Risk Management Planning in Construction Industry - Research Paper Example

 «RISK MANAGEMENT PLANNING IN CONSTRUCTION INDUSTRY» Abstract Man’s existence is plagued with risks and uncertainties. From the time he set forth on earth, he has encountered accidents and calamities. Many of these accidents are outcomes of discoveries, inventions and innovations. But an almost equal number can be said as natural accidents or catastrophes. Biblical history relates how our ancestors took risks to attain their goals. Instinct of self-preservation drove them to survive those risks which had threatened extinction. They avoided dangerous areas and situations. They made tools and learned to invent new things, no matter how crude. They learned how to plan their activities. Risks can lead us to peril and harm if they are not anticipated. But risks can be minimised through a well-studied risk management planning. Experience can help in the process of planning for new projects. Technological inventions provide areas for possible risk encounter, for example the industrial revolution characterised by major events which introduced a lot of changes in the workplace and organisations. Modern capitalism emerged after a transition period over several centuries, during which the conditions needed for a capitalistic market society were created. Risks account not only in physical terms, but also in abstract terms like financial and economic outcomes. This research paper includes significant issues in risk management planning, which have a huge impact in overall organisational performance. An appropriate risk management plan ensures employees’ safety and increased productivity. The paper will include research on risk management planning and focus will be on the construction industry. There is not much research done in this area in the past, thus a study is crucial on this regard. 1. INTRODUCTION Risks were simple when people were living without the amenities of technology and modern living. They multiplied during the industrial revolution, and subsequently after the introduction of technology. Machines and new equipment were applied to production and other activities of man. More hazards and risks were acquired as more and more labourers work in factories. With the emergence of the internet and information technology, risks include business system problems, fraud, and privacy issues, which can all interrupt the day-to-day operations of a business. Fear has turned against vandalism and electronic larceny committed by computer hackers. Meanwhile, the media are full of news about the perils of human-made and natural hazards. New discoveries such as the nuclear power plant provided more risks and danger as safety in the workplace was not assured. Accidents resulted into injuries and deaths of hundreds or thousands of lives. Globalisation has shifted paradigms for organisations which are now more focused on financial risks. The recent global economic downturn has brought in a lot of changes in the organisational set up of global businesses. Managers are more careful to take risks because of the numerous recessions that have taken place in a span of just a few years. The recession in the early 1990s brought the Third World countries in Asia to succumb to the financial debacle. In 2000, some Wall Street companies had to close shop, declare bankruptcy, downsize, or merge, while others had to ask government aid. These are caused by risks which organisations failed to anticipate. The impact of risk has increased in terms of financial losses. This is not only a consequence of the increased number of risks we are confronted with; the severity and frequency of disasters has increased as well. As more and more people live close together, business has become more capital intensive, and our infrastructure is more vulnerable. 1.2 Objectives of the study The objectives of this study involve research and analysis on the significance of risk management planning and how risks have impacted on the lives of peoples and organizations. This is to conduct an empirical study on risk management planning in the construction industry. 1.3 Methodology There are two strategies in the attainment of the data and information that would lead us to arrive at a meaningful discussion and possible conclusion. This is through analysis of the available literature on risk management and planning, and through qualitative data using questionnaires and personal interviews. Questionnaires and personal interviews with employees of the companies and people living around the construction companies will be conducted. Questionnaires can be sent through emails; names will be sourced from a database of construction companies. After obtaining the names of managers of these construction companies, communication will be conducted through emails. From the managers, we can obtain the names of prospective participants. It will be explained that the study is confidential and that the names of the participants will not be revealed. A coding system will be assigned to the participants. Questionnaires will deal on the participants’ ideas and views on risk management planning and how to deal with risk and avoid accidents in the workplace. Data and statistics will be collected, organized and discussed in a thorough manner as part of the findings and analysis for this paper. 2. Literature Review The term risk could mean deviating from the normal course of a particular structure, activity or establishment, as the case maybe, which means it is probable that something could happen and this is within a range, which is from zero to a hundred percent probability. In other words, it could happen but it’s not a hundred percent certainty. Hillson and Simon (2007, p. 4) define risk as ‘any uncertainty that, if it occurs, would have an effect on achievement of one or more objectives.’ When we talk of risk, we talk of the outcome or result. However, the results can be modified by at least determining what these risks are. This can be done through management and planning. Risk management involves supervision and management of an establishment which can have equipment, structures, and processes that need to be closely monitored in the course of production or operation (Gallati, 2003, p. 5) Vaughan (1997, p. 8, cited in Brewer & Huque, 2004, p. 78) states: ‘Risk constitutes a condition in which there is a possibility of an adverse deviation from a desired outcome that is expected or hoped for.’ Risks cannot be avoided, even if they ‘can be transferred, accepted, managed, minimised, or shared’ (Latham, 1994, cited in Rahman and Kumaraswamy, 2002, p. 131). Businesses face risks everyday in the course or their operations. These risks can range from economic downturn and adverse market conditions to losses arising from natural calamities or man-made accidents, or as a result of corrupt practices of employees and managers of companies. Each contingency may generate financial losses that undermine businesses in achieving what must, no matter what other objectives are pursued, be regarded as the primary objective – namely maximizing profits. (Brewer & Huque, 2004, p. 78 Taking risks does not mean ignoring the quality of construction or project. ‘The core of risk management process needs to focus on quality, meaning that your product performs as it was designed to, defects are eliminated, customers stay happy and liability is reduced.’ (Kent, 2004, p. 31) 2.1 Definitions Terms such as peril, hazard, danger, and jeopardy are used interchangeably with each other and with the term risk. When we say there is risk, there is likelihood that something could happen to produce a loss – there is a possibility that the owner or manager could acquire a loss of the resources out of a peril. A peril creates the potential for loss. Perils include floods, fire, hail, and so forth. Peril is a common term to define a danger resulting from a natural phenomenon. (Gallati, 2003, p. 11) On the other hand, hazards are conditions that increase the risks of a peril’s occurring. A hazard is abstract because it is a condition the increases the likelihood of a loss out of the peril. Organizations concerned of their assets were the first to introduce corporate insurance management to reduce the degree of risks that results into losses in assets and income. The job has been given to risk managers. (Gallati, 2003, p. 11) Risk management (RM) is the protection of all of a company’s assets, including people, property, productivity, and profits. Managing risks involves taking care of the safety and security of individuals or organizations. (Saied, 1990, p. 46) Risk management has evolved as a way of preserving income and assets for minor losses, to protect ourselves from danger and harm. In business, it is the job of management to protect the organization from more risks and further damage and losses. Risk managers have devised ways to do this by applying a scientific approach to deal with risk. This may require a step-by-step process. (Gallati, 2003, p. 11) The practice of risk management began in the early 1950s. The change in attitude and philosophy and the shift to the risk management philosophy had to await management science, with its emphasis on cost-benefit analysis, expected value and a scientific approach to decision making under uncertainty. Assessing insurance coverage remains an important part of the risk manager’s job, but it is only one element of the complex RM function. The risk manager first must be able to identify and assess potential risks from many diverse sources. Next, the risk manager must determine the loss exposure associated with the risk. Finally, the manager must select the proper risk-management method and implement that plan. Peter Bernstein (2000, cited in Holt, 2004, p. 253) describes risk management as the analysis possible harm and losses to the company’s income and assets using laws of probability (statistical measurement; regression to the mean; diversification) and utility theory (value judgements; opportunity cost assessments; games theory). There are four approaches to managing risk. These are: (1) terminate or avoid, (2) tolerate or assume, (3) transfer or shift to others, and (4) treat or prevent. In the case of the hotel service industry, a combination of all four approaches can be used depending on the situation. For example, if there are diving boards from its swimming pool, the hotel may eliminate such diving boards to avoid accidents. It may also cancel alcohol sales in its restaurants to avoid drank clients. However the risk may be eliminated but guests expect a certain level of service. Hotel operators tolerate or assume risks when they have no other choice or when the dollar amounts involved are small. The key to this tactic is not to assume a risk unknowingly. Although insurance remains the primary method of transferring risk, it is probably also the most expensive method in the long run, especially in view of the great increase in premiums. While many hotel companies have responded to increased premiums by increasing deductible levels, more and more companies are switching to self-insurance. (Saied, 1990, p. 46) The primary means businesses use to manage risk are loss prevention and control. Losses due to theft may be reduced or even eliminated by employing a contingent of security guards supported with a sophisticated burglar alarm system. In some cases, a degree of loss is inevitable, so controlling loss becomes the most important consideration. Losses arising from a fire can be minimized by installing a sprinkler system even though some loss will be sustained, not least because of water damage caused by the sprinkler system itself. Obviously businesses want to operate in an environment as safe as possible and an important consideration must be the costs associated with different kinds of risks. Regardless of the kind of risk management strategy adopted, business managers must ensure that both fixed and recurrent costs balance positively against the potential losses associated with particular safety and security issues. However, when security issues are considered, the sharing of loss prevention and control responsibilities between private firms and public agencies give businesses an opportunity to reduce their direct costs. If there is a shortfall in the timely and effective provision of public security services then businesses face greater risk, which they must endeavour to reduce by using more sophisticated technology or by engaging additional security personnel, either as firm employees or on a contract basis from private security firms. Security risk management is one of many areas where business managers need to decide about resource commitments in the face of considerable uncertainties. An additional complication arises when businesses are located in an overseas jurisdiction. However, the published performance measures of public agencies can be a source of useful information to business firms when good governance principles underpin the work of the public sector in the host national country. (Brewer & Huque, 2004, p. 86) 2.2 Risk Management in Construction Companies Managing risks in construction is performed by the resident engineer. Mitigating the risks of fraud, misconduct, waste and abuse, and litigation in the construction industry, is a serious task that should be performed by the resident engineer. (Jobst, 2009, p. 437) Construction companies include risk management in planning projects. These are carried out in their financial and operational planning. In the process of achieving the balance between risk and company’s operational requirements, an effective and efficient mechanism is required that can identify and analyze any sort of risk to the companies. Anytime during the course of the project, crisis occurs. That is why, it is important to plan everything before construction begins. There are complexities in construction projects that constitute risks, and they include location, type of contract, familiarity with the work, and breakdown in communication. Evidence shows that these risks are not being dealt with appropriately. (Thompson & Perry, 1992, cited in Ahmed et al., 1999, p. 225) Most of the construction firms follow the find and eradicate strategy for risk management. Those construction firms first identify risks and then find some effective and efficient methods to reduce the potential for loss. For any construction company, risk identification and risk management are the keys towards successful implementation of any commercial strategic plan. Inability to take proper measure on any foreseen risk leads to poor performance regarding successful achievement of goals and objectives set by the company. Construction sites have posed a serious environmental impact, an example is that generated by construction and demolition wastes (C&DW). Constructions carry along with them a lot of pollutants including noise, air, solid waste and water. Wastes and hazardous materials come in various forms such as excavation and demolition materials, road building and maintenance materials, worksite waste materials, and so forth. Health and safety in the construction industry in Britain are not quite good. Accidents are among the highest of all the industrial groups, resulting in a third of all work fatalities (Health and Safety Commission, cited in Pritchard, 2004, p. 172). Also, those who work in the construction industry are at a greater risk than the general population of a variety of sicknesses like cancer. (Malker et al, cited in Pritchard, p. 172) The construction industry is a major generator of waste, generating more waste than the household sector. Construction waste can account for more than 50% of the waste deposited in a typical landfill. (Institution of Civil Engineers, 1995, p. 1) 2.3 Types of Risks and Reduction Planning In the research, the risks for which the risk management planning will be done include design assumption risk, fire and safety risk, structural development risk, and environment uncertainty risk. These risks are associated with construction and they need to be managed effectively in order to reduce the danger to employees’ safety and company’s profits. 2.3.1 Design Assumption Risk and Reduction Strategy Design assumption risks occur when the structural design of a building is prepared without proper consultation with the client who invests in the development of that specific building. Let us consider a scenario in which an architect develops a building design which is not properly discussed with the client and development gets started. Now it is a complete risk as no proper discussion sessions were arranged with the client. The risk is that changes applied to the original design at a later stage of construction may cause danger. In order to avoid such risks, the company should arrange a detailed meeting between the client and the architect at the initial stage of the project. In construction, they call this value management or value engineering, which is a system or a process of determining the value of the project through functional analysis. In this set up, the client and the value engineering team who will conduct the study, will have time to refer to each other. All loopholes and problems are discussed and given possible solutions before construction is to commence. 2.3.2 Fire Risk and Reduction Strategy Fire safety aspects of buildings are of extreme importance for the health and safety of the employees and other persons in and around the buildings. The risks associated with fire include short circuit risk, explosion risk, and some other forms of risks. Electrical connections can cause accidents and fire. This can be avoided through careful planning. The design, construction, layout and furnishing of buildings play a key role in any fire safety management strategy. It is the prime responsibility of the electricians and electrical engineers to ensure safe and secure electrical works. Fire risk management planning involves safety measures instituted by management to reduce accidents. Fire risk management planning involves various critical factors like minimising flammable materials at the workplace, and ensuring that the structure can withstand fire. Initial measures for the fire risk reduction strategy include fire safety training for the company’s employees and the proper management of flammable waste materials. Long term measures include securing electrical wiring of the building, installation of effective fire control mechanisms, installing fire security alarms, designing the escape routes to be used in case of fire, and replacement of hazardous materials. 2.3.3 Environment The risks involved in environmental conditions are unexpected earthquakes, unforeseen rain, and unpredicted climatic changes during the project operation. Proper risk management planning should be done in order to minimise damage during environmental disaster. Some effective risk reduction strategies include building earthquake proof foundations, proper scheduling of tasks by considering the rain forecast, and applying personal security measures in order to reduce personal safety risks. Construction wastes can also be minimised with careful planning. 3. Conclusion Risks are a part of implementing a project such as construction, an event, or other major activities. Big and small organisations or businesses encounter and experience risk, and it is how they plan their activities that they become triumphant in the end amidst unexpected risks. If one institutes risk management planning, there would be no blame in the end, like saying “It wouldn’t have happened if we had instituted measures.” Big organisations take major risks in financial aspects out of a well planned and well studied risk management. Constructions make a major blow to the environment because they produce a big amount of construction and demolition wastes (C&DW), if risk management planning is not implemented. Risk management planning is a major study and survey that should be conducted on projects so that damage and loses are minimised. Results as Predicted I predict that the results will be quite helpful in giving an exact idea about what real risks are in the construction industry and which risk reduction strategies can be used to eliminate the danger of risk from the workplace and ensure the safety of the employees. The results can be attained through qualitative method and a review of the various cases on risk management planning. Risk management planning has been beneficial to the construction industry. This has to be maintained and improved further. Analysis of the questionnaires can be more meaningful with the actual survey on construction personnel and engineers in the field. Results/Analysis is a part of the thesis after this proposal. References Ahmed, S. et al., 1999. Risk management trends in the Hong Kong construction industry: a comparison of contractors and owners perceptions. Engineering, Construction and Architectural Management 1999 6/3, 225-234. Arrow, J., 2008. Risk.01: Knowledge-based proactive project risk management. AACE International Transactions. Available from: http://web.ebscohost.com.ezproxy.staffs.ac.uk/ehost/pdfviewer/pdfviewer?vid=1&hid=111&sid=5ccf2ed2-c90f-467a-be6d-83a9e9519b3f%40sessionmgr110 [Retrieved 23 September 2010] Brewer, B. & Huque, A. S., 2004. Performance measures and security risk management: a Hong Kong example. International Review of Administrative Sciences 2004; 70; 77. DOI: 10.1177/0020852304041232. Gallati, R., 2003. Risk management and capital adequacy. New York: McGraw Hill Publishing, Inc. Hillson, D. and Simon, P., 2007. Practical project risk management: the ATOM methodology. Virginia: Management Concepts Inc. Institute of Civil Engineers, 1995. Managing and minimizing construction waste: a practical guide. London: Thomas Telford Publications. Jobst, J., 2009. What resident engineers should know about risk management. Journal of Construction Engineering and Management. ASCE, June, 2009. Kent, J., 2004. Risk management: risk management starts and ends with quality. Process improvement report. www.housingzone.com. Pritchard, C., 2004. Building for health? The construction managers of tomorrow. The Journal of the Royal Society for the Promotion of Health 2004; 124; 171. DOI: 10.1177/146642400412400409. Rahman, M. and Kumaraswamy, M., 2002. Risk management trends in the construction industry: moving towards joint risk management. Engineering, Consruction and Architectural Management 2002 9/2, 131-151. Blackwell Science Ltd. Saied, J., 1990. Approaches to risk management. Cornell Hotel and Restaurant Administration Quarterly 1990; 31; 45. DOI: 10.1177/001088049003100207. Read More