happens in the case of lump-sum contract. In conclusion, the traditional system of construction projects require a contract to be drawn up between the client and the contractor. This contract is not the sole determinant of the success of the project. Situation may warrant the contractor and the client to deviate from the contract and if both sides are competent and expect to depend on each other, the success is not in jeopardy. Both sides will do their best regardless of the contract. The terms of the contract are referred to only in case of mutual distrust, otherwise the terms of the contract are even forgotten. Mutual faith and respect determines the success of any project. Reference: AbouRizk S, Risk and Uncertainty in Construction, 19 May 2006 Atkinson (2001), Risk Allocation in Construction Projects, 20 May 2006 Legal Week (2006), Property, Planning & Construction: Constructive criticism, 20 May 2006 Roxbury S M, Construction Law: The Developers Responsibilities, http://www.eastendlawyer.com/Articles_1.shtml> 20 May 2006 Shapiro B (2004), Project Management Wisdom, 19 May 2006 Read More