Risk Management in Construction Industry - Assignment Example

Risk Management in Construction Industry 1. Introduction Risk management is a process, which is used to identify and measure the risks being faced by a company or a firm. Risk management refers to the concept of keeping the risks under control so that they do not create any kind of dangerous situation for the company. This process of controlling and measuring the severity of risks is termed as risk management process. There exist many risk management processes, which help the companies, come out of the fear of risks and move towards stability and success in the market. 2. Risk Management in Construction Companies Akintoye and MacLeod (1997) state, “Risk management is essential to construction activities in minimizing losses and enhancing profitability”. Construction industry faces various types of critical risks, which need to be handled carefully in order to keep the companies away from the hazardous effects of risks. “Risks need to be properly identified, evaluated and addressed” (Sharp, 2009). The managers of the construction companies focus properly on identifying and assessing the risks, which the companies are likely to face at some point in future, with their operational, financial and, contractual activities. Lyons and Skitmore (2004) state, “Risk identification and risk assessment are the most often used risk management elements ahead of risk response and risk documentation”. An effective and well-organized mechanism is required in order to analyze the risks associated with the companies while achieving the balance between identified risks and the operational necessities of the construction companies. Edwards (1995, p. 4) asserts, “Risk analysis is the identification and assessment of the likelihood of hazards”. Some companies try to eliminate the possibility of risks whereas some companies focus on reducing the chances of occurrence of risks. A well-organized, cost effective, and reliable risk management system should be implemented in any construction company not only to identify the associated risks but also to take proper measures to reduce the occurrence of all sorts of risks. 3. Types of Associated Risks There are various types of risks associated with the construction industry. The risk management department of any construction company can never overlook these risks because these risks have the ability to destroy company’s image in the market. Let us discuss some of the most critical risks related to the environment, safety, and structural engineering departments of a construction company. These risks include design assumption risk, structural development procedures, fire risk, and environment uncertainty risks. 3.1 Risk of Design Risk of design is one the most critical risks associated with the construction companies. This risk occurs when a company develops the structural design of a building without getting it approved by the client. The structural design of a building should be approved by the client in order to avoid occurrence of design risk. Let us take an example in which an architect develops the design of a building and sends it to the company for development. Now, in this case, the likelihood of design assumption risk increases because the client can raise objection at a final stage of development by mentioning that the design needs to be altered because it was not what he expected. In such cases, it becomes very difficult for a company to satisfy the client or alter the building according to the desire of the client. The risk management strategy for such kind of risk can be to arrange a meeting between the client and the company before starting to develop the building. It is because the meeting will be helpful for both the company and the client to agree on the design prepared by the architect. 3.2 Structural Development Procedures Risk Structural development procedures risk is also a very critical risk associated with the construction industry. These are the procedures, which are to be checked continuously during the development stages of a building in order to make sure, whether the building is being constructed according to the standards of the company or it needs some improvements. The risks occur if any of the procedures is not found up to the standards. The procedures, which are checked for ensuring quality, include planning and implementation of the selected architectural design, quality of the raw material being provided by the suppliers, quality of the building being developed, implementation of appropriate safety measures, and some legal issues related to the structural design of the building to be developed. Risk may occur when these procedures are not implemented properly and efficiently during the development of a building. 3.3 Fire risk Fire risk is related to the safety and security of people working at the construction site. There are various risks associated with fire, which include explosion risk, short circuit risk, and many other types of risks. Fire occurs at the construction sites due to negligence shown by the employees during carrying out work related to installation of electricity wires and cables. For example, if an electrician does not repair or join the electric connections of a building in an appropriate manner, fire is likely to occur in that building at some point in future. “Employees may be required to wear safety goggles, gloves, or earplugs in order to ensure safety and thus minimize the chances of injury through company negligence” (Tatum, 2010). Fire hazards not only result in causing damage to the buildings but also injure many people working in and around the place of fire. The management of a construction company can reduce the occurrence of fire by taking useful measures such as installation of reliable and guaranteed wires and cables and installation of effective fire control mechanisms. Fire risk management staff takes appropriate steps to ensure building stability in case of fire, to ensure employees’ safety, and to ensure customer satisfaction with the company. 3.4 Risk of Environment Uncertainty Shen and Tam (2002) state, “The control of environmental impacts from construction has become a major issue to the public”. Uncertainty of the environment is another risk related to the construction industry. Environmental risk management is one of the major tasks for the contractors because environment related risks can not only lead to unforeseen delays but also they can result in loss of material needed for construction. Environment uncertainty related issues and problems include unexpected rains, loss of raw material, delays in the project’s deadline, and earthquakes. Unexpected climate changes and earthquakes are those problems, which can create very serious problems for the construction companies. 4. Risks Can Lead to Poor Performance Risks can lead to poor performance of the construction companies in the market. They not only make the companies operate inefficiently but also destroy the image of the company in the market. Risks also lead towards the poor performance of employees because if they are not confident about their safety, their attention will be diverted from their job responsibilities, which will make the employees inefficient and less productive. Inability of the risk management department of a company to respond properly to any kind of expected risk stops the company from achieving its goals and objectives. Flanagan and Norman (1993, p. 45) assert, “Attention to risk is essential to ensure good performance”. It is the responsibility of the risk management departments to perform risk management activities regularly. The risk management staff should not only be able to identify all sorts of possible risks that a company may face but also it should be able to take effective measures in order to eliminate the occurrence of risks. 5. Some Established Management Practices The risk management practices, which can be established by the construction companies, include taking steps to eliminate the occurrence of identified risks and cutting off the negativity of all sorts of risks. The negativity of the risks can be cut off by analyzing the possible negative outcomes of the identified risks and then making efforts to reduce the negative effects of those risks. The occurrence of identified risks can be eliminated by analyzing the impact of risks not only on the company but also on the employees and then adopting effective strategies to reduce or eliminate the occurrence of risks. 6. Processes of Risk Management Preventive and mitigative risk management processes can be used in the construction industry. Preventive method is effective at the early stages of construction whereas mitigative method is used to minimize the risks during construction (Kartam,N. and Kartam, S., 2001). One of the widely used risk management processes in the construction industry includes identifying the risks at the start of the design phase of the projects and taking steps to reduce the chances of occurrence of those risks in all phases of the projects. 7. Conclusion Summing it up, there are many kinds of risks associated with the construction industry, which need to be identified and tackled effectively and efficiently by the risk management staff of the companies. These risks create various problems for the construction companies. The risk management staff should be able to tackle the risks effectively in order to make the companies come out of the fear of risks. There exist proper risk management practices and processes that should be implemented in order to identify, measure, and eliminate the risks, which are likely to be faced by the construction companies. References Akintoye, A. and Macleod, M., 1997. Risk analysis and management in construction. International Journal of Project Management, 15(1), pp.31-38. Edwards, L., 1995. Practical Risk Management in the Construction Industry. London: Thomas Telford Publications. Flanagan, R. and Norman, G., 1993. Risk Management and Construction. Oxford: Blackwell Publishing. Kartam, N. and Kartam, S., 2001. Risk and its management in the Kuwaiti construction industry: a contractors’ perspective. International Journal of Project Management, 19(6), pp.325-335. Lyons, T. and Skitmore, M., 2004. Project risk management in the Queensland engineering construction industry: a survey . International Journal of Project Management, 22(1), pp.51-61. Sharp, D 2009. Managing Business Case Risks, viewed 08 December 2010, Shen, L. and Tam, V., 2002. Implementation of environmental management in the Hong Kong construction industry. International Journal of Project Management, 20(7), pp.535-543. Tatum, M 2010. What is Risk Management?, viewed 08 December 2010, Read More