Each construction project is unique and comes with its own challenges, issues and risk. So, it is important to identify these risks & with proper analysis these risks need to mitigate or eliminate. This can be done through properly planning and continuous evaluation.
What is Risk and its management?
Risk is the potential event, on its occurrence can cause a project to fall flat by failing to meet its expected goals. These risks if not attended can cause delay, operational failure and cost overrun.
Risk management is the identification, evaluation & prioritization of risk followed by coordinated & economical use of resources to control probability or effect of hazardous events. It is a process of augmenting the acknowledgement of chances that can be taken to avoid major catastrophe.
Why is Risk Management Required?
Risk management is a critical aspect of developing a project. Elimination of this process results in overrun in budget, decrease of productivity & profitability, safety risk and delayed timeline of project. Despite the approach to avoid risk completely, we can gear up using risk management tools to minimize its extent. Digital software & project management solutions provide easier and more efficient risk alleviation processes.
Types of risk affecting construction procedures:
To fully grasp the severity of risk management, first we need to understand different types of risk affecting construction activities. There are four major categories of risks affecting the construction activities:
1. Financial Risk:
Anything that can affect a business's finances is considered financial risk. Financial risk in construction industry is mostly affected by these factor: excessive labors, equipment handling & change in cash flow.
Cash flow often termed as liquidity of funds is the most influential factor in financial risk management of a developing project. It is referred to as the amount of money equivalents that moves in or moves out of a project at any given time. Negative cash flow indicates financial problems that can lead to abrupt stop or collapse of a developing project. Cash flow is affected by many aspects such as interest rates, labour charges, material & equipment costing along with changes in legal rules & regulations.
Labour charges account for a major portion of contractor’s billing. If the project has labour intensive work, the financial stress of making payment every week or two can make cash flow difficult.
Wide variety of tools & equipment are required for different construction processes. Planning & handling the equipment requirement is a huge task. If not done properly it adds up to budget overrun. Equipment management needs to provide maximum benefit at minimal expense of the company's resources. Idle Charge can also cause cost overrun. This is a prerequisite for timely completion of a project that ensures it’s financial stability.
Contractual risk affects a project at either managing level or during the risk rectification process. While preparing contract, identification of risk along with transfer of risk is to be identify. Contractual risk are generally faced due to inappropriate risk allocation, misunderstanding terms & conditions and termination clause.
Allocation of risk in the contract bid process is the employer's call. Fair and balanced allocation of risk defines the relationship between the parties and its effect on the project. Risk allocation through contract terms and conditions is necessary to avoid disputes.
For example, design risks are allocated to the employer as he can coordinate with the project designer to minimize design errors while the contractor is generally undertaking primary jobsite risk such as bodily injury or property damage during contractor’s operations.
Terms & Conditions are the most important part of the contract bid process. There are negotiations made during the signing of the contract. Terms & conditions must be updated before signing of contract. Risk allocation & citations should be mentioned clearly in contract and no foul play shall be made. These terms and conditions should also include if it protects the contractor against certain types of risk such as fire damage, damage due to natural calamities. It has to mention if the contractor is responsible for damage underlying his position in specific condition; he will not have immunity & must aid the rectification through his funds.
The Termination for Convenience contract clause is a provision that entitles one party to terminate a contract at any time without any liability for damages the other party might suffer because of the termination. This gives a party holding the clause to authority to terminate the contract at any time with or without giving any necessary explanation. This leads to major problems of abuse of small contractors & workers. Generally, immunity to such clauses is provided if one has agreed to add terms & conditions regarding allotment of allowable cost incurred based on performance of finished product.
Project planning is the key to resolving & avoiding risk at the operational stage of a project. Operational risk involves subsequent failure of activities during the operational & functioning phase. Reason behind this is poor planning & management of the project. It leads to perplexing site conditions & leaves the workforce in a labyrinth of poorly managed sites. Coordination is key to this type of damage.
Lack of coordination results in catastrophic failure. Coordination is important between contractors & subcontractors as well as among the managing authorities. To prevent such hurdles, proper planning & management should be done. Layout & timeline involving different activities should be prepared & circulated for understanding & sequential planning for smooth workflow.
As quality control is a highly definitive process in the success of a project, the risk involved here is also significant than others. Failing to provide the quality assured meaning rework & wastage of valuable resources. Rework & wastage not only incurs financial & time loss but also jeopardizes the enthusiasm of the workforce deployed in the field. Lack of documentation provides inadequate data for risk assessment & results in lack of accountability. Often, language barrier between highly trained professional & regional workers & task force leads to disruption of work cycle creating havoc on the site.
External risk widely categorizes as legal risks, governance & technological risks.
Legal risks are classified as risk rising as result of faulty transaction, claim being made or counterclaim & violation of regulations that can lead into potential failure & freezing the assets of the organization. This risk should be planned during the management stage & help of legal counsel is required.
Risk related to governance include risks related to unclear planning, priorities & accountability in developing projects. This leads either to overrun in budget due to delayed timeline or abrupt stop of project until the demands are satisfied. The change in policy during the course of the project may sometime cause problem.
Technological risk means the use of outdated technologies in aiding and abetting the construction process. These technologies can be as simple as machinery used for different processes to advanced digital tools for project planning & designing. It is very speculative to use outdated technologies as they lead to unsafe site conditions & consume more time & labor than required.
5.How is Risk Management Done?
Risk management can involve some basic steps which are mention below:
- Identify the risk and analyze the frequency of its occurrence.
- Gather Information regarding the problem at hand. First locate the source of risk & what are the reasons for formation of risk.
- Classify the risk based on its likelihood to be repeated in future and its impact on the project.
- Assessment of risk is the next plan in this process. It is the most important step to classify what part of the project is affected by it - Cost of project, Timeline, or quality of project. Either of these factors are affected; many changes are to be made for forthcoming activities.
- Plan to mitigate is the next step in this chain reaction. The risk contingency plans made during the planning stage are put into action. Necessary material & equipment are arranged for the rectification process.
- Actions are monitored & properly recorded. The documentation done during this stage helps in mitigating risk in future projects.
In the end we can understand the importance of risk management in the construction industry. If factors affecting it are controlled and supervised along with management & risk contingency plans, it can lead an organization way in the marketplace & help them build a strong portfolio of success.