Factors Causing Failures of Construction Project in Terms of Cost and Time Overruns - Term Paper Example

Construction industry: An overview: Construction industry is one of the industries that offer the most rough and tough working environment for those associated with it. It is no doubt a rapidly growing industry. It is evident from the erection of tall and impressive buildings that offer multidimensional uses. But this becomes possible as a result of indefinable dedication and continuous hard work of the construction project players, who go through innumerable difficulties and face a lot of challenges to make it happen. The process of construction is not a bed of roses. It is not possible for an outsider to imagine the intricacy of process the skyscraper has gone through during the course of its construction. Construction is indeed a challenging and risky business and not many contractors have been successful in making money out of it. Despite the hard work of countless days and nights, a lot of project owners end up incurring huge losses. This happens because of an unorganized and unprofessional approach from the parties involved in it toward the project execution. As construction industry is a growing and maturing sector, not many project teams are reported to conduct the work as per the standards and procedures laid out in the construction literature. New construction techniques and methodologies are emerging as more and more projects are being analyzed. Though the conclusions drawn from their study require time to be practiced in order to make the process more organized and beneficial for the investors. The factors causing failures in terms of cost- and time- overruns are analyzed in the following text. Causes of project failures: Construction project goals and missions are negatively affected by the wrong construction management practices prevailing in the project. There are a number of factors that play their part in that. These factors include, but are not limited to wrong project procurement processes, unrealistic planning and impracticable scheduling, uncompromising behavior of the team members involved in the project, project disputes, insufficient project risk management measures and personal interests. Besides there are numerous social, environmental and political issues that influence the project outcome. Due to the rough and tough nature of the construction process, there are numerous controllable and uncontrollable risks associated with it. It is imperative that the project participants consider them thoroughly and take necessary actions in advance in order for them to earn profit from the project. They should tend to adopt a proactive approach toward risk management, failing which they are likely to face a mere waste of time and money. It is therefore necessary that the project owners work out the risk management processes most suitable to the nature and scope of their project. This can be achieved through making an analysis of the challenges faced by the project participants in the past projects of similar nature conducted in the same environment, the way they had influenced the project, and the performance of the measures taken to mitigate the risks. Approach of the previous project members should be analyzed to modify the intended approach toward risk management in the upcoming projects. Role of insurance in risk management: One way to cater for the risks associated with a project is to purchase necessary insurances to cover them. Investment in project insurance tends to minimize the unnecessary expenditures, and bears fruit for the project participants in the long run. Therefore, all concerned parties should jointly agree to purchase necessary insurances. However, various controversies have been noticed in the past projects related to the insurances. The traditional approach toward purchasing project insurances and the attitudes of the project parties are discussed as follows. Traditional approach toward project insurance: Various construction law formulating bodies including Federation International Des Ingenieurs - Conseils (FIDIC) have formulated laws to cater for the construction risks. These conditions of contract have been internationally followed in many renowned projects. These contracts allocate various insurance responsibilities to the different parties. The general trend that is followed in the construction requires all parties to individually purchase certain insurances to manage risks associated to their respective portions of work. The contractor is contractually bound by the client to purchase certain insurances to protect his work and workers against the potential risks he is likely to encounter during the tough and tedious course of project execution. Many clients require the contractor to produce the proofs of purchased insurances imposed upon him by the conditions of contract before he would be awarded the contract. Insurances that a contractor is obliged to purchase include Workmen’s compensation insurance, Contractor’s public liability and property damage insurance and Contingent liability insurance. Apart from them, Property insurance and Owner’s liability insurance may be placed in the domain of either the client or the contractor, as the conditions of contract suggest. Besides, the contractor may also be compelled to acquire certain other types of insurances depending upon the risks associated with his job in a certain environment as perceived by the client. In addition to the insurances imposed upon the contractor by the conditions of contract, he is also bound to acquire certain other insurances as decided by the law prevalent in the project region, irrespective of whether or not it is stipulated in the contract agreement. Some of them include Vehicle insurance, Unemployment insurance and the Social security insurance. Contractor needs to acquire these insurances in order to plan for the remedy of losses brought by the risky nature of the construction process. In a construction project, it is not only the contractor who is required to insure his belongings and work, but also other parties including the client, consultant and designer need to gain certain insurances as stipulated in the conditions of contract. Normally, the insurances are acquired to cover the losses incurred due to the individual party’s fault. However, there are certain factors beyond human control like floods, wind-storms, bomb-blasts and earthquakes against which the project needs to be insured. Such construction hazards are generally considered as the owner’s liability because there is nothing much a contractor can do to avoid them. Therefore the owner needs to insure his project in order to regulate the losses generated by such natural phenomena. Likewise the consultant and the designing firm need to acquire certain insurances to cover the claims regarding the designing and supervision. Thus traditional approach toward project insurance necessitates that all of the parties attain insurances as required or as needed individually, and the insurance companies are meant to protect their respective policy holders. Modern approach toward risk management: Bamforth (2006), identified two approaches on p.6 of his report that would tend to simplify and ease the dispute resolution process and hence aid the timely project completion and generate larger benefits for the project teams. First of the two ways is to encourage dispute resolution by means of simpler and cheaper methods like mediation and arbitration. This would get the matter resolved through mutual consensus of the conflicting parties whereby a third party would try to work out a solution acceptable to the opposing parties which would consider the interests of both. Such methods are cheaper and quicker to reach at a conclusion, and facilitate the work’s conformance to schedule. The second way as identified by Bamforth in his report necessitates that all concerned parties be mutually united in the wellbeing of project and determined to draw a conclusion through mutual consensus without getting involved in any blame game to work out the causes of the hazard. This requires all parties involved in the project to own the project so that they do not entertain personal interests on the cost of the project. There are certain merits and demerits associated with both the methods, however their severity varies. It depends on which dispute resolution method is stipulated in the conditions of contract to be adopted in a specific project. Certain methodologies have been devised to replace litigation, because litigation is not appreciated since that is a very costly and time consuming process. Additionally, litigation is not competent enough to work out appropriate solutions because of a lack of technical knowledge related to the construction process in the deciding personnel. Arbitration is slightly preferred over litigation for there is less involvement of courts and legal complexities in the process, neglecting which arbitration is not much different from litigation. However, adjudication and mediation are very appreciable means of dispute resolution in construction projects. Comparison of the two approaches: A major characteristic of the modern approach toward risk management is a modified project procurement system, whereby joint-ventures or partnering is very encouraged in the project ownership. This allows the owners to share risks associated with the project. In such a procurement system, the ownership-partners need to jointly work on the project feasibility studies, preconstruction activities, designation of project team members and their responsibilities and assessment and management of the project risks. Such an approach toward project execution removes personal conflicts among the parties involved, thereby reducing project completion time and cost and earning larger benefits. However, in a traditional approach toward project risk management, a lot of cases have been reported in the history in which the progress of project has been immensely affected by clashes between contractor, client and consultant on petty issues. When, each party acquires individual insurance, then certainly none of them wants to bear the claims. This phenomenon gives birth to the blame game fundamentally responsible for tarnishing the relationships among the project parties, which becomes the route cause of project failure. It is not only the allocation of charge that is difficult, but also the process ends up into damaged links among the concerned parties, which destroys the holistic approach toward project completion. Barriers of communication are formed, which is a very negative factor for a project, because for a project to be successful, it is imperative that the parties involved in it, convey the right idea to the right party in the right time. In an atmosphere of conflict, parties tend to be reserved. They get so involved in blaming one another for the hazards that have happened, that they forget to unite to fight the hazards that have to come on the project. Also, it is very difficult to decide who should be blamed for a certain type of hazard, that has occurred. Construction is a risky business. We all meet with various types of accidents in our daily life. If it so happens, does that mean we have been careless and not considerate about our own lives? Certainly not! Likewise, none of the project parties wants accidents to occur on the project site, yet they do because it is natural for them to occur. But when they occur, the biggest sufferer is the client in the traditional approach toward risk management, because he is the ultimate owner of the project and accordingly the loss. Besides, the procedure for accusing the contractor for the hazard which has happened and putting charge on him is very expensive and time-taking for the client. It might take the client long enough to accuse the contractor of the matter through proper legal procedure that the legal charges might exceed those brought to him by the original hazard. Besides, the courts referred to in litigation for dispute resolution fail to assess the technical aspects of the construction process because of their lack of knowledge and expertise in the construction process, and the chemistry of relations among the parties involved in the project. This delays the process of dispute resolution further giving rise to further increased costs to be borne ultimately by the client. Whereas the modern approach toward risk management causes the project teams to concentrate more on the problem solution than charge allocation to the responsible party, in order to reduce the resolution time and accordingly the construction costs. Additionally, the joint venture form of project ownership distributes the costs evenly among the owners, which becomes lesser and bearable for them as compared to the otherwise approach. However, this is necessary that responsibility is allocated in the right manner to the deserving party. The best way for a client in order to ensure that the project costs do not overrun is by hiring a consultant who would look after the project from its start till its completion, and ensure that the project would be completed within a certain pre-established amount of money. This can be achieved by giving the consultant this leverage that all the unachieved costs may be shared evenly by the client and the consultant. This would inculcate a unified approach between both of the parties toward the project completion and minimize the project costs, by timely solution of the disputes arising. Another way to achieve the mutual consensus of the project parties is by getting them involved in partnering pacts, which can be designed for laying out points of mutual concern between client and contractor, client and consultant or contractor and consultant. These partnering pacts are increasingly being employed in the UK’s construction industry and have been successful in improving the relations between the concerned parties as identified by Bamforth (2006) in the same report as referred to before. The partnering pact requires both the involved parties to sign the document which may become binding or otherwise as stipulated in the conditions of contract. The idea has proven successful in a number of projects in the construction industry of UK and a key document to complement the environment of conflict between the various parties in the times of dispute arousal. However, the procedure has got certain limitations and managers hold a rosy view about the usefulness of partnering pacts in the times of escalation of the financial implications associated with the points of dispute in the project. Therefore, a more effective approach needs to be worked out in order to unite the interests of the project parties from the financial, social and cultural perspectives. This is possible if the project parties agree to work together in favor of the project, and share the financial losses or cost overruns at the end of the day equally among themselves. But this would require all parties to be financially sound enough to bear their share of the total cost overruns. Therefore, it is necessary that an upper limit be predefined in order to make the idea as much practicable as possible. Conclusion: Construction is a tough job. Minor carelessness can put the responsible parties in very dangerous situations, where they can even be compelled to pay from their pockets to come out of trouble. It is not only the contractors that are blamed for accident occurrence on the project traditionally, but also the consultants are blamed for carrying out poor supervision of the contractor’s work, and not performing their duty properly. In these circumstances, if these parties have not purchased sufficient insurances to cover the expected liabilities, then they may find themselves in great trouble any time during the course of project execution. This would give rise to a defensive environment where the parties would strive to safeguard their personal interests, and the ultimate sufferer would be the project. The solution to this problem is a change in the project procurement system, and the dispute resolution process. A holistic approach toward project completion can be materialized by joint sharing of project costs and risks among the project teams, through employing multiparty insurance, or in other words the project insurance in the project. References: Bamforth, S., July 2006. “Insuring the integrated team”. Available at: http://www.scl.org.uk/node/801. [Accessed 19 March 2010]. Read More