Risk Management: A of the Construction Industry - Case Study Example

Introduction

In the construction sector, there tends to be a significant rate of risks involved due to the complexities and changing nature of project environments, thus leading to situations of grave uncertainty and risk. Further, the construction sector is also exposed to technical, business and socio-political risks. On the other hand, the track record regarding how firms in the industry have been coping with various risks is not often effective as required. Consequently, numerous failures tend to emerge that range from a failure to adhere to quality and operational requirements, delays imminent in project completion and cost overruns. In this regard, it is evident that lack of proper systems related to risk assessment and management continues to create challenges for practitioners in the industry (Ehsan et al., 2010).

Further, in any given industry, companies often seek measures to improve, for instance, business efficiencies, commit to regulatory requirements and improve profits. In essence, such measures are also necessary in the construction industry. On another note, due to the risks that are prevalent in the construction industry, it is essential for companies to embrace a continuous and effective risk assessment process that is capable of addressing risks in a proactive manner. While most firms in the sector have put in place some form of measures for risk assessment, failures may arise due to the inability due to the development and implementation of a mitigation strategy that is ineffective. As such, situations often merge where practitioners in the industry lag behind and tend to be reactionary to unexpected risks. In this sense, the development and implementation of an effective mitigation programme can help to transform operations in the sector from being reactive to proactive (Ehsan et al., 2010). This paper examines various risks impeding operations in the construction industry and how they can be mitigated effectively by referring to the case study related to ineffective risk mitigation measures that not only contributed to delays in completing the new Wembley Stadium but also substantial losses suffered by the contractor Multiplex (Gribeen, 2007).

Sources of risks in the construction industry

The recognisable sources of risks in the sector tend to have an influence on a project’s performance particularly in terms of quality, cost and time. On the same note, sources of risks within the construction industry can also emanate internally or externally. Further, the risks that often emerge in the construction industry can be categorised in different ways depending on the nature of the risk. While risks can be peculiar to each specific construction project and each project practitioner, it is also important to note that most construction projects tend to share common risks such as construction, financial, performance, contractual and legal, socio-political, technical and organisational risks. Within the construction Industry, risk management is becoming more important as a differentiator in terms of the value that it can add to a company’s bottom line. As such, firms that often exhibit success in their various construction projects seems to be focused on developing and implementing effective risk mitigation programmes (Iqbal et al., 2015).

The classification of risks in the industry

Risk classification is considered as an important component of risk identification and its main is to structure the various risks that may affect negatively, for instance, on a construction project. The classification of risk sources is important because it assist project managers to be in a better position to predict risks (Akintoye & MacLeod, 1997). In terms of classifying risks as internal and external risks, it is evident that internal risks tend to be under the auspices of the project manager; however, the risks in this category are also considered to create uncertainty in various construction projects. In essence, the risks classified as internal may include, for example, technical risks (labour stoppage, safety problems and government regulations), non-technical risks (technological changes and issues related to design, operations and maintenance) legal risks (licences issues, lawsuit and issues related to subcontractors’). Conversely, external risks are considered to be outside the domain of a project manager; however, they sway the direction that a construction project is likely to take. In this light, the risks classified as external may include, for instance, costs and availability of raw materials (Akintoye & MacLeod, 1997).

Dynamics of risk management in the construction industry

Within the construction sector, risks management is regarded as the most challenging aspect of managing construction projects. In this sense, the project manager needs to be in a position to recognise and identify what is causing the risks and to trace such causes to ensure they do not affect negatively on the progress and prompt completion of the construction project. . In addition, risk management especially in the construction sector require a comprehensive and systematic measures that can help to identify, analyse and respond to risks in a manner that can ensure project objectives are realised. It is also important to introduce risk management particularly in the in the initial stages of a construction project because this phase of the project involve key decisions that include, for instance, choice regarding alignment and selecting the construction methods considered ideal for a given project. Similarly, the benefits attributed to the risk management process may emanate from identifying the existing and anticipated risks, carrying out analysis, improving the management processes, and using the available resources in an effective manner (Edum-Fotwe & McCaffer, 2000).

On another note, the construction industry is considered heterogeneous and largely complex. As a result, several key classifications in the sector tend to differ significantly. For example, construction projects in the sector may fall under housing, highway, heavy or industrial construction projects. Further, construction projects may include, for example, new construction or renovations. In this light, the consideration for the success parameters in the industry needs to focus on completion within the stipulated time, budget and requisite performance. However, a major barrier to the success of a construction project may emerge due to constant changes especially in the project environment (Mills, 2001).

Further, risks evident in the sector tend to increase depending on the project size. For instance, uncertainties in a construction project may increase depending on its size. The factors that often contribute to the increased uncertainties in large projects include planning and design issues, the complex nature of the project, conflicting interest from various groups, issues related to availability of resources, environmental concerns statutory regulations. Further, construction projects have also proved unpredictable from time to time. On this note, managing risks in the sector should be given priority to ensure project objectives become achievable by considering important factors such as cost, quality, time, safety and sustainability practices that focus on the environment and social wellbeing respectively. Risk management process in the construction industry should also be viewed as an iterative process. As such, the benefits in the sector can be realised through the implementation of a systematic process in entire life cycle a given construction project. Such a process should begin from the planning to the completion phase (Edum-Fotwe & McCaffer, 2000).

Case Study: The delays in the construction of the new Wembley Stadium by Multiplex

The delays in the construction of the Wembley Stadium provide a case scenario where the lack of effective implementation of risk mitigation programmes resulted in additional costs that were not part of the initial contract. Other than additional costs, lack of proper risk management measures also contributed to delays and subsequent postponement of the completion date, and within the planned budget. The contractor for the project was an Australian firm known as Multiplex. In essence, the delays in the construction of the new Wembley Stadium ended up tripling the cost of construction and resulted into significant losses for Multiplex. When the company bid for the project in the year 2000, the total construction cost was estimated at £326.5m; however, when the bid was eventually signed, the cost had increased £ 445m. The stadium was expected to be complete by the year 2003; however, work at the sited only began in 2002. As such, its completion date was changed to 2006, and this contributed to additional costs that made the total cost of construction to rise to £ 757m. Further, delays later led to the overall cost of construction to reach £ 900m. Due to ineffective risk management measures, the company dented its reputation in the construction marketplace and ended up being sold to a Canadian firm known as Brookfield Asset Management (Gribeen, 2007).

The factors that may have exacerbated the risks such as increased costs for the contractor included poor estimation of actual costs, the implementation of the design was not thought out exhaustively, ineffective information flows and incentives, lack of trust between the sponsor and contractor. During the bidding process, the government intended to award the contract to the lowest cost bids. As such, the process ended up creating a “winners curse situation” for Multiplex. This is because, while the firm was the lowest bidder, its estimation of the actual costs of the project appeared too aggressive and unrealistic. As such, the poor estimation of the actual costs contributed to a 36% rise even before the project begun (Strategic PPM, 2011).

On the other hand, the firm came up with a design that had not been tested before, and this presented greater risks in terms of its success rate. Consequently, the untested design proved problematic and as such, the sub-contractor sourced for implementing the design was replaced, which meant additional costs for Multiplex. Within the project, issues also emerged with regard to information flows, which appeared not to be straightforward and there were improper alignment of incentives. The contractor was also reluctant to communicate the project progress to the sponsor and shareholders respectively. As a result, tensions emerged between the sponsor and the contractor, which almost ended up in a legal tussle. The senior management were reluctant to share information due to the implications that the delays would have on profits. The senior management ended up hoodwinking the public that all was well yet the project progress was experiencing numerous challenges. Further, lack of a proper communication channel between the senior management and the junior staff at the project site contributed to misplaced priorities (Strategic PPM, 2011).

Further, due to the delays that embedded the project, a culture of mistrust developed between the sponsor (UK Football Association) and the Contractor (Multiplex). A negative attitude was also evident among the workers with increased allegations of drug use at the work site. Overall, the Wembley Stadium Case Study presents numerous challenges that can arise due to ineffective implementation of a risk management programme in companies within the construction sector (Strategic PPM, 2011).

Relating the Wembley Stadium case study to the theory of constraints

In any given industry, including the construction industry, risks are unavoidable, and thus the need for the construction practitioners to maintain focus on implementing effective risk mitigation programmes. Multiplex suffered significant losses in its contract with the UK Football Association due to implementation of risk mitigation measures that were ineffective. As such, the firm would have avoided the higher costs and loss of profits that it suffered in the project process through a focus on a model such as the theory of constrains. In essence, this model would have helped Multiplex to identify and eliminate the existing bottlenecks in the project and to ensure the project is completed on time and without incurring additional costs. In the field of project management, performance is often dictated, for instance, by constraints. Further, these constraints tend to prevent firms from maximising their performance in an attempt to achieve the desired goals. In relating the model to Wembley Stadium case, people, policies, supplies, technology used, might have caused constraints or information related issues (Spector, 2011).

As posited by the theory of constraints, every system in an organisational setting tends to face some challenges that impede performance. From the Wembley Stadium case, it is clear that Multiplex was unprepared for the task ahead. It only rushed to secure the contract by coming up with the lowest bid, but did not put great consideration into the actual cost of constructing a new stadium. Consequently, the “weakest link” for Multiplex appeared to be ineffective implementation of risk mitigation measures to ensure there are no impediments to the successful completion of the project. Relying on the theory would have helped Multiplex to identify its constraint and subsequently, implement changes to ensure that the existing and future risks are mitigated. On the other hand, this model also identifies and eliminates constraints by focusing on five important steps (Schmenner & Swink, 1998).

Fig I: The five focusing steps in the theory of constraints

Source: Goldratt, 1990

In the five focusing steps related to TOC, the first step is aimed at identifying the existing or current constraints. In the Wembley Stadium case, the major constraint was the lack of a proper risk management plan by the contractor. As such, it became difficult for the contractor to mitigate various risks that emerged as the contract progressed. Exploiting the constraint as the second step in the process denotes implementing quick measures to address the identified constraint to the project’s progress. On the same note, quick measures can be realised by utilising the existing resources. The resources that Multiplex would have put to use to address the delays in the project completion include, for instance, human capital, technology and social capital. On the other hand, the subordinate and synchronise to the constraint focus involves reviewing the various activities in the project process to ensure that such processes addresses the identified constraint (Schmenner & Swink, 1998).

Important activities that would have allowed Multiplex to avoid risks such additional cost of building the stadium and negatively publicity associated with the delay include an improved communication process between the sponsor and contractor, senior management and junior staff, and also embracing transparency and accountability to the public in general. Such a process would have accorded Multiplex the benefit of doubt from the key stakeholders and the public in general, and to allow the contractor to come up with appropriate mitigation measures without being placed under constant pressure or scrutiny (Gupta & Boyd, 2008). Elevating the performance of the constraint, on the other hand, entails the consideration of further actions that can help to eliminate the identified constraint. Multiplex would have avoided the problems it faced by ensuring that it had a contingency plan in case things did not work out as initially planned. The last step in this process involves an engagement in a continuous improvement cycle. Similarly, risk management should be a continuous process due to unforeseen changes that may emerge during the duration of the project at hand. Multiplex lacked a plan that ensured it engaged in a continuous process of dealing with the risks that emerged during the duration of the project, and as such, the firm incurred significant losses (Gupta & Boyd, 2008).

Conclusion

The various risks that are prevalent in the construction industry require firms in the sector to maintain a focus on effective implementation of risk mitigation programmes. Such measures need to start in the initial phase and flow to the completion phase of a given project. Further, implementation of risk mitigation measures needs not only to focus on the current risks but also on the unforeseen risks that may have a negative impact on the progress of a construction project. On another note, due to the competitive nature of a globalized marketplace, the firms in the construction industry can gain a competitive edge by considering risk mitigation programmes as a differentiator in the business strategies they are likely to embrace.