RISK ASSESSMENT AND MANAGEMENT IN CONSTRUCTION PROJECTS

Project by

A.DEVIPRASADH M.E Construction Engineering and Management

Under the guidence of

Dr.M.SEKARProfessor & 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.

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 in class" service in all areas - from property management to risk management.

The four major processes of project risk management

Risk IdentificationDetermining which risks are likely to affect the project and documenting the characteristics of each.

Risk QuantificationEvaluating risks and risk interactions to assess the range of possible project outcomes.

Risk Response DevelopmentDefining enhancement steps for opportunities and responses to threats.

Risk Response ControlResponding 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 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.

The scope of this work is limited to the 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

1. Bankruptcy of project partner2. Loss due to fluctuation of inflation rate3. Loss due to fluctuation of interest rate4. Loss due to fluctuation of exchange rate5. Loss due to rise in fuel prices6. Low credibility of shareholders and lenders7. Changes in Bank formalities and regulations

Financial risk

Legal risk

1. Breach of contract by project partner2. Lack of enforcement of legal judgment3. Improper verification of contract documents4. Lack of knowledge of arbitration5. Uncertainty and unfairness of court justice

Management risk

Change of Top management No past experience in similar projects Short tendering time 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. Cost increase due to changes of Govt policies2. Loss incurred due to corruption and bribery3. Loss incurred due to political changes4. Loss due to bureaucracy for late approvals

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 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;αj = 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 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 Bank formalities and regulations 0.93

Low credibility of shareholders and lenders 0.86

Ranking of Financial risks

3.05 2.992.75

1.691.43

0.93 0.86

0

0.5

1

1.5

2

2.5

3

3.5

Factors

Mea

n V

alue

1.   Loss due to fluctuationof inflation rate

2.   Loss due to fluctuationof interest rate

3.   Loss due to rise in fuelprices

4.   Bankruptcy of projectpartner

5.   Loss due to fluctuationof exchange rate

6.   Changes in Bankformalities and regulations

7.   Low credibility ofshareholders and lenders

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 verification of contract documents 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

Uncertainty and unfairness of court justice 1.04

POLITICAL RISK

Cost increase due to changes of Govt policies 2.24

Loss due to bureaucracy for late approvals 1.73

Loss incurred due to corruption and bribery 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

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 more than 50 crores top ten risks

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

4.51 4.5

3.933.923.85

3.563.45

3.173.112.99

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

Factors

Mean

Increase of materials price

Loss due to f luctuation ofinflation rate

Increase of labour costs

Materials shortage

Errors in design draw ings

Shortage of skilful w orkers

Time constraint

Sub-contractor relatedproblems

Project delay

Competition from othercompanies

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 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 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 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 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 of future development and create a more attractive construction sector.

National Conference

National Seminar

Thank you

1. A Guide to the Project Management Body of Knowledge, (1996), PMI, Project Management Institute.

2. Akintola S Akintoye and Malcolm J MacLeod "Risk analysis and management in construction" International Journal of Project Management Vol. 15, No. 1, pp. 31-38, 1997

3. Alfredo del Can,and M. Pilar de la Cruz, "Integrated Methodology for Project Risk Management" , Journal of Construction Engineering and Management, ASCE, December 2002, 473-485

4. Artem Aleshin “Risk management of international projects in Russia", International Journal of Project Management Vol. 19, 2001, PP. 207-222

5. Bing, L., Tiong, R. L. K., Wong, W. F., and Chow, D, ‘‘Risk management of international construction joint ventures.’’ Journal of Construction Engineering and Management, 1999, ASCE, 125(4), 277–284.

6. Darrin and Mervyn K Lewis “Evaluating the risks of public private partnerships for infrastructure projects”, International Journal of Project Management 2002 , 107-118

7. Daud Nasir, Brenda McCabe and Loesie Hartono “Evaluating Risk in Construction–Schedule 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. A and Gill S. M. "A taxonomy for construction terms in privatized infrastructure finance: supporting semantic exchange of project risk information" Construction Management and Economics, March 2006, 271–285

9. Eric Verzuh, “The Fast Forward MBA in Project Management”, Wiley – 2nd Ed – 2005, 105-10910. Garg.A.K.,(2005) “Risk management in construction contacts”, Construction Materials Purchase,

February 2005, 14-16.11. Hyun-Ho Choi Hyo-Nam Cho and J. W. Seo "Risk Assessment Methodology for Underground

Construction Projects" Journal of Construction Engineering and Management, ASCE, April 2004, 258-272

References