COST AND TIME RISK ANALYSIS OF PLANT EXPANTION CONSTRUCTION PROJECT

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1 COST AND TIME RISK ANALYSIS OF PLANT EXPANTION CONSTRUCTION PROJECT Edi Santoso 1), Aditya Sutantio and Bambang Syairudin Master s Program in Management of Technology, Institut Teknologi Sepuluh Nopember Jl. Cokroaminoto 12A, Surabaya, 60264, Indonesia 1) edi.civil01@gmail.com ABSTRACTS Plant expantion project is one of important activities to support increased production capacity. The construction projects are generally carried out by a contractor through a tender process. Contractor often encounter obstacles that cause delays and cost overruns at the implementation of the construction project. This research conducted to analyze the risks in the implementation of plant expantion construction projects. This research take one of the existing plant in Jombang, East Java as the research object. This study apply qualitative risk analysis to get a dominant risk factor with Expert Judgement methods. Director and Project Manager of the contractors who have implementing plant expantion construction projects on the selected object will be take as the respondent. Dominant risk factors obtained from the analysis of probability-impact matrix. Risk mitigation and risk contingency will be conducted on dominant risk factors with Focus Group Discussion method. The expected result from this research is to get the dominant risk factors and find Risk Mitigation and Risk Contingency plan for dominant risk factors in the implementation of plant expantion construction projects. Keywords: Expert judgement, Probability-impact matrix, Risk Analysis, Risk mitigation, Risk contingency. INTRODUCTION Production capacity up always in line with increased demand of product at the target market. Plant expantion to support production capacity up is needed for add new machinery and equipment purposed meet the target production. Plant expantion construction project carried out by contractors as partners that selected through a closed tender process. Its important to finish plant expantion project based on plan schedule and budget that has been approved between owner and contractor. This research take one of the existing plant in Jombang, East Java as the research object. This research discusses the dominant risks factor in plant expantion construction project. Risk will be seen from the contractor side through the perception of the experts that involved in the plant expantion project. This study did not focus on getting dominant risk factors but also take the actions that can be apply to minimize the probability and impact of a risk event (risk mitigation) and actions that can be apply to restore the condition at the time a risk event occur (risk contingency). METHODOLOGY Risk Management Framework Risk management is attempts to recognize and manage potential and unforeseen trouble spots that may occur when the project is implemented (Larson & Gray, 2014). Risk A-1-1

2 management has identified possible risk events that may occur to minimize the impact caused and managing the response to risk events that occur (contingency plan). Figure 1. Risk Management Framework (Yoe, 2012) Risk Identification Risk identification is determining which risks might affect the project and documenting their characteristics (Meredith and Mantel, Jr, 2012). Risk identification also described as a holistic approach that organized to find the real risks in a project (Pritchard, 2015) In this research risk identification process performed in two steps. First, risk variables collected from research study of Identification and assessment of risk factors affecting construction projects (El-Karim, at.al.,2015), Saudi Arabian aviation construction projects: identification of risks and their consequences (Baghdadi & Kishk, 2015), Significant risk factors in construction projects: contractor s perception (Karim, at.al., 2012), Factors affecting cost overruns in micro-scaled construction companies (Polat, at.al, 2014), Factors affecting construction cost in mara large construction project (Memon, et.al., 2010), Risk analysis on underpass construction projects in simpang Dewa Ruci Kuta Bali (Dewi & Nurcahyo, 2013), Analysing factors affecting delays in Indian construction projects (Doloi, et.al., 2011), An exploration into cost-influencing factors on construction projects (Cheng, 2013), Ranking of delay factors in construction projects after Egyptian revolution (Aziz, 2013) and Examining factors affecting budget overrun of construction projects undertaken through management procurement method using PLS-SEM approach (Rahman, et.al., 2013). The results from research study shows 42 variables relevant with research object. Second, after get the results of the research study, conducted preliminary survey. Preliminary survey conducted on perceptions of academics and practitioners who have experience risk analysis in construction projects related to the variable that will be used in the this research. Risk Analysis Risk analysis consist a qualitative and quantitative method that can used to give a measure of the calculation of risk events to event risk that has been identified (Richardson, 2015). The purpose of this stage is to choose the risk factors that have an opportunity and a A-1-2

3 major impact on the success of the project. In this research will be use a qualitative risk analysis method. Risk Scoring Data for risk assessment drawn from preliminary survey. Respondents of main survey are sample of director and project manager from contractor who handle projects directly. The value given by respondents are taken on average and rounding mathematically. Risk assessment methods using methods by multiplying the value of the variable risk event probability and impact value when the event occurs (Mulcahy, 2010). Risk Score = P (probability) x I (impact) (1) Value of probability and impact have been determined by criteria with likert scale 1-5 from expert judgement as follow: Table 1. Probability Criteria Value Criteria Schema 1 Rare Risks occur with the percentage <20% 2 Unlikely Risks occur with a percentage of 20% -40% 3 Possible Risks occur with a percentage of 40% -60% 4 Likely Risks occur with the percentage of 60% -80% 5 Highly Likely Risks occur with the percentage of> 80% Table 2. Impact Criteria Value Criteria 1 Insignificant 2 Minor 3 Moderate 4 Major 5 Catastrhopic Schema - Losses cost of less than 0.5% of budget - The results of the work accepted by the owner - The time delay has no effect on the job - Losses cost of less than 0.5% -2% of budget - The results of the work accepted by the owner - The timing of increases of 5% - Losses cost of less than 2% -10% of budget - The work was rejected by the owners - The timing of increases of 5% -10% - Losses costs less than 10% -20% of budget - The work was rejected by the owners - The timing of the increases of 10% -20% - Losses cost> 20% of budget - Results of the work rejected by owners - The timing of the increases 20% Qualitative risk analysis matrix Qualitative risk analysis matrix used in risk management plans to categorize risk event. This matrix provides the logic for combining the value assessment of the likelihood and consequences of risks A-1-3

4 Table 3. Qualitative Risk Analysis Matrix (Source : Richardson, 2015) Note: E = Extreme; formal risk assessment must be performed. H = High; formal risk assessment should be performed. M = Moderate; for possible and above ratings, a formal risk assessment should be performed. L = Low; formal risk assessment at discretion of the PM. Risk ranking is determined by probabilty criteria and impacts criteria in Table 1 and Table 2, in which value of the probability and impact of each variable inserted into the matrix to obtain rangking (low, moderate, high and extreme) of each risk variables. Risk Mitigation Risk mitigation is the most common of all risk management strategies. Mitigation strategies are also essential for risk management because sometimes handling risks by avoiding (Avoidance) can not handle a significant project risk. Risk mitigation is the process to identify measures to reduce the probability and impact of risk (Pritchard, 2015). Risk Contingency Risk Contingency is an action plan that will be used when the risk occurs (Mulcahy, 2010). Contingency plans adjusted for the effects of risk and produce a plan for recovery project condition (Kendrick, 2015). Contingency planning process is exactly the same as for other project planning. Every contingency planning process starts with the trigger events are a sign that the risk event has occurred. By recognizing the signs of the beginning, it can increase the number of alternative contingency plan to do so can reduce the impact of risk that may be posed. RESULTS AND DISCUSSION Based on literature and preliminary survey, there are 41 risk variable which are relevant for selecting research object. Probability-impact survey are performed for the probability and impact, in order to determine risk score that will be used in qualitative risk analysis matrix. Table 4. Probability-impact survey result NO RISK FACTORS PROBABILITY IMPACT AVR SCORE AVR SCORE 1 Unpredicted Weather conditions Precipitation /flood Lack of communication between parties A-1-4

5 NO RISK FACTORS PROBABILITY IMPACT AVR SCORE AVR SCORE 4 Poor site access Delays in decision making by owner Oral request from the owner Accidents and safety issues Evaluation of the change order and the negotiations did not run smoothly Human resource allocation Delays by a third party (Sub Contractors, Suppliers, Vendors) Lack of material supplies Delays in delivery of materials and equipment Delay in materials procurement Contractor financial failure Dropi in labor productivity Material wastage Poor site conditions Design change by owner Changes in the design specifications Poor design criteria Design failure Mistake time estimation Mistake budget calculation Construction failure Incomplete design Re-work Unforeseen ground conditions Quality control by owner Inadequate standard contract documents Inadequate contract clause They are not compensation clause Unclear technical spesification Unclear project scope Delay in permits and licenses Inappropriate contract type Delay in progress payment Project duration to short Contract breaching by owner Change of scope Extra work not included in contract Penalty resulting from delays From the results of the ranking of risk variables in table 5. A total of 41 risks variables, two variables has extreme level, 12 variables in high level, 14 variables has moderate level and the remaining 13 variables has low level. Risk variables that has extreme level will take into risk mitigation and risk Contingency Plan. A-1-5

6 Table 5. Ploting Probability-impact survey result Risk mitigation and risk contingency using focus group discussion method to get expert opinion from FGD respondents. Respondents who used for the focus group discussion in this research are the director of the contractors who have or are implementing factory expantion construction projects in object of this research more than 15 years. Table 6. Risk mitigation for extreme level risk factors NO RISK FACTORS RISK MITIGATION 1 Design Change by owner 2 Incomplete design at tenders process Provide a contingency cost at bidding document. (M1) Bargain reaccounting agreement for design change impact (cost and time). (M2) Check and analysis design and bill of quantity that have prepared by owner before create bidding document. (M3) Communicate and clarification for uncomplete design to create bidding cost analysis. (M4) Create cost analysis based on design and asumption with additonal contingency cost. (M5) A-1-6

7 Table 7. Risk contingency for extreme level risk factors NO RISK FACTORS 1 Design Change by owner 2 Incomplete design at tenders process RISK CONTINGENCY Claim for additional time and cost based on reaccounting calculation. (K1) Use contingency cost to completion add work which cause by design change. (K2) Provide a contingency cost at bidding document. (K3) Bargain reaccounting agreement for design change impact (cost and time). (K4) CONCLUSIONS AND RECOMMENDATIONS Based on the result of all research process, this research concluded the dominant risk factors for factory expantion project are design change by owner and Incomplete design at tender process. Risk mitigation for design change by owner are provide contingency cost and make agreement for reaccounting work volume cause by design change as background claim additional cost and time. Risk mitigation for incomplete design at tender process are check, analyse, communication and clarification for incomplete design to create cost analysis. Risk contingency for design change by owner are use contingency cost to completion work schedule and claim for additional cost and time based on reaccounting analysis. Risk mitigation for incomplete design at tenders process are provide contingency cost and make agreement for reaccounting if occur design change at the construction stage. Some recommendations for future research: provide risk mitigation and risk contingency for high level risk factors until low level risk factors to minimize probability and impact of each risk factor. In future research, this research can be performed on other object in order to develop risk variables that can occur in factory expantion construction project in general. REFERENCES Abd El-Karim, M. A., El-Nawawy, O., & Abdel-Alim, A. M. (2015). Identification and Assessment of Risk Factors Affecting Construction Projects. HBRC Journal, Abd Karim, N. A., Memmon, A. H., Jamil, N., & Abd.Azis, A. A. (2012, December). Significant Risk Factors in Construction Projects: Contractor s Perception. Colloquium on Humanities, Science & Engineering Research (CHUSER 2012), Ayyub, B. M. (2014). Risk Analysis in Engineering and Economics (2nd ed.). Boca Raton: CRC Press. Aziz, R. F. (2013, April). Ranking of delay factors in construction projects after Egyptian revolution. Alexandria Engineering Journal 52 (2013). Baghdadi, A., & Kishk, M. (2015). Saudi Arabian Aviation Construction Projects: Identification of Risks and Their Consequences. Procedia Engineering, 123, Cheng, Y. M. (2013, October). An exploration into cost-influencing factors on construction projects. International Journal of Project Management 32 (2014). Dewi, A. I., & Nurcahyo, C. B. (2013). Analisa Risiko pada Proyek Pembangunan Underpass di Simpang Dewa Ruci Kuta Bali. JURNAL TEKNIK POMITS, 2 (2), Fellows, R., & Liu, A. (2015). Research Methods for Construction (4th ed.). Oxford: Wiley. Godwin, W. (2013). International Construction Contracts - A Handbook. Wiley - Blackwell. A-1-7

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