REAL-TIME RISK MANAGEMENT APPROACH TO CONSTRUCTION PROJECTS

Transcription

1 REAL-TIME RISK MANAGEMENT APPROACH TO CONSTRUCTION PROJECTS Z Shehu, J Sommerville School of the Built & Natural Environment, Glasgow Caledonian University G4 0BA Zayyana.shehu@gcal.ac.uk Abstract: If things can go wrong on a construction project they will. With effective real-time risk identification and management we can mitigate the effects of such events. Both public and private sector clients of the industry have become more aware of the effects of risks on the industry and have reduced their margins for error and therefore seek a maximum level of accuracy and precision. In order to achieve these tight margins management of the project are forced to employ a wide range of risk management approaches. The tools and techniques in use for identification of project risks in the construction industry range from desk based, in the form of computer programmes to workshops and site applications or combinations of various tools which this paper critically evaluates. Based on the survey conducted in the UK construction industry, it has been established that among the various tools and techniques interviews, workshops, brainstorming master-programme, personal experience and checklists are more acceptable than the others. This paper evaluates the tools and techniques in terms suitable stages of application, cost, ease of use, flexibility, reliability and accuracy. Key words: real-time risk identification, assessment, evaluation and mitigation INTRODUCTION In construction projects risk can generally referred to as any development in the course of executing the project that has a detrimental effect on the cost, quality, health and safety of the construction operatives, and the project in general. In other words risk remains as the possibility of an undesirable outcome from a project. Containing costs, staying on schedule and minimising risks are essential to project success and profitability. It all comes down to the level of control exerted by various experts. Criticism and comments of the experts in the construction industry make clear that there is need for the industry to tackle some issues to provide solutions to the problems face by the clients of the industry. In view of that this paper seeks to address one of the major problems constituting concern to the industry - namely real time risk identification. Latham (1994) suggests that no construction project is risk free. Risk can only be managed, minimised, shared, transferred, or accepted: it can not be ignored. In response to Latham s argument, this research identifies that risks can be minimised, shared, transferred or accepted if properly identified. Therefore the challenge to the industry is to find ideal tools and techniques to identify risk(s) as the first step. Ahmed et al. (date unknown) accept that construction per se is a risk-prone industry, with a poor track record of coping with risks, as a result of which the clients have been enduring the agonising outcomes of failure in the form of unnecessary delays in project completion, cost surpassing the budget and sometimes failing to meet quality standards and operational requirements. 45

2 Taking it from where Latham and Ahmed et al. left it, this paper therefore suggests that effective identification, analysis and management of construction risks remain a big challenge to the industry. In construction projects, it may be argued that success now hinges on risks management and maximising opportunities. The success may be subject to the ability of the project manager to identify the project risks, evaluate and decide on strategies for keeping them to a tolerable and acceptable level to all project stakeholders. In order to achieve effective real time risk management, there is a need for the proper evaluation of the various available tools and techniques that are in use by project managers in identifying risk efficiently by conducting a survey to collect the opinion of the practitioners. RATIONALE OF STUDY Based on the outcome of various reviews by Egan s Rethinking Construction, Latham s Constructing the team and Fairclough s Rethinking Construction Innovation and Research, it is understood that along with the tri-axial factor (cost, quality and time), health and safety are the big construction risks that occur as a result of deficiencies in the real-time risk identification process. These result in the clients of the construction industry spending huge amounts of money and time to undo project failures; which can be minimised if the project team devotes sufficient time to identifying the project risks. This can be achieved through the use of efficient tools and techniques available to the project team. All construction projects are prone to risks that may affect their costs, quality completion time, and health and safety of the operatives. Effective risk management relies on efficient identification of those risks and implementation of an action plan to manage and control the risks during the life of the project. This paper seeks to fill the gap left by various researches in risks identification by providing ideal tools and techniques that will aid the project managers to identify risks in construction projects. This is in order to discover sufficient means of identification, analysing, accepting and managing risks. It will also address the issues that may be considered by the project managers when assessing the suitability of tools and techniques for analysing risks before accepting them. RISK Kerzner (2003) define risk as a measure of probability and consequence of not achieving a defined project goal. Ray (2003) in a broader perspective describes risk as the possibility of an undesirable outcome from a project. Such undesirable outcomes include exceeding budget, overrunning the completion schedule or delivering an unsuitable product. One or the combination the above outcomes can be severe enough to negatively impact an entire business enterprise. MJY Team (1997) sees risk as the possibility of suffering harm or loss. Having established some opinions about project risks, this paper defines risk as any unexpected or unwanted project development that will affect or disrupt overall planning, coordination and control of activities or entire project. This affects the principal aim of meeting the client s and stakeholders requirement and expectation 46

3 of producing a functionally and financially efficient project in terms of cost, quality and time, environmental impact, and health and safety. REAL-TIME RISK IDENTIFICATION Real-time risk identification is a vital activity for effective risk management; it prepares the project team for the uncertainties which lay ahead in the course of executing a project with the important aim of not to miss any risks out. Ward and Chapman (1995) suggest that it is often said that the real risks in any project are the ones that the project team fails to identify. This suggests that the project team have a broad scope when attempting to identify potential sources of risk and thereby reduce the chance of overlooking important areas of risk. Jenkins (1998) explains that risk identification at the operational level is very effective and can help with on-the-spot improvements and day-to-day management. It is usually a tractable, qualitative process. At the other end of the scale, risk identification at a strategic level can also be done in a very qualitative and broad brush way. The real difficulty is the next step of making the links between risks at all levels and across interfaces. Tasmania (2002) also suggests that before risks can be properly managed, they need to be identified. One useful way of doing this is defining categories under which risks might be identified: for example, categories might include corporate, health & safety, financial and system risks. These can be broken down even further into categories such as environmental, economic, human, etc. Another way is to categorise in terms of risks external to the project and those that are internal. This paper suggests that real-time risk identification is an essential methodical process to achieve effective real-time risk management. It sets out to identify likely project exposure to uncertainty or what can go wrong in the course of executing a project. This requires sound knowledge of the project, organisation, the market within which it operates legal requirement, health & safety, social, political and the cultural environment in which the project exists. In other words, the term encompasses strategic and tactical level risk identification. REAL-TIME RISK MANAGEMENT Risk management may be defined as a process of controlling the level of risk and to mitigate its effects. Angelo and Day (2001) see risk management as an important part of any project. The proper management of risks limits delays, budget overruns, and claims between parties. Nummedal et al.., (1996) see it as a systematic approach for identifying, evaluating and responding to risks encountered in a project. Some contractors think of risk management as insurance management where the main objective is to find the optimal economic insurance coverage for the insurable risks while Kerzner (2003) did not limit risk management to insurance, he defines it as the act or practice of identify, analysing, and evaluating risk. Dealing with risk involves planning for risk, assessing risk issues, developing risk handling strategies, and monitoring risks to determine how they have changed. Filling the gap left by various definitions of risk management, this paper defines real-time risk identification as the act or practice of identifying, analysing, evaluating, mitigating and dealing with project risks. Dealing with risk involves planning for 47

4 risk, assessing risk issues, developing risk handling strategies, and monitoring risks to determine how they change. Figure 1 below illustrates real-time risk management concept. Real-time risk identification Risk assessment Real-time risk Management Risk Analysis /Evaluation Risk Mitigation Figure 1: real-time risk management model In essence, risk management has a broader meaning it should be a qualitative or quantitative, systematic approach for managing project risks. It should deal with both insurable as well as uninsurable risks and the choice of appropriate identification tools technique(s) for dealing with these risks. Jenkins (1998) suggests that being in business is all about taking risks and maximising opportunities. The core skill of managers is to be able to identify, evaluate and decide on strategies for keeping risks at a level which is tolerable to all stakeholders at proportionate cost. RISK IDENTIFICATION TOOLS AND TECHNIQUES There are a number of techniques that can be used in identifying project risks, the ideal ones are probably to use a combination and work with outsiders as well as people who are involved in the project and know it well. Useful techniques include various brainstorming methods as well as systematic inspections and process analysis. Risks can be identified using various techniques at various points or stages of the 48

5 project life cycle; these techniques include but are not limited to the ones in the figure 2 below: Interviews, Surveys & Research Hazards Identification Personal Experience Master Programme RISK IDENTIFICATION TOOLS AND TECHNIQUES Organisational Charts Risk Prompts Flow Charts Checklists Figure 2: Risk Identification tools and techniques Personal Experience This method of identifying risk relies on the expertise, knowledge and experience of the project managers and other personnel in the project organisation. Tweeds (1996) suggests that in construction projects that however schemes are usually unique and different, thus the experience gained from one project can only be transferred to a limited degree to another. This approach usually encounters cognitive limitations due to the potential biases associated with the views of individuals. Interviews, Surveys and Research Jones (1998) observes that interviews, surveys and research can provide information on the number and nature of specific project risks. With regard to a specific type of construction risk, he further argued that some of the construction risks relate to geophysical conditions. Therefore more work on understanding those conditions will lead to a reduction of the risks through a better assessment of the costs likely to be incurred as a result of construction in those geophysical conditions. Interviewing the project personnel and stakeholders from every construction discipline, staff within organisation who have experiences of similar projects ensures that corporate knowledge and personal experiences are utilised in the process of identifying risk. Smiths (2002) accepts that this technique allows project personnel to have their say about the risks they anticipate in the project, and gives them a feeling of involvement in the process and ownership of the identified project risks, which will 49

6 lead to greater acceptance of any risk mitigation measures implemented. Jones (1998) accepts that, apart from physical observations, other data acquisition methods include one-to-one interviews, questionnaire surveys, observations, etc. Master Programme Master programme can be used to identify the major sources of risk. Hayes et al. (1986) suggests that project managers will find it useful to develop their own detailed list based on their own experience in the type of projects with which they are usually concerned. The risk identification here is done by checking the detailed construction programme to identify the risks at the dependencies from one stage to another. Checklists Dickson (1987) discusses that checklists are cheap, simple, adaptable, and allow for comparisons to be made between different sets of data. On the other hand, the production of generic checklists can be slow and lead to ambiguous results. Carter et al.., (1994) suggest that the completion of the checklist does not guarantee thoughtful answers. Heemstra and Kusters (1996) explain that the use of recorded information in the form of checklists can help in the identification of risks. Simister (1994) notes that checklists were frequently utilised by project risk analysis and management (PRAM) practitioners. Uher and Toakley (1999) also found this method to be in common use in Australia. External Consultation In some specialised projects, experts are consulted when their knowledge is thought to aid the identification of project risks. Carter et al.., (1994) however point that external consultants require time to fully understand a new setting and often leave with their expertise after the assignment. Risk Prompts Simon et al., (1997) are of the opinion that risk prompts are used to jog memory. They consist of open-ended questions that can assist in the identification of risks in a certain aspect of a project. Risk prompts are similar to checklists; but prompts are more generic and thus fewer in number. Assumptions Analysis According to Simon et al. (1997) at the project definition stage, many aspects of the scheme will either be unknown or uncertain. Assumptions are then made to enhance a decision on whether the project should proceed or not. These assumptions can be used as a means of identifying the risks (uncertainties) surrounding a project scheme. Organisational Charts Dickson (1987) argues that organisational charts can show areas of work duplication, concentration and dependencies. Conrow and Shishido (1997) explain that organisational charts can also help to identify the structure that is in place for managing risks in the endeavours of an organisation 50

7 Flow Charts Dickson (1987) also suggests that flow charts depict the sequential flow of activities in the practices of an organisation While flow charts in themselves do not identify risks, they can be used to ask what if questions; leading to the identification of the risks posed by different activities, personnel, machines, etc. Flow charts are commonly used in construction practice (Uher and Toakley, 1999). Hazard Identification Studies Dickson (1987) argues that hazard identification studies utilise prompts to identify risks or hazards and aid decision making, especially at the planning or design stage In such studies, the different ways in which an activity or component could deviate from a planned course of action are explored in order to provide a basis for pre-emptive action. Hazard analyses are largely unknown amongst Australian contractors (Uher and Toakley, 1999). FRAMEWORK FOR SELECTION OF REAL-TIME RISK IDENTIFICATION TOOLS AND TECHNIQUES Real-time risk identification is double-edged technique for use at various stages in construction of construction project. Based of the survey conducted, it has been discovered that the under-listed tool and techniques are more acceptable and widely used in real-time risk identification. The analysis is carried out using the indices of cost, simplicity in use, flexibility, reliability and accuracy. Below are useful frameworks developed from the statistical analysis and evaluation responses from a questionnaire base survey conducted on sixty selected construction companies. Table 1 (below) seeks to evaluate the real-time risk identification tools and techniques within the various stages/ phases while table 2 evaluated the tools and techniques within bounds of important consideration of cost of application, simplicity, flexibility, reliability and accuracy. Framework Based on the Adequacy Analysis Responses Conception Inception Feasibility Briefing Interviews/surveys Workshops sessions Site visits Brainstorming/ Intuition Master Programme Personal experience Checklists or prompt words Table 1: Selected tools and techniques and their respective stage of use Design/ Construction The shaded portions if interpolated indicate acceptance of the tool and technique for the respective stage. 51

8 Expense (cost of use) Ease of Use (simplicity) Flexibility Reliable Accurate Tools and Techniques Interviews/surveys Cheap Simple Not Yes Yes Workshops sessions Expensive Simple Yes Yes Yes Site visits Cheap Simple Yes Yes Yes Brainstorming/ Intuition Cheap Simple Yes No No Master Programme Cheap Simple No Yes No Personal experience Cheap Simple No Yes No Checklists or prompt words Cheap Simple Yes No No Table 2: Factors of consideration to select a tool Looking at the tables above, this paper suggests that to achieve real-time risk identification and management, if any tool fails 2 out of 5 should be replaced with another more effective one; that will be in terms of stage of use and expense, simplicity, flexibility, reliability or accuracy. The tools take fail only 1 out of 5 can be used but it may not be as effective as the ones with score of 5 out of 5. CONCLUSION Real-time risk identification and management requires experience of construction team and cannot be done by one person alone, forming the right team to identify the risks demands a serious investment of effort, time and selection of the right tools and techniques. To be fully effective and efficient, real-time risk management needs to address the whole project life cycle. The scope and depth of analysis should increase as the project progresses toward the construction stage, it is important that prior to each stage a preliminary risk identification and analysis should be taken. Real-time risk management is an integral part of project management designed to accommodate the focus of each stage in an integrated manner. From a system approach, any activity on a project is a reference point in a larger system affected by the wider system (whole project) with potential to affect the delivery of the wider system. One of the implications of risk management is the degree of interdependency between (component) projects, the need for sound risk management approach to address the overall system increases dramatically as the interdependency between projects increases. The paper discussed about concept of real-time risk identification and management and explored the available tools and techniques in use in the construction industry for identification of project risks in the construction industry. Recommendation for Further Studies In view of the dynamic nature of technology in construction and the demand of clients for higher quality and more value for money, these translates to need for perfection and precision in our approach to the techniques, methods, and tools in use (for risk identification and management) to enhance our abilities to identify and 52

9 manage project risks. Such tools and techniques span traditional areas such as cost estimating and quality assurance to less traditional ones such as organisational behaviour and personal risk aversion. As the project demands become more sophisticated, these tools may not stand the ever-increasing demand and sophistication in technology (which goes along the same direction with projects risks) of the project demand, thus there is need for the industry to search and research, view and review for the variables that will lead us to the development of more efficient tools and techniques for risks identification. There are still more efficient tools and techniques waiting out there to discovered and put to use. REFERENCES Ahmad, I., Ahmed, S., M., and Azhar, S., (no date) [Florida International University research group] Evaluation of Florida General Contractors Risk Management Practice: Available on accessed on 5th December Angelo, W., and Rubin, D. (2001) School Officials Learn Lesson in Managing Booming Work. Engineering News Record, 247(7), Carter, B.; Hancock, T.; Morin, J. and Robins, N. (1994) Introducing Riskman Methodology: The European project risk management methodology. NCC Blackwell Ltd, Oxford-UK. Dickson, G.C.A. (1987) Risk Analysis. Witherby & Co. Ltd., London Hayes, R. W., Perry, J. G., Thompson, P. A. and Willmer, G., (1986) Risk Management in Engineering Construction--Implications for Project Managers Project Management Group, UMIST, Thomas Telford Ltd, London. Heemstra, F.J. and Kusters, R.J. (1996) Dealing with risk: a practical approach. Journal of Information Technology, 11(), Kerzner, H., (2003) Project Management: A Systems Approach to Planning, Scheduling and Controlling. Wiley Latham, Sir, M, (1994) Constructing the team: final report joint review of procurement & contractual arrangements in the UK construction industry. H. M. S. O Simister, S.J. (1994) Usage and Benefits of Project Risk Analysis and Management. International Journal of Project Management, 12(1),5-8. Smith, N., J., (2002) Engineering Project Management. 2 nd Edition. Blackwell Stuckenbruck, L., C., (1981) The Implementation of Project Management, Project Management Institute, PA. Wiley Tasmania (2002) PM007 Project Risk Register, Template and Guide. URL [Accessed 12 th September, 2004] pm007_riskregisterv1.0.htm Tweeds (1996) Laxton s Guide to Risk Analysis and Management, Tweeds Chartered Quantity Surveyors, Cost Engineers and Construction Economists (eds), Oxford. Uher, T.E. and Toakley, A.R. (1999) Risk management in the conceptual phase of a project. International Journal of Project Management, 17(3), Ward, S.C. and Chapman, C.B. (1995) Risk-management perspectives on the project lifecycle. International Journal of Project Management, 13(3),