Project Risk Management - Essay Example

Practice of Project Risk Management Process Risk management within construction projects entails a joint effort that involves multiple parties. The project outcomes within the construction projects involve a complex network or procedures. These procedures are identified as the major instigators of risks for construction projects. Construction projects involve risky undertakings, and contracts that result in inflexible management of risks. Contractors, in essence, need to engage in a collaborative and a risk management process considered less informal. However, relying on an already established risk management process within the construction site is suitable. A co-operation considered less informal in terms of risk management results in a number of gains. This requires a long term relationship or co-operation among actors of project network. For example, a risk management engagement considered less informal, results in a reduced transaction costs since, it limits the need for rather, expensive contractual engagement. In addition, a risk management process that engages co-operation minimizes dyadic relationships and introduces a network-level engagement. A co-operative means of managing risks results in efficiency and at the same time, pinpoints ineffective and expensive practices resulting into risks (Abdou 3). In the construction field today, risk management for projects is gaining recognition as a result of the critical procedures involved. Shortfalls witnessed in construction projects results from the complex nature of various implemented projects. The idea of subcontracting is taking precedence as a result of construction companies concentrating on their main businesses. This creates a situation where, involvement in projects becomes complex due to many project participants (Abdou 5). Uncertainty related to implementing successful projects is caused by various sources. Effective risk management for projects is tenable by developing an understanding of the relationship manifesting between risks and project networks. The stakeholders responsible for implementing a project need to recognize risks attributable to each participant in the project. This provides a reliable mechanism for risk allocation; on the other hand, risks within construction projects often arise because of the involvement of various sources. Construction projects often involve a continuous process in relation to decision making. This results from the existence of many sources that create uncertainty and risks. In most cases, such decisions are beyond the control of the bonafide project participants. Further, most construction projects fail in terms of meeting cost targets and stipulated timeline (Abdou 7). As a result, it is crucial for contractors to recognize risk sources earlier. For example, in regions such as the Far-East, delays often results from, interference by the owner, lack of experience on part of the contractor, poor planning and financial constraints. Such risks are often network-related, in order to execute a successful project, there is need for guarantee in terms of project participant’s experience and skills. Other factors to consider involve the network undertaking the project (Abdou 8). As a good practice, risk management within projects requires improvements for contracts, providing incentives for quality and recognizing capabilities. According to Baloi and Price, there are two categories of risks related to construction projects (262); this is illustrated in the tables below. Table 1: Typical Risks Technical Social Construction Economic Legal Financial Natural Commercial Logistics Political Table 2: Risks by Impact Dynamic vs Static Corporate vs Individual Internal vs External Positive vs Negative Acceptable vs Unacceptable Insurable vs Non insurable As suggested in both tables, the major source of risks for construction projects, are networks, this occurs either directly or indirectly. On another note, risks attributed to construction projects forms part of the project’s total cost and allocation of dangers influences on project’s budget. Projects related to construction, are considered as open systems, and not closed systems. This increases the variability and the risks related to a project. It is important to make adjustment in relation to risk management according to the cooperative situation of construction projects (Baloi and Price 265). However, the process of managing risks in construction projects still depends on contracts. The result of depending on contracts is the cause of many claims and disputes affecting construction projects. Contractual structures results in inflexibility and impacts negatively on actor relationships. In addition, contract clauses increase the project costs. In light of the risks, managing project risks require human judgment, experience and assumptions; however, as a result of risks being situation-specific, there is need for expert judgment (Baloi and Price 266). In addition, knowledge from expert judgment requires documentation, an act that is a characteristic of the construction sector or industry. Biased decisions on the other hand, may also result in risks. Most projects face problems as a result of focusing on risk management only in the identification stage. Future events known in advance are impossible to quantify, most construction companies lack experienced personnel to carry out efficient risk management. In addition, the construction industry lacks proper structures in terms of conventional measures to analyze risks. This result in every company formulating and testing own models (Baloi and Price 267). Uncertainty for construction projects not only result from implementing the initial stages of the project. As reiterated by Odeh and Battaieh, Improvements related to managing risks within projects entails providing incentives for projects completed earlier, and should form part of contract negotiations. It is also important to establish a mechanism where contracts are awarded in relation to experience and not the lowest price (68). Floricel and Miller further restate the need to initiate financial safety reserves, shared between participants in the project for purposes of mitigating crises in the event they occur(445).On the other hand of the spectrum, an efficient risk mapping practice involves a focus on all steps related to managing risks. This entails identification, analysis, response and monitoring of possible risks. Risks require an assessment that focuses on interdependencies; this may involve relying on risk maps, cause-effect diagrams and risk paths for purposes of visualizing anticipated risks. The construction industry currently is fragmented as a result of several parties; this makes the industry vulnerable in terms of project changes, unclear project scope and constant changes in company objectives. To achieve desirable outcomes, it is vital to establish provisions for vulnerability and risks. There are a number of assessment methodologies established to enhance the management of risks. In this regard, a methodology that takes into consideration interdependencies related to vulnerability and risk factors provides a realistic prediction for project outcomes (Floricel and Miller 445). To advance risk mapping, it is important to use data from previous projects for purposes of implementing an efficient risk map in the event of a new and similar project. Identifying risks in construction process is significant to successful completion of a project. When risks are mapped in the project management process, it is possible to achieve desirable objectives in relation to managing time, sustainability, safety, cost and quality. The construction industry suffers numerous risks as a result of unique features related to construction activities. This involves, long durations, complex processes and organizational structures that are dynamic and abominable environment. It also requires effective techniques to manage variable construction features. Further, risk management for projects needs to focus on the life cycle of a project and not just a single phase of the project (Chapman 150). Extensive research in relation to construction projects revolves around the risks that impact on project delivery; the factors considered include management, resource and parent factors. For example, according to a case study conducted on West Rail in Hong Kong, risk factors observed included overpricing materials related to resource factors. Additional risk included inaccurate budget, default by subcontractors and suppliers, related to management factors (Ward 331-332). The study also identified extreme interface related to the management of the project and influenced by parent factors. In another study related to safety management standards in China revealed lack of awareness regarding safety by top management, poor training and reluctance to allocate resources to improve safety at project sites. The Chinese contractors were also observed to engage in reckless operations (Ward 333). According to Ward, mapping for risks also involves reviewing cultural and structural factors related to implementing the management of risk at the conceptual stage. According to their study, contractors are familiar with the process involved in risk management, but its implementation in regard to the conceptual stage is considered low. Most contractors rely on qualitative while ignoring quantitative analysis (334-336). Mitigation plans for construction projects may involve dealing with risks earlier in the project to achieve full benefits. Assessing of risks earlier in the project enhance the opportunity for developing innovative solutions meant to cut on unnecessary costs. In addition, identifying risks earlier enable contractors to appropriately estimate costs related to risks in the initial budget. This is achievable through contingency plans, insurance or contractual clauses. Communication is essential among team members of a project to execute accurate assessment of risk. Effective mitigation requires constant exchange of information, such information should emanate from relevant stakeholders involved in a project (Jannadi and Almishari 492-500). Sharing of information should start from the initiation phase, the team also needs to identify emerging issues earlier and establish a means of internal communication to control escalating risks that cannot be attended to directly by the project team. Further, an assessment that is extensive in terms of assessment of risks is important immediately the project begins. This involves a rigorous assessment that assists in reviews and changes to the mitigation process. The management in a project should prioritize procedures related to risk management; further, risk management should be viewed as part of a company’s culture. This involves not leaving risk management entirely to experts. It is also important to advocate for measures that limits chances for litigations (Fidan, Dikmen, Tanya and Birgonul 302-315). Relating the practice of risk management to the case study of Wembley Stadium, the project attracted attention and controversy. As a result of huge public interest in the project, it required bidders to conduct a proper feasibility study prior to starting work at the construction site. Such study would allow bidders to assess the risks prior to making budget estimations, and setting time line, for the project completion. Further, the contract award was based on design-build. Prior to presenting a bid, it is wise to establish estimates regarding construction materials, human resource and other miscellaneous costs. Most government contract, are awarded to the lowest bidder; however, large scale projects tend to attract more risks and require early identification of anticipated risks to avoid delays and increase in project cost (Arminas 8). The English construction companies failed to present their bid because of uncertainty over perceived risks of such a massive project. The contract was a fixed contract and this meant additional costs are beared by the contractor. A lack of proper risk assessment early may lead to the contractor suffering liability rather gaining profit from the project. A company’s reputation is of significance in terms of improving chances to win other subsequent construction contracts. English companies feared placing their bid for the contract and the huge interest it attracted as a way of maintaining untainted reputation in the public domain (Arminas 8). The nature of the contract meant the winning bidder bears all the cost, the initial value for the contract was ?458million.However, a fixed contract means that additional costs for completing the contract remain the responsibility of the contractor. This includes responsibility for vicarious liability from other interested parties, and may arise in terms of litigations. Multiplex company awarded a subcontractor a fixed lump sum contract for supply, delivery, among others; the danger of offering a fixed lump sum contract to another contractor involves failure to meet the obligations of the subcontract. This means additional costs for Multiplex in the event that the subcontractor fails in meeting the stipulated obligations. Acquiring the services of another subcontractor increases the expenses and delays in terms of completing the project. Prior to soliciting the services of a subcontractor, Multiplex should have engaged the subcontractor in terms of committing to deliver on time and bear expenses for any delay not negotiated in the subcontract. Such an engagement enables a contractor to minimize risks of incurring additional expenses (Marsh 25). Designs required for construction projects need thorough testing prior to approval for use in the construction site. This should involve consulting experts as a way of reducing failures of the desired design. Multiplex increased the risks of failure with the project as a result of approving untested design for the construction of Wembley Stadium. Such short fall, plays a role in damaging the reputation of a company in terms of lacking experience in implementation of project designs. The company knew that any negative results would attract interest from the company’s shareholders back in Australia, but never made a concerted effort to improve the management of risks at the construction site. Delays in completion of a project whose contractual terms is known in the public domain may result in a strained relationship between the owner, contractor and other interested parties, this is another major reason that landed the company to court. Creating an information center for such a massive project is essential in terms of updating major stakeholders and other interested parties on the progress of the project. Further, the project team needs to engage each other in terms of the anticipated risks. This, also require the participation of the senior management, since they are responsible in providing feedback regarding the progress of the project. Multiplex lacked effective means of communicating the progress at the construction site, and this led in the provision of conflicting information regarding the project’s progress (Marsh 25). Proper channels of communication serve to improve mitigation plans in the event of identified risks that may delay a project. In conclusion, good practice related to risk management within a construction project, is crucial in achieving milestone. Early mitigation plans are essential in terms of limiting project delays, additional costs and numerous litigations from interested parties. Multiplex incurred a loss on the project as a result of not implementing appropriate practice in the management of anticipated risks at the construction site. Further, such a massive project requires a contractual clause to limit additional costs to the contractor. This is because such a project may require changes in the middle of the project, and this means additional cost, which needs to be shared by the contractor and the owner. In general terms, Multiplex Company suffered losses and delays in completing the construction of New Wembley stadium due poor practices in managing anticipated risks at the project site. Works Cited Abdou, Ossama A. Managing Construction Risks. Journal of Architectural Engineering 2.1 (1996): pp. 3-10. Print. Arminas, David. Wembley sends for OGC to monitor work on stadium. Supply Management 7.13 (2002): pp. 8. Print. Baloi, Daniel. And Price, Andrew. Modeling global risk factors affecting construction cost performance. International Journal of Project Management 21 (2003): pp. 261- 269. Print. Chapman, Robert.J. The Controlling Influences on Effective Risk Identification and Assessment for Construction Design Management, International Journal of Project Management, 19 (2001): pp. 147-160.Print Fidan, Gulsah., Dikmen Irem., Tanyer Murat.A. and Birgonul M.Talat. Ontology for relating risk and vulnerability to cost overrun in international projects. Journal of Computing in Civil Engineering 25.4 (2011):pp. 302-315.Print. Floricel, Serghei., Miller, Roger. Strategizing for anticipated risks and turbulence in large-scale engineering projects. International Journal of Project Management 19 (2001): pp. 445. Print. Jannadi, Osama. and Almishari Salman. Risk assessment in construction. Journal of Construction Engineering and Management 129.5 (2003): pp.492-500.Print. Marsh, V. Ambitious Multiplex reels from Wembley own goal: Debacle has tarnished the . property group’s reputation and left its shareholders nursing losses. London: Financial Times, 2005. Print Odeh, Abdalla.M. and Battaieh, Hussien.T. Causes of construction delay: traditional contracts. International Journal of Project Management 20.1 (2002): pp. 67-73. Print. Ward, SC. (1999) Assessing and managing important risks. International Journal of Project Management 17.6 (1999): pp. 331-336.Print. Read More