Risk Management in the Construction Industry - Wembley Stadium - Case Study Example

Risk management in the construction industry: Case study of Wembley Stadium Introduction Construction projects are often complex and require proper planning prior to signing a contract. Most contractors often find themselves in financial risks because of poor planning. For instance, there are different types of contracts and when they are signed, it is almost impossible to renegotiate for another contract where in the process of completing a project, the budgeted cost increases than the one signed for by the contractors. Most governments often approve contractors with the lowest bid and the type of contract is always a fixed contract. In this sense, where any cost arises that was not in the contract, then the extra costs for completing a project are often the liability of the contractor. The other risk faced by contractors in the construction sector is the challenge of identified an efficient subcontractor to help in the completion of the project and who can deliver on time. Most construction projects have a time line and the services of subcontractors important in completing the project on time. However, poor planning can result in a delay to complete the project and this also result in additional costs for the contractor in case the contract signed a fixed price contract. In a fixed price contract, the risk remains with the contractor and as a result, the project manager and the team working in the construction project need to conduct an extensive risk assessment to ensure that risks during the progress of the project are minimal. This is because in such a contract, unforeseen risks related to a project often remain on the side of the contractor (Adams, 2008). This paper examines the failures in the construction of Wembley stadium and how and an effective risk management process can be used to avoid such failures. Case Study: Project Failures of the Wembley stadium project Wembley stadium is in England and mostly used for football matches and was first constructed in 1923. However, as a result of its dilapidated nature, the government decided to rebuild the stadium to replace the original one. As a result of poor planning, the project took longer to complete than previously expected. In addition, the cost for completing the project also increased compared to the initial estimates. The design of the stadium proposed by the winning bidder involved using steel arch, which added an aesthetic value to the stadium in addition to being a load bearer. This means that the structure did not need many internal support considered to obstruct the stadium’s view. The arch was also believed to improve the seating quality within the stadium. However, this design had never been used previously and most contractors often rely on previous design to draw on when working on a new project of similar nature. This meant that the design for the new stadium was the first of its kind and this present a risk from the beginning with regard to accurate planning for the project (Arminas, 2002). Since this was a project initiated by the government, the contract was awarded to the lowest bidder. This often pose a problem in terms of coming up with the actual cost to complete the project. For instance, the cost of completing the project surpassed the actual cost by 36% (Arminas, 2002). Further, implementing the arch design also became a problem and this resulted in the subcontractor being replaced prior to the completion of the project, resulting in additional costs for the contractor. The subcontractor tried to use a new design that was untested in any previous designs for stadiums (Arminas, 2002). Most projects that tend to be too innovative often find themselves in a precarious situation as a result of relying on untested models. In the case of Wembley stadium project that had a formal budget and a timeline, experimenting with new design was unwise decision for the contractor. The project also faced challenges because of problems with regard to information flow, which was not straightforward and a lack of properly aligned incentives. In addition, the contractor was economic with information; thus, keeping shareholders in the dark with regard to the progress of the project. This led to contradictory flow of information to the public who also had an interest on the progress of the stadium since it was being built by the taxpayer’s money. As a result of this conflict of interest, the sponsor of the project (government) was concerned and contemplated taking legal action against the contractor for the Wembley project. Legal action for delay in completing a project is one of the risks that a contractor can face in a fixed price contract. While on the other hand, delays also have negative impact on profitability for the contractor (Jacobs & Richard, 2011). The other problem with the project was that there was lack of coordination between the senior and junior staff and as such, the junior staffs were more informed regarding the project than their senior managers were. For instance, while the junior staff new about the project facing a delay, the senior management insisted the project was on track. This is because they never took time to interact with the staff on the ground to understand the project’s progress (Arminas, 2002). On another note, the delays in the project further resulted in a strained relationship between the sponsor of the project and the contractor. This created a situation where both parties were no longer working together since the government was now unsure concerning the completion dates (Arminas, 2002). The vacuum with regard to communication between the sponsor and the contractor may have loosened the pressure on the contractor, but this is a risk for the contractor in terms of tarnishing its image in the construction sector. In most construction projects, scope changes often result in delays as evident in changing the arch design for the Wembley stadium project (Jacobs & Richard, 2011). Looking at the failures of this project, it is notable that using untested item or design in a project can result in further costs and delays. This is because it has never been done before and estimate costs are just speculations. Further, fixed price contract often exacerbates risks for the contractor when estimating costs for a project. This is because in a rush to win a contract, bidders often estimate costs in hurry without proper consultations regarding the viability of the estimate costs. As such, a project of this nature required proper planning and a risk management process to complete the project on time and avoid unnecessary costs that impacts negatively on profitability (Jacobs & Richard, 2011). Risk management process Project of this nature required the project team to conduct an accurate risk analysis by looking at the sensitive areas that can derail the project. Since this was a fixed price contract, the project team needed to be aware from the beginning the importance of implementing a proper plan to avoid delays that may contribute to additional expenses incurred by the contractor and not part of the contract. This means that the project team must first identify the anticipated risks. For instance, this project was to use a design that was the first of its kind and as such, it was a major risk since this design has never been used anywhere before. In order to mitigate such risk, the project team should have acquired the services of a consultant to provide technical expertise with regard to selecting the most qualified subcontractor to install the arch in the stadium. However, due to lack of consulting the advice of experienced experts, the contractor ended up enlisting the services of an incompetent subcontractor; thus, leading to delays in the completion of the project since the subcontractor had to be replaced. The shareholders of the construction firm involved in the project also share this loss. The project team also needed to look at other technical problems that may occur in the process of implementing the project. This includes logistics related to the supply to construction equipment to the site and how to implement efficient IT solutions that would fast track the installation the arch in the stadium (Aloini, Dulmin, Mininno & Ponticelli, 2012). In identifying risk that may emerge in the project, the project team should have also analysed the risks associated with the management of the project. For instance, managing the project required a working alliance between the sponsor and the contractor. This helps to smoothen the progress of the project since they keep communicating regarding the project’s progress and helps to minimize conflict of information in the public domain. The government was not the only interested party in this project, but also the public since it is public coffers that were being used to build the stadium hence; consistency of information to the public by both the contractor and the government help to loosen pressure on the project team at the site (Miozzo & Ivory, 2000). The staff in the project also needed to assess the organizational risks both at the top management and at the project site. The decision on organisational structure to be used by the project team for instance, in the Wembley stadium project should have been one that allows both the senior management and the junior staff at the site to work in unison. In essence, the senior management needs to take an active role in the project by also engaging the junior staff at the site. This is important because it is the senior management that is involved in updating both the sponsor of the project and the construction firm shareholders regarding the progress of the project. Working with the junior staff helps in improving information sharing and helps to avoid conflicting information from the senior and junior staff regarding the completion of the project. Further, working as team in a project of such magnitude helps in making accurate decision and prevents the risks of extra costs that may emerge from a rushed decision by the top management (Perera, Hayles & Kerlin, 2011). Since this project attracted a huge public interest, the project team should have also assessed the external factors that can affect negatively on the project. During the progress of the project, there were a number of whistle-blowers and in particular, the media that placed pressure on the contractor regarding delays in the completion of the project. In addition, the public outcry meant denting the image of the construction firm and this may affect negatively in terms of winning future contracts and its shares in the stock market. As such, managing external risks for a project of this nature require setting up an information centre where the public and other interested parties are updated on a frequent basis regarding the progress of a project. This is important in terms of managing speculation by the media and the public in general (Perera, Hayles & Kerlin, 2011). As part of risk management, managing financial risks is the key to ensuring that a firm realises maximum profits from a project. Since most government projects prefer fixed price contracts, it is important to come up with accurate estimates to avoid incurring additional cost in case there are certain changes prior to the completion of the project. This requires the project team to make provision for costs that may arise prior to the completion of the project. Such provisions may come in the form of contract change or defective pricing (Miozzo & Ivory, 2000). Conclusion Risk management process in the construction sector is vital in terms of ensuring that the contractor avoid incurring additional costs that impact negatively on profitability. Further, identifying risks earlier enable project teams to come up with mitigation measures to enable a project to be completed within the stipulated timeline. In the Wembley case study, the failures experienced prior to the completion of the project were as a result of lack of a proper risk management process by the project team. Reference Adams, F.C. (2008). Construction Contract Risk Management: A Study of Practices in the United Kingdom. Cost Engineering, Vol. 50(1), 22-33. Aloini, D., Dulmin, R., Mininno, V., & Ponticelli, S. (2012).Supply chain management: a review of implementation risks in the construction industry. Business Process Management Journal, Vol.18 (5), 735-761. Arminas, D. (2002) Wembley sends for OGC to monitor work on stadium. Supply Management, Vol. 7(13), 8. Jacobs, F.R., & Richard, B.C. (2011).Operations and Supply Chain Management (13th edition). New York: McGraw-Hill/Irwin. Miozzo, M., & Ivory, C. (2000).Restructuring in the British construction industry: Implications of recent changes in project management and technology. Technology Analysis & Strategic Management, Vol. 12 (4), 513531. Perera, S., Hayles, C., & Kerlin, S. (2011). An analysis of value management in practice: The case of Northern Irelands construction industry. Journal of Financial Management of Property and Construction, Vol.16 (2), 94-110. Read More