• Internal Code :
  • Subject Code : SBM1206
  • University : Asia Pacific International College
  • Subject Name : risk management

Report on Risk Management in the Construction Industry

Table of Contents

Introduction.

Literature Review..

Risk Analysis and Finding. 

Preventive Risk Management Strategies.

Remedial Risk Management Strategies.

Analysis.

Effectiveness of the Strategies developed for managing the risks.

References.

Introduction

Infrastructure growth is one of the most critical practices that can improve the economy of various sectors, thus growing the country's gross domestic product (GDP). Construction activities are often complex and are prone to several risks that can arise from a variety of separate sources. Risk is described as an activity or event that may negatively affect the achievement of the goals of the project (Pawar et al. 2015). Risk management is a methodology employed in many other sectors, including the IT industry, automobile industry, pharmaceutical, and construction. The risks and complexities present in the construction sector are greater than any other sector. Most companies have been more involved in incorporating risk reduction strategies in the business.

However, the same is not widely seen in respect to the construction sector. Risk is an inherent element of every project. Risk is inherent in all the projects, regardless of the magnitude or industry. There is no completely risk-free project. If the risks are not adequately assessed and solutions are not developed to resolve them, the project is likely to fail. The risk management process is a mechanism that defines project risks, analyzes them, and determines measures to avoid risks in the project (Merna & Al-Thani, 2011). To execute the project plan successfully, all measures in the contingency planning phase must be included in the risk management framework.

Literature Review

The overall construction industry and the activities of the construction project are uncertain (Zavadskas et al. 2010). Risk assessment is a very critical method owing to the complexity of construction projects. The following risks can be associated with the construction industry:

  1. Technical risks: threats identified with insufficient planning, inadequate layout, inadequate site inspection, adjustments in size, building practices, and limited supply of equipment, etc. are referred to as technical risks.

  2. Construction Risks: The risks usually involve productivity of labor, disputes among the labor, condition of the site, equipment breakdown, design changes, high-quality standards, and adoption of innovative technology.

  3. Physical risks: dangers resulting from structural failure, failure of machinery, work accidents, plant & inventory fire, and robbery, and so on, are classified as physical risks.

  4. Organizational Risks: Risks related to business relations, the experience of the contractor, attitudes of the stakeholders, inexperienced labor, and miscommunication.

  5. Financial risks: higher production cost, reduced consumer demand, exchange rate volatility, late payment, and inadequate calculation of taxes, etc. are linked to financial risks.

  6. Socio-Political Risks: changes to construction laws and legislations, guidelines on pollution and security, infringement/corruption, cultural or language barrier, war, and civil disorder, and permit requirements and approvals.

  7. Natural risks: environmental events and weather consequences.

Risk can be described as an occurrence that affects goals, may have a favorable or unfavorable result that usually occurs across micro and macro environmental settings. Risk assessment is a program to identify and measure any threat to an organization or activity so that a conscientious decision on how to deal with threats can be made (Markmann et al., 2013). Risk assessment, as identified by PMBOK, is one of several key points of the project management and describes it as a comprehensive method for defining, assessing, and reacting to project threats (PMI, 2008). This involves increasing the probability and effects of successful outcomes and reducing the possibility and implications of negative events for the project. To assess the probability of several project operations, risk analysis has been applied differently from project to project using various risk management approaches. Different scholars in the evaluation of the construction project have built various types of risk management models for similar actions (Yafai & Santial. 2014).

The goal of this analysis is to illustrate the key risks facing construction companies and the risk management strategies that can be used to handle these risks. It further explains the understanding of professionals as to how such risks and risk control strategies can be utilized to handle them.

Risk Analysis and Finding

The report has used a questionnaire to determine the danger in the construction sector, which consisted of three parts. It contains 37 specific risk categories and is contacted to the expert in the industry to improve it locally. The second part examines the accountability for each degree of risk, using the following categories: the responsibility of the client, the responsibility of the contractor, and shared responsibility. The third section consists of preventive, remedial, and approved risk management strategies following an in-depth discussion with a specialist in the industry. This questionnaire was distributed to the engineers in the local market and 86 responses were collected. 37 of the most important risks were included in the questionnaire, which was concluded after a comprehensive literature search and a dialogue with a specialist with extensive expertise consulting with customers, vendors, and business experts (Creemers et Arietal, 2014). The outcomes are shown and the combined scores for each form of risk are determined. When the cumulative score was measured, the percentage point for each chance was estimated using the below-mentioned formula:

AS= (sum of total score /(minimum score *total number of respondents))*100

Percentage score methodology has been adopted since it is widely applied in the everyday lives and is easy for everyone to recognize. The risks have been structured in a series of decreasing risks, i.e. the probability of termination. Risk management involves minimizing, monitoring, and exchanging the risks instead of simply moving them over to another entity. The only way to handle the risk is to stop it. Risk can be stopped at the design level before the launch of the project by making the required improvements arising from the evaluation of the potential risks (Hopkin, 2018).

Preventive Risk Management Strategies

To avoid the risk considered necessary by anticipation and preparation of necessary risks before the project is initiated, preventive management policies shall be applied during the design period (Kerzner, 2017). Appropriate data on the reaction of respondents to the efficacy of the deemed proactive risk prevention measures have been gathered as well as organized to minimize their efficacy.

Remedial Risk Management Strategies

Prevention measures to reduce risk do not eliminate threats, and risk can arise from time to time during the project's execution, and therefore, remedial techniques must be used to minimize and remove the risks, whenever required. Assaf and Al-Hejji (2006) have stated in Saudi Arabia that for an average duration of between 10 percent to 30 percent of construction projects were completed by scheduled completion dates.

Analysis

Findings with regards to the top 10 most important risks and their overall roles are as follows:

  1. Payments delayed culminated in the top with the highest percentage value and the client's responsibility resulting from the 78% response rate. This means that the maximum delays in the construction project is caused because of the client not paying the contractor on time.

  2. The second problem is the funding problem for the project and the response rate for this was 90% and the responsibility was of the client. The construction delays are mostly caused because of the funding problems in the project.

  3. Safety and accidents are also one of the important risks in the construction delays. The responsibility of ensuring safety and minimum accidents goes to the contractor with a response rate of 64%.

  4. Another significant risk with a client's responsibility is a lack of design which means that the client and consultant and the contractor should take measures to make sure that the design is correct so that there is no risk while implementing the project.

  5. An inaccurate schedule is another risk, which is the responsibility of the contractor with an 85% response rate. Thus, it is important to make sure that different risk factors are considered for obtaining an accurate schedule.

  6. Poor performance of the subcontractors is another risk, with 93% of the response rate and the contractor being responsible for it. Thus, the contractor should ensure that competent subcontractors are hired for the project.

  7. Inflation and fluctuation in the exchange rate is another risk factor, with the mixed response, 52% responses said it was a shared responsibility while 35% responses indicated that it was the responsibility of the client.

  8. Improper scope of work definition in the contract is also an important risk, with mixed respomnse rate where 58% of the response rate indicates that it is the responsibility of the client while 37% responses indicated shared responsibility.

  9. Poor Quality of material and equipment is another risk and the responsibility for this is given to the contractor with 87% of the response rate.

  10. Delay in the material supply or shortage of the material for construction is the last risk that is deemed significant in this study. The contractor is held responsible for this risk which may cause delay to the construction project with 92% of the response rate.

Effectiveness of The Strategies Developed for Managing the Risks

Preventive measures: based on the analysis undertaken a) a detailed plan by the compilation of updated project details and b) a comprehensive timeline of all past and current projects are the two most effective preventive risk management strategies. All these strategies are used to develop a realistic plan taking all the risk factors into account by reviewing details of projects and seeking guidance from similar projects which have been or are already being executed to make the plan feasible. If all risk factors are assessed, the probability of completing the project will be high.

Effectiveness of the remedial measures: It is not that all the risks can be controlled during the design stage, and that there are some risks during the implementation phase that require remedial risk management techniques. The two top techniques are a) closely supervised sub-contractors to reduce unsuccessful work and b) strongly alignment with sub-contractors; according to this survey. Two techniques illustrate that a successful project needs good communication with the subcontractors. The risk that a project will fail will diminish as long as closely supervised and organized work takes place and both stakeholders work together as one team.

Conclusion

The efficient risk management process facilitates risk recognition, quantification, and evaluation of risk control and risk mitigation policies. Successful and efficient risk management in the construction sector benefits from financial savings and enhanced productivity; improved efficiency and better decision-making in new projects. Management of risk is an effective and systematic way to identify, assess, and respond to risk to develop project management to achieve project objectives.

The report explains how the respondents interpret business risk relevant to a construction project. Of the 37 risk areas covered by this questionnaire, the top ten issues were listed and discussed in greater detail. (a) payment delays. (b) problems with project financing.; (c) accidents / safety in construction.; (d) defective design.; (e) incorrect plans/schedules; (f) poor performance by the subcontractor; g) exchange rate for and on construction; h) incorrect measure of contractual work definition; i) inadequate material and equipment quality, and j) delay or shortage in the supply of the material or equipment.

This illustrates that the contractor is directly responsible for most of the risks, clients are responsible for the risks allocated under them, and the risks which were not classified under anyone described as shared risks. It is also noted that the preventive measures of ensuring accurate schedule by considering updated information and referring to similar reports for accurate design; and remedial measures of keeping the subcontractors closely supervised and ensuring well coordination with them were considered as effective risk management techniques in ensuring that the projects are not delayed.

References

Assaf, S. A., & Al-Hejji, S. (2006). Causes of delay in large construction projects. International journal of project management24(4), 349-357.

Creemers, S., Demeulemeester, E., & Van de Vonder, S. (2014). A new approach for quantitative risk analysis. Annals of Operations Research213(1), 27-65.

Hopkin, P. (2018). Fundamentals of risk management: understanding, evaluating, and implementing effective risk management. Kogan Page Publishers.

Kerzner, H. (2017). Project management metrics, KPIs, and dashboards: a guide to measuring and monitoring project performance. John Wiley & Sons.

Markmann, C., Darkow, I. L., & Von Der Gracht, H. (2013). A Delphi-based risk analysis—Identifying and assessing future challenges for supply chain security in a multi-stakeholder environment. Technological Forecasting and Social Change80(9), 1815-1833.

Merna, T., & Al-Thani, F. F. (2011). Corporate risk management. John Wiley & Sons.

Pawar, C. S., Patil, J. R., Jain, S. S., & Gaikwad, A. M. (2015). Management of risks implied by conditions of contract and specifications. Management2(03).

PMI, A. (2008). Guide to the project management body of knowledge Project Management Institute. Newton Square, PA.

Yafai, K. N., Hassan, J. S., Balubaid, S., Zin, R. M., & Hainin, M. R. (2014). Development of a risk assessment model for Oman Construction industry. Jurnal Teknologi70(7).

Zavadskas, E. K., Vilutiene, T., Turskis, Z., & Tamosaitiene, J. (2010). Contractor selection for construction works by applying SAW‐G and TOPSIS grey techniques. Journal of Business Economics and Management11(1), 34-55.

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