RISK ASSESSMENT AND MANAGEMENT IN CONSTRUCTION PROJECTS
Project by
A.DEVIPRASADH
M.E Construction Engineering and Management
Under the guidence of Dr.M.SEKAR
Professor & Dean, College of Engineering – Guindy,
INTRODUCTION
Project risk management is the processes concerned with identifying, analyzing, and responding to project risk.
Risk is a multi-facet concept. In the context of construction industry, it is the likelihood of the occurrence of a definite event or combination of events which occur during the whole process of construction. Risk is exposure to the consequences of uncertainty.
RISK ASSESSMENT
Risk assessment is defined as a technique that aims to identify and estimate risks to personnel and property impacted upon by a project.
Construction involves many variables, and it is often difficult to determine causality, dependence and correlations. correlations.
As a result, subjective analytical methods that rely on historical information and the experiences of individuals and companies have been used to assess the impact of construction risk and uncertainty.
RISK IN REAL ESTATE AND CONSTRUCTION INDUSTRY
The real estate and construction industry has changed significantly over the past years. It is an industry driven primarily by private investors; the presence of securitized real estate has increased considerably. Not unexpectedly, the influence of institutional investors on the real estate industry is formidable. They are beginning to experience a higher degree of scrutiny by investors, consultants and analysts, and are expected to deliver "best "best in class" class" service in all areas - from property management to risk management.
The four major management
processes
of
project
risk
Risk Identification Determining which risks are likely to affect the project and documenting the characteristics of each. Risk Quantification Evaluating risks and risk interactions to assess the range of possible project outcomes. Risk Response Development Defining enhancement steps for opportunities and responses to threats. Risk Response Control Responding to changes in risk over the course of the project.
General Sources of risk in construction projects
Misunderstanding of contract terms and conditions
Design changes and errors
Poorly coordinated work
Unskilled staff
Poorly defined roles and responsibilities
Natural hazards
Political and legal problem
OBJECTIVE
Infrastructure Infrastructure projects being huge in nature and involving a large amount of money, any sort of wastage (either time, resources etc) would lead to huge monetary losses.
The losses are due to various risks associated with such mega projects.
Research on risk assessment and management has been done by various people, mostly on developed countries.
In India, only few research works have been done in this area.
This study focuses risk assessment and management in India in field of construction. construction.
The scope of this work is limited l imited to the construction construction of large building projects like IT parks, Multiplexes, Malls, Large residential complex etc.
METHODOLOGY
Study of literature related to Risk Analysis and Risk Management capabilities Preparation of Questionnaire. Site visit to major construction project sites. Questionnaire survey and personnel interviews with in-charges and managers and collection of data from site. Analyzing the Questionnaire Qualitative analysis of data obtained from site and to identify the root cause. Remedial measures to be suggested and the present data to be recorded for future reference. Conclusions, recommendations and suggestions for future study.
Types of risk Financial risk 1. 2. 3. 4. 5. 6. 7.
Bankruptcy of project partner Loss due to fluctuation of inflation rate Loss due to fluctuation of interest rate Loss due to fluctuation of exchange rate Loss due to rise in fuel prices Low credibility of shareholders and lenders Changes in Bank formalities and regulations
Legal risk
1. 2. 3. 4. 5.
Brea Breach ch of co cont ntra ract ct by proj projec ectt part partne nerr Lack La ck of enfo enforc rcem emen entt of of lega legall judg judgme ment nt Impr Improp oper er ver verif ific icat atio ion n of co cont ntra ract ct doc docum umen ents ts Lack La ck of know knowle ledg dge eo off arb arbit itra rati tion on Unce Uncert rtai aint nty y and and unf unfai airn rnes ess s of of cour courtt just justic ice e
Management risk
Change of Top management No past experience in similar projects Short tendering time Sub-contractor Sub-contractor related problems Improper project feasibility study Improper project planning and budgeting Inadequate choice of project partner
Management risk contd…
Improper project organization structure Poor relation and disputes with partner Poor communication between clients Internal management problems Team work Poor relation with government departments Time constraint Project delay
Policy and political risk 1. 2. 3. 4.
Cost Cost Loss Lo ss Loss Lo ss Loss Lo ss
incr increa ease se due due to chan change ges s of of Gov Govtt poli polici cies es incu incurr rred ed due due tto o cor corru rupt ptio ion n and and brib briber ery y incu incurr rred ed due due to poli politi tica call cha chang nges es due due tto o bur burea eauc ucra racy cy fo forr lat late ea appr pprov oval als s
Technical risk
Design changes Equipment failure Errors in design drawings High degree of difficulty in construction Accidents on site Stiff environmental regulations Incompetence of transportation facilities Industrial disputes Materials shortage
Technical risk contd…
Obsoleteness of building equipment Poor quality of procured materials Problems due to partner’s different practice Shortage in supply of water Shortage in supply fuel Shortage in supply electricity Unknown site physical conditions Following government standards and codes Wastage of materials by workers Theft of materials at site Site distance from urban area Surplus materials handling Architect Vs Structural Engineer dispute Shortage of skilful workers
Environmental risk
Any adverse impact on project due to climatic conditions
Any impact on the environment due to the project
Healthy working environment for the workers
METHOD OF SURVEYING
The general methodology of this study relied largely on the survey questionnaire which was collected from the local building contractors of different sizes by mail or by personnel meeting. A thorough literature review was initially conducted to identify the risk factors that affect the performance of construction industry as a whole.
This research has adopted the more general and broad definition of risk as presented by Shen et al (2001)* on China’s construction joint ventures and more risk factors from other literature. Also some interviews with industrial practitioners were conducted to produce to check effectiveness of questionnaires.
*Shen et al (2001) based on their survey, established a risk significance significance index to show the relative significance among the risks associated with the joint ventures in the Chinese construction procurement practice. Real cases were examined to show the risk environment faced by joint ventures.
ANALYSIS OF SURVEY RESULTS
For calculating the significance score = multiply the probability of occurrence by the degree of its impact. Thus, the significance score for each risk assessed by each respondent can be obtained through the model
where Si = significance score assessed by respondent j for risk i; i; α j = probability of occurrence of risk i, assessed by respondent j; and βi = degree of impact of risk i, assessed by respondent j.
By averaging scores from all the responses the risk index score is obtained and is used to rank all risks. The model for the calculation of of risk index score can be written as
RSi = index score for risk i;
Si = significance score assessed by respondent j for risk i and T = Total number of responses. To calculate Si, the five point scales for α and β, which will be converted into numerical ( Likert scale) scales.
KEY FOR QUESSIONAIRE
Example
Results of survey
Totally for seventy five companies the questionnaires were given, out of which forty five had an effective reply and two were rejected due to improper answering. Thus the response rate is 60%, which is considered a good response in this type of survey.
For easy understanding the survey analysis is divided into two part (i.e.) one for the project costing below fifty crores and the other for projects costing above fifty crores.
FINANCIAL RISK Loss due to fluctuation of inflation rate
3.05
Loss due to fluctuation of interest rate
2.99
Loss due to rise in fuel prices
2.75
Bankruptcy of project partner
1.69
Loss due to fluctuation of exchange rate
1.43
Changes in regulations
Bank
formalities
and
0.93
Low cred credib ibil ilit ity y of of sha share reho hollders ders and and len lende ders rs
0.86 0.86
Ranking of Financial r 3.5
2. Loss due to fluctu of interes interes t rate
3.052.99 3
2.75
3. Loss due to rise rise in prices
2.5 e u 2 l a V n a 1 . 5 e M
1. Loss due to fluctu of inflation rate
1.69 1.43 0.93 0.86
1 0.5
4. Bank ruptcy of proj partner 5. Loss due to fluctu of exchange rate 6. Changes in Bank formalities and regulati
0 Factor
7. Low c redibility redibility of shareholders and lend
MANAGEMENT RISK Shortage of skilful workers
4.58
Materials shortage
2.94
Unknown site conditions
2.83
Design changes
2.74
Site distance from urban area
2.6
Errors in design drawings
2.53
Poor quality of procured materials
2.39
Wastage of materials by workers
2.3
Technical risk
2.15
High degree of difficulty in construction
2.07
Ranking of Market risks Sub risks
Mean
Competition from other companies
3.51
Fall short of expected income from project
1.15
Increase of accessory facilities price
1.54
Increase of labour costs
2.95
Increase of materials price
3.07
Inadequate forecast about market demand
1.33
Local protectionism
0.98
Unfairness in tendering
1.26
TECHNICAL RISK Time constraint
4.12
Sub-contractor related problems
3.94
Project delay
3.94
Improper project planning and budgeting
3.25
Poor communication between clients
3.03
Internal management problems
2.93
Improper project feasibility study
2.86
Improper project organization structure
2.79
Team work
2.56
LEGAL RISK
Improper documents
verification
of
contract
3.83
Breach of contract by project partner
2.91
Lack arbitration clause in agreement
2.13
Lack of enforcement of legal judgment
1.26
Unce Uncert rtai aint nty y and and unf unfai airn rnes esss of cou court rt jus justi tice ce
1.04 1.04
POLITICAL RISK
Cost increase due to changes of Govt policies
2.24
Loss oss due to bureaucrac racy for late approvals
1.73
Loss oss inc incur urre red d due due to corr corrup upti tion on and and br briber ibery y
0.78 0.78
Loss incurred due to political changes
0.68
ENVIRONMRNTAL RISK
Any adverse impact on project due to climatic conditions
2.5
Any impact on the environment due to the project
0.8
Healthy working environment for the workers
0.8
For project costing more than 50 crores top ten risks S.No
Sub risk
Mean
SD
1
Shortage of skilful workers
4.58
3.61
2
Time constraint
4.12
4.58
3
Sub-contractor related problems
3.94
5.72
4
Project delay
3.94
6.39
5
Improper verification of contract documents
3.83
3.6
6
Competition from other companies
3.51
6.31
7
Improper project planning and budgeting
3.25
2.92
8
Increase of materials price
3.07
4.73
9
Loss due to fluctuation of inflation rate
3.05
3.45
10
Poor communication between clients
3.03
4.47
For project costing less than 50 crores top ten risks S.No
Sub risk
Mean
SD
1
Increase of materials price
4.51
3.5
2
Loss due to fluctuation of inflation rate
4.5
4.13
3
Increase of labour costs
3.93
5.13
4
Materials shortage
3.92
6.56
5
Errors in design drawings
3.85
3.16
6
Shortage of skilful workers
3.56
6.32
7
Time constraint
3.45
3.93
8
Sub-contractor related problems
3.17
5.71
9
Project delay
3.11
4.44
10
Competition from other companies
2.99
6.17
Bar chart for project costing less than 50 crores - Top ten risks Increase of materials price
5 4.5 4.51 4.5 4.5 4.5 4
Loss due to fluctuation of inflation rate
3.93 3.923.85 3.56
3.5 3.5
Increase of labour costs 3.45 3.173.11
2.99
Materials shortage
3 Errors in design drawings draw ings
a e 2.5 2.5 M
Shortage Shortage of skilful w orkers
2
Time constraint
1.5 1.5 1
Sub-contractor Sub-contractor related problems
0.5 0.5
Project delay
0 Factors
Competition petition f rom other companies
Conclusion
Shortage of skilful workers is the major risk faced by almost all the companies. This is because; the skilled workers are migrating between companies very often due to the high demand in the market/ Middle east countries.
Since real estate, construction sector are in the boom side, construction companies are in move to make profit as soon as possible in current wave itself; but this creates tremendous pressure to the management & workers to complete the project in a very short span. This time constraint risk prevails in all the companies surveyed.
Conclusion..contd
Sub-contractor Sub-contractor related risks are also high, since most of the sub contractors are not able to meet the standards of the main contractor and the client due their size of work.
Delay in the project is also one of the main risks, but this delay is looped with various others factors and risks directly or indirectly.
Conclusion…
Inflation rate is very high in India and increasing proportionately proportionately with time, this causes the increase in prices of materials like cement, steel which intern causes financial risk to the developers and construction firms.
Banks have also raised their interest rates for the loan given by them, this have affected the residential construction construction market hugely. Thus the financial part of risk is very high than any other risk.
Political risk is substantially very low for the large firms when compared to other risk.
Conclusion…
Legal risk is also very low, but the implementation of court directive is not proper; this was the complaint seen from this survey.
Large companies are accepting that there are few environmental effects due to their project, but says that it is a global phenomena and it can not be nullified, but only can be reduced.
Overall management and the financial risks are high when compared to other risks.
Suggestions to the companies:
Risk management should be considered a primary tool to assess the project. From the survey we can understand that risk management is not followed in most of the companies as such but if followed also it is not done systematically. Immediate mitigation measures are not in place if a risk event happens. During the planning stage itself a full fledged risk assessment about the project should be made as a effective measure to curb risks. Financial part of the risk is a global phenomena and this risk should be handled carefully using financial consultants since this cannot be handled by engineers alone.
There is not a single company with a separate person in the manager level who handles risk management within the company and takes decision on his own. Thus a risk management body within the company should be formed and atleast monthly once evaluation should be done. Most of the company’s management follow Top to down approach which is a traditional approach, but Down to top approach should be followed so that the employees’ voices are heard. It is better to involve a risk consultant in a large construction project.
With the assistance of the practical survey, this paper has systematically examined major risks affecting the construction industry.
This study should assist management management in identifying activities where there is a risk of injury or loss and hence provide a basis for management decisions on the application of resources.
These findings are very important for implementing further effective measures to ensure the right direction di rection of future development and create a more attractive construction sector.
National Conference
National Seminar
Thank you
References 1. A Guide to the the Project Project Manageme Management nt Body of of Knowledge, Knowledge, (1996), (1996), PMI, PMI, Project Project Managemen Managementt Institute. 2. Akintola Akintola S Akintoye Akintoye and Malcol Malcolm m J MacLeod MacLeod "Risk analysi analysis s and manageme management nt in construc construction" tion" International Journal of Project Management Vol. 15, No. 1, pp. 31-38, 1997 3. Alfredo Alfredo del Can,and Can,and M. Pilar Pilar de de la Cruz, Cruz, "Integra "Integrated ted Methodolo Methodology gy for Project Project Risk Management Management"" , Journal of Construction Construction Engineering and Management, ASCE, December December 2002, 473-485 4. Artem Aleshin Aleshin “Risk “Risk management management of intern internation ational al projects projects in Russia", Russia", Internatio International nal Journal Journal of Project Management Vol. 19, 2001, PP. 207-222 5. Bing, Bing, L., Tiong, Tiong, R. L. K., Wong, Wong, W. F., F., and Chow, Chow, D, ‘‘Risk ‘‘Risk managem management ent of internatio international nal construction joint ventures.’’ Journal of Construction Engineering and Management, 1999, ASCE, 125(4), 277–284. 6. Darrin Darrin and Mervyn Mervyn K Lewis “Evaluatin “Evaluating g the risks of public public private private partnershi partnerships ps for infrastruc infrastructure ture projects”, International Journal of Project Management 2002 , 107-118 7. Daud Nasir, Nasir, Brenda Brenda McCabe McCabe and and Loesie Harton Hartono o “Evaluatin “Evaluating g Risk in Constru Construction ction–Sche –Schedule dule Model (ERIC–S) Construction Schedule Risk Model” Journal of Construction Engineering and Management, ASCE, Vol. 129, No. 5, October, 2003, 518-527 8. El-Diraby.T El-Diraby.T.. A and Gill S. M. "A taxonom taxonomy y for constru construction ction terms terms in privati privatized zed infrastr infrastructur ucture e finance: supporting semantic exchange of project risk information" Construction Management Management and Economics, March 2006, 271–285 9. Eric Verzu Verzuh, h, “The “The Fast Fast Forward Forward MBA MBA in Projec Projectt Managem Management”, ent”, Wiley – 2nd Ed – 2005, 2005, 105-109 105-109 10. Garg.A.K.,(2005) “Risk management management in construction contacts”, Construction Construction Materials Purchase, February 2005, 14-16. 11. Hyun-Ho Choi Hyo-Nam Hyo-Nam Cho and J. W. Seo "Risk Assessment Methodology Methodology for Underground Underground Construction Projects" Journal of Construction Engineering and Management, ASCE, April 2004, 258-272
