Effects of the Economic Downturn in Risk Management - Essay Example

Name : xxxxxx Tutor : xxxxxxx Title : EFFECTS OF THE ECONOMIC DOWNTURN IN RELATION TO HOW RISKS ARE ASSESSED AND MANAGED IN CONSTRUCTION ACTIVITIES Institution : xxxxxxx @2009 Introduction An economic recession or down turn is a phase marked with a negative growth in the economy, increased levels of unemployment and reduction in the out put level. It is the negative growth in the economy for two quarters consecutively. The economic cycle can be grouped in four stages namely the boom stage, recession, the slump and the recovery stages. A fall from the boom stage down to the other stages marks an economic downturn. Other major features of this phase include a very slow or declining growth in the economy, reduced prices of assets such as shares, poor confidence and a declining investment level, increasing spare capacity and an increased level of borrowing within the government. Risk assessment is the process of identifying the possible threats or risks within a given sector and developing possible solutions and ways of mitigating and dealing with those risks. For effective decision making, the level of risks is measured against the expected out come or impact. Risk management on the other hand is the process of using the available resources to monitor, minimize and control the identified risks (Haimes 2004). Discussion The rampant economic downturn has heavily affected the construction industry all over the globe with specific activities such as construction of houses being the most hit. A decline in the level of out put has also been evident in building material manufacturing industries. The sector has predicted the stagnation of the market and a reduction in the employment figures as a result of the recession. A decline in the production index within the Norway and European Union construction sector was first marked in the 2nd quarter of the year 2008 with the index reducing by 7 percent by the 4th quarter of the same year compared to the year 2007. By 2009, the index had decreased by 14 percent. The down turn has also seen the decline and abandonment of new building constructions in many countries. The effects of production decline in the construction industries vary depending on the different sizes of the company in varying countries. Large companies in Denmark, Sweden, Slovakia and the United Kingdom for example seem to have been the hardest hit while small ones in the Portugal, Lithuania, Germany and Poland have been the most intensely affected. The effect was relative in Austria, Finland and Cyprus within the companies of different sizes (Ward and Coughtrie 2009). Construction has always been known to follow the GDP of most nations. In Spain, problems within the sector led to the slashing of the economic estimates of the country by the economy minister with the prediction that it would take a period of two years for the economy to rise. Over the years, the United Kingdom’s construction sector has continued to grow especially in the areas of home building, commercial property and retail. These areas however get deeply affected by the negative or lack of growth in the economy mainly leading to customers’ reduced spending and inventories thus limiting the uptake or implementation of activities such as the private ownership/construction of houses. The annual unemployment rate in Northern Ireland has currently risen by 90.5 percent, a value higher than that of the UK’s percentage of 88.6. The intense effects of the down turn in Northern Ireland worst hit the construction sector leading to a 4.2 % of employees drop since 2008, May and a % of 11.4 between the month of December 2007 and that of December 2008. As the economy continue to depreciate, each sector, both public and private, cuts its various expenses and cancels out some of its planned projects. Companies have for example been found to delay or post pone the construction of certain buildings and other facilities. The delay and cancellation of such projects has heavily affected construction companies whose demand, inputs as well as profits has continued to dwindle. Decline in the construction activities has led to the shrinkage of the labour market with the employment in real estate, building materials and legal services related to property being intensely affected. There has also been a sharp decrease in the number of newly constructed private housing with only for thousand, eight hundred and thirty one new such constructions in 2008 compared to nine thousand three hundred and forty three in 2007. according to the ‘EC Harris/ construction News Contractors’ the input costs for contractors in the United Kingdom in 1999 fell by 10.4 percent since September year 2008. This recorded consequent drops in labour and material costs by 12.2 and 3.7 percent respectively. Germany, Eastern Europe and France are examples of the few countries whose construction industries are overly equipped for economic downturn thus less likely to be affected. The increased loss of jobs, reduced housing value and other negative effects of recession within the construction sector has led to an intense need to have these sectors develop effective risk assessment and management strategies. The application of various techniques in risk management requires an intense analysis of the threats to ensure that workable and relevant control measures are put in place. In this case, managers dealing with construction activities need to comprehensively study the possible effects of economic recessions and develop necessary control measures (Ward and Coughtrie 2009). Administrators at Princeton University have reduced the capital plan cost by over 300 million dollars by scaling on certain construction projects and delaying others. The university is also seeking other ways of obtaining additional savings to enable them complete their most crucial constructions. As a way of ensuring that it rapidly rebounds once the economy improves, the university plans to continue designing and seeking approvals for the highly prioritised projects like for example the construction of the new neuroscience and psychology buildings. Most risks have been identified as construction and design related leading to the selection of a construction and design contract where by the cost and time risks are assigned to one contractor. Time overruns ware however found to be the greatest risks in any activity or project making it a very critical issue in enhancing the overall success of a project. The renovation projects are to be done using contingency funds. With this kind of strategies, the university is likely to complete their most critical projects using the initially planned budget cost and also ensure that unwanted costs are reduced. As a way of reducing the level of out puts and maintaining an input- out put balance, construction industries have not only retrenched a number of their employees but also reduced their employees’ wages. These industries have taken up compulsory retrenchment programmes as a short term measure. This however is a strategy that may be beneficial to the companies but very worrying to the employees who are mainly composed of the middle class groups/ casual labourers. An alternative strategy should thus be sought. One such alternative is the adopting work sharing rather than laying off the workers. Work sharing is the aspect of having employees agree to cut their work time and to allow a reduction in their earnings. This is mainly taken up as an impermanent measure and on voluntary terms between the firm and the employees. Provision of Unemployment Insurance benefits proportional to a worker’s reduced number of hours is one way of encouraging work sharing among employees. In countries where construction has not been adversely affected by the down turn, companies have established policies that prevent the renewal of employment contracts as a way of reducing costs spent on the work force. Other countries such as Lithuania and Latvia have adopted the employment of workers on temporary basis with an aim of enhancing flexibility when the economic conditions worsen. The government has also played a role in establishing control measures to deal with the threats of global recession and to boost the economy demand. Many of these measures involve public investment and have mainly helped the civil engineering section. The government established measures include the formulation of policies in relation to the construction sector. One major intervention measure is the introduction of tax concessions as a way stimulating demand in various areas of the construction industry, especially in housing. Extra tax allowances have for example been introduced on modification, repairs and maintenance of various buildings. The reduction of Value Added Tax on new house construction in Belgium and the increase of mortgage tax relief ceiling in Italy have been established as strategies to encourage the construction of houses. Another government measure has been the introduction of subsidies in countries such as Sweden that allocated subsidies of up to eight billion pounds to local investment in civil engineering and public building projects. In various cases, governments have changed the regulations and rules relating to the payment of social security as a way of maintaining the earnings of employees whose wages have been reduced. In Finland for example, the payments have been increased for employees who have employed in the firm for longer than 3 years. As a way of directly supporting companies in dealing with the costs of economic decline, governments such as that of Germany have allowed companies application of short term working allowances, of up to 60 percent wage reduction, when the wage cut is above 10 percent a minimum of 1/3 of the entire work force. The companies can later pass this 60 percent on to the employees. The employers can as well receive a reimbursement for half the security payments payable to the workers whose working hours have been reduced. In Norway, rules that govern lay offs have been modified to allow employers to provide wages for their workers for only 5 days as an alternative to ten days. On the other hand, employees are given benefits for fifty two instead of thirty weeks making it less difficult for firms to use impermanent lay offs as a way of decreasing wage bills rather than resorting into redundancies (Ward and Coughtrie 2009). Conclusion The economic down turn has had intense impacts on the construction sectors globally enhancing the need for the sector and the government to develop necessary risk assessment and management measures to ensure that the threats and negative impacts of this scourge are effectively dealt with. Though the measures have been a success in many countries, a lot still needs to be done to prevent further negative motion of the sectors as well as the national economy and to equally safe guard the welfare of both the employer and employees. Bibliography Haimes, Y 2004, Risk Modeling, Assessment and Management, Wiley-Interscience publishers, New York. Ward, T and Coughtrie, D 2009, Restructuring in the construction sector, Applica sprl, Brussels. Read More