Risk management in construction project

ABSTRACT Investments in long-lived projects such as buildings are characterized by uncertainties regarding project life, operation and maintenance costs and other factors that affect construction industry conditions. Risk and uncertainty are inherent in all construction work no matter what the size of the project. For years the construction industry has had a very poor reputation for coping with risk, with many major projects failing to achieve their time, quality, and budget goals. Many contractors think of risk management as insurance management It is emphasized in this dissertation that risk management has a broder meaning and involves more than just insurance management This study provides an introduction to the growing literature including systematic approaches on the subject and building controls, responsibilities and the insurance concepts are emphasized in detail because of their importance for Turkey. Its aim is to increase awareness of this vital issue among both the industry and and its clients and to advice approaches that can be adopted throughout the life of a construction project. Its principal conclusions are these;. All too often, risks are either ignored, or dealt with in a completely arbitrary way; simply adding 10% contingency onto the estimated cost of a project is typical. In a business as complex as construction, such an approach is virtually certain to prove inadequate, resulting in expensive delay, ligitation, and even bankruptcy. The greatest uncertainty is present in the earliest stages in the life of a project, which is also when decisions of greatest impact are made. Risks must be allowed for at this stage. On most construction projects, it is inappropriate for the client to require single figure estimates of both cost and time at the appraisal and funding stages. Range estimates, including specific contingencies and also tolerances for uncertainty, should be adopted. Wherever possible, a cost estimate should be based on a programme for the project Only in this way will the realistic effects of delays on the cost estimate be established. Analytical techniques that can give a much more accurate assessment of the risks involved in a project have been available for years. These techniques are within the reach of even small companies, requiring only a microcomputer to be put into action. The appraisal of risk requires an assessment of the likely extent and interaction of variable factors. The analysis should therefore be carried out by those with experience in this area of expertise, and should preferably be subject to review. The need for XI. judgement should not be used as an excuse for failing to give adequate consideration to project or contract risk. Analytical techniques are not the only way of dealing with risk successfully. There is growing evidence that the traditional contractual arrangements are no longer the best. way of administering today's high-risk projects. Studies in the US have shown that selecting the right type of contract can produce significant cost savings for the projects. Proposals for funding (sanction) should therefore include a review of contract strategy. Competitive tendering coupled with the use of conventional contractual arrangements has had the effect of preventing a realistic attitude towards risk. The pressure is always on those bidding for contracts to keep their tender prices as low as possible, which can put both them and their clients at great financial risk if things go wrong. Even when some provision has been made for eventualities, it is often buried in the total bid. This hinders effective management of risk and militates against a systematic and equitable approach to payment Now that well-developed ways of assessing risk have been evolved, such a situation need no longer be tolerated. Clients should ensure that the allocation of risk is clearly stated in the tender documents, and that contractors clearly specify the provision made in their bids. Instead of awarding contracts on the basis of lowest price, a 'minimum acceptable risk' criterion should be used by project sponsors, below which a bidder can not be awarded a contract Risk analysis allows such a criterion to be used. All parties involved in construction projects and contracts would benefit greatly from reduction in uncertainty prior to financial commitment. More effort should be devoted to risk management as a continuing activity throughout the life of the project.. Risk management functions are closely linked with insurance.. Responsibility-Control and Insurance are concepts that are greatly interrelated.. A survey conducted in Hong Kong reflects that the potential benefits of using risk management process has been generally accepted and widely adopted by the building services industry.