Including Risk Management in Construction Projects
Abstract
Construction is an inherently risky domain, as its projects are submitted to several contingencies, from the weather that may delay the project’s completion to limited involvement of some stakeholders or even accidents. Contrarily to other industries however, Construction have not really implemented structured risks management methods to handle those threats to each and every project.
The following article will try to handle that issue. As such it will define a risk and point out that risk management methods are really necessary within the management of a construction project. A short review of the methods currentlyused for managing the risks in the Construction buisness will point out that what is currently used is very unsatisfaying.
To adress this lack, we will then see the process used in general to treat risks within a project, and then list a few usefull tools. Those tools will not be explained (on how to use them) as other articles on this wiki do it, but their benefits for a project will be detailled.
Finally the limitations of risk management and its benefits will be detailled in the conclusion.
- Definition of a risk
Short theoretical definition of a risk
- Presentation of the main risks a construction project may face
List of the main risks as defined by companies and scholars, and put into some categories
- Current methods currently used to deal with risks in a construction project
General overview of risk management techniques used by companies today, as defined by some studies
- General method in risk management
General overview of a risk management process
- Tools applicable for Construction project
List of some method applicable to a Construction project, and their benefits
- Conclusion and limitations
Contents |
Introduction
Construction is an inherently risky domain, as its projects are submitted to several contingencies, from the weather that may delay the project’s completion to limited involvement of some stakeholders or even accidents. Contrarily to other industries however, Construction have not really implemented structured risks management methods to handle those threats to each and every project.
The following article will begin by presenting the definition of a risk. It will then move on to an overview of all the risks a construction project may face which explains the need for risk management. The current methods used to deal with them will be presented as well. It will then detail the general process to deal with risks, and list some precise methods and their impacts on each phase and risk. Last but not least the potential benefits and limitation of this process will be listed so that the goals of a risk management method can be set up realistically.
Definition of a risk
Risk itself is not always well defined, but is used as a tool used to measure safety or the deviation from an objective. An overall definition can be that risk depends on the consequences, often negative or undesirable, of future activities with respect to something human being values, and the likelihood of those consequences.
A mathematical definition of a risk would be Risk = Probability of occurrence x Consequences.
As a general concept, safety is the freedom to potential harm. Being totally free from potential harm is impossible, and so there is no 0 risk. The object of risk management is consequently to determine the risks and try to mitigate them in order to make the risk acceptable (which implies the creation of acceptance criteria).
However, a risk is not always negative, as using them is a major part of an entrepreneurship activity. It indeed may generate profit or innovations, as long as the risks are mastered alongside the process and not let alone to go astray.
"The biggest risk is not taking any risk... In a world that changing really quickly, the only strategy that is guaranteed to fail is not taking risks." Mark Zuckerberg.
"I think there's a difference between a gamble and a calculated risk." Edmund H. North
As pointed out above, the whole point with risks is taking some as they are necessary for a company to succeed, but not take them unwisely: hence the risk management process.
Quick overview of risks faced by the industry
Several factors may endanger a construction project, and as such may harm a construction company. A construction project is usually complicated to manage, with the need to handle some complexity (not always in the technicity of the project itself but more in its realisation), all the participants, who often have different when not divergent goals, and many other points listed below. As the project evolves constantly, with its completion advancing but also all the changes imposed by the field’s reality, numerous feedback and decisions must be processed, often in a short period of time.
All those phenomenon makes that historically construction has been a risky domain, with often projects not being completed in time or within the original budget, high level of conflicts and litigations between the stakeholders, most of the profits being generated based upon some risks (hence creating a low margin), and a bad record concerning health and safety.
The 2008 crisis didn’t improve the situation at all, as it reduced the number of contracts being awarded and so increased the concurrence between companies. This consequently tended to decrease quality to improve costs and delay, and generated more risks for all the stakeholders. It also put even more pressure to save time and money to generate profits upon the money invested in the project, as well as on the workers’ health and safety. Here are some of the of those risks, in different domains.
Organizational risks
Those risks are mainly around Costs, Time and Quality, and may be created mostly in the early phases of a project. They impact a company as a whole, not individuals.
• The first risk to take into account is the technical feasibility of the project, and the design issues. They can impact the whole construction process with high consequences upon the schedule or costs. The same risk may be created if the construction method is not adapted.
• The commercial benefits of a project may as well be a risk factor for the client. If for example the building is technically obsolete or has been built with a low quality, the advantages expected from the project may not be available.
• For the contractor one of the main risk is about coordination and communication with the other stakeholders of the project. He must as such ensure a good commitment from every partner, and be ready to face potential failures, both from a subcontractor or supplier and from the client (lack of fund to ensure the cash flow for a given milestone for example).
• During the tendering phase of the projects, setting up an unrealistic schedule or budget can also create a risk for the company and the client, upon the costs and or the schedule.
• All those risks may as well impact the reputation of the company and then endanger not only the project but the whole business strategy.
Personnel, Health and Safety risks
They are the most obvious risks when studying construction risks. Even if some safety progress has been made, this is still a serious issue when planning a project, as more than 1300 death per year are still registered in link with Construction in the EU alone. Statistics shows that 90% of those construction-related deaths could have been avoided. (Cooke & Williams, 2004, p83).
The Safety risk is also important for people external to the project, for example the neighbours that may be endangered or hit by a site issue, like the fall of a crane.
Some personnel-related risks can also occur during the project. They can include strikes, sicknesses or holidays that could prevent the workers from being on site and so delay the progress of the construction process as well as a lack of commitment from the employees, either on the field or the consultants.
Events beyond direct controls
To conclude this quick overview of the risks a construction project may face, here are some events that may damage its process but that one can’t directly control:
• Dependencies between a new project and other projects. If two projects with different stakeholders interfere with one another it can impact the two of them but it may be really hard to address the issue.
• Some physical events can also present a risk. The weather is an obvious one, as concrete cannot be casted if the temperature is below 0, but it may also involve earthquake, wind, sandstorm,… which may be usual in some areas.
• Legal risks: depending on the country the project is to be carried out in, some specific legislation may be applied and can impact the project if they were unknown beforehand. They can also be created in some unstable countries with change of political regimes and their consequences (like nationalizations in Cuba with Castro’s arrival).
Methods currently used to face those risks.
Studies conducted both in the early 1990s and, more recently, in 2008 and 2009 (just before and after the 2008 crisis) showed that the methods used to deal with those risks in the construction domain have not really evolved, and that there is a real lack of methodology in their treatment.
Methods used to handle risks in construction projects, Risk Management in Construction Projects, Nerija Banaitiene and Audrius Banaitis, INTECH, 2012.
As represented here, most of those risks are treated either by creating some contingencies reserve or warranties or by transferring them to another party, insurance or project partner. For those using some risk management methods, most of those techniques are not scientifically demonstrated and objectives ones, but are based upon experiences and the past. That kind of methods, useful to a certain extent, are however limited upon the knowledge of the employees and as each project is specific. They as a consequence can’t be enough to manage risks on themselves.
Risk management methods used in companies, Risk Management in Construction Projects, Nerija Banaitiene and Audrius Banaitis, INTECH, 2012.
As those studies showed, risk management is not a developed field in the Construction industry, and there has not been any real progress in this domain in 20 years. The following parts of this article will as a consequence present some methods to try and manage risks in a Construction Project.
General Process to deal with risks.
The whole process of risk management begins with a risk assessment phase. It will require to analyse the risks, i.e. to identify them, and to quantify them using some methods presented below, in order to determine the risk as a mathematical entity.
Once this process is complete, one has a list of risks and their probable impact and likelihood. The question is now to determine whether those risks are acceptable (“calculated risks”) and as such can be accepted, or if they should be somehow mitigated and controlled. This is the risk evaluation phase. During this step, the project manager should compare the risks he has identified beforehand with the acceptance criteria he established. Those criteria may be a company policy, let to the decision of each project manager, agreed with the other stakeholders, … It’s always a balance between the costs of the risk reducing policy required and the benefits of those measures on the risk. Once this comparison has been made, he gets the list of risk that he is ready to take, and others that need mitigating.
Here comes the risk control process. During this phase, the project manager finds out way to limit the risks that were not considered acceptable in the risk evaluation phase. Four big techniques are mainly used:
• Avoid risk: This implies to change the methods used or remove the source of the risk. It’s not always possible but it is the best way to ensure a perfect control of the risk. A good example is the use of a toxic chemical: its utilisation generates risks. If this chemical can be replaced by another not toxic (for a reasonable cost), then the toxic risk can be avoided.
• Transfer risk: The main method currently used in construction projects, as seen before. This does not control the risk itself but mitigates its consequence for the company as somebody else is to take the consequences should something go wrong. Most of the time it consists on insurances warranties or the use of a subcontractor to take the risk in the company’s stead. This however leaves the risk existent and it may still harm the project, for example through unscheduled delays.
• Reduce exposure: This consist on reducing the risk by limiting the exposition to its source. It may for example be limiting the use of a crane to the really needing tasks to limit the risks of a load falling and injuring workers: it does not delete the risk but reduces it by acting on its probability of occurrence.
• Accept risk: Finally, when there is no other option whatsoever, the last remaining choice is to accept the risk. This should only be considered for acceptable risks as defined in the risk assessment process, as the risk will remain unmitigated during the whole project.
Once the mitigation methods have been decided, the last phase of control and monitoring may begin. It includes, in the preparation phase, the choice of risk response methods, which should be recorded in a document to allow a good and efficient application throughout the project. During the construction process itself, the risks should be monitored, to ensure that the first no one was forgotten during the preparation process and second that the assessment was correct and that a risk is not more important than expected.
This monitoring process must if necessary lead to some corrective measures to always keep the risks on track and mastered.
The overall method to ensure a good risk control: plan ahead (risk assessment and control and mitigation methods), do and apply the mitigation measures chosen, check and monitor the risks throughout the project and act if the mitigation process shows a necessity to.
Tools applicable for Construction project
The following part will list some of the risk management tools that are well adapted to be used in risk management for a Construction project. In order to use the Wiki principle fully, those functioning of those tools will not be detailed here be there will be links sending to some detailed articles about each tool. However, for each point of the list, a short summary of the benefits and potential uses of the tool will be granted.
Qualitative methods
Those are, for some, the methods currently used in the industry. They include:
• Brainstorming. It is an intuitive method which using the ideas of several people around the project in order to list possible problematic aspects (or possible advantages as a risk may be an opportunity) affecting the project. This can be used in order to gather as many risk as possible during the risk identification process, but it is mainly based upon people’s experience and imagination and as such may not be exhaustive or accurate, especially since every construction project is unique. The Delphi technic is also a brainstorming process but which keeps participants anonymous while each can see the results of the process. It may be a way to encourage participation and “crazy” ideas which may prove useful for the process. Using a SWIFT (structured what if method) process during the brainstorming may help explore more paths and gather more risks.
• Interviews. This method is based upon the experience of the people being interviewed, either directly or through a paper questionnaire. This method has basically the same interest and flaw that the other qualitative method, as it is based upon people and experience as well.
• Check-lists. Using once again previous experiences, this tool aims to create a list gathering all the possible risks, their consequences and the mitigation methods. It may be used to be sure that no risk known from previous project have been forgotten and that the measures are correctly enforced (during the monitoring process).
Example of document that may be used to list the risk and the mitigation measures. Risk management, Scott Cullen, Hanscomb Consulting, 2014.
• Scenario analysis. This method is based upon scenarios of possible future as imagined by the participants. They will then try to determine the necessary conditions to reach this future and the corresponding risks.
Semi-Qualitative methods
They are methods using some qualitative process through an organized pattern.
• FMEA/FMECA (Failure modes and effects (and criticality) analysis. They are tools creating a map of possible failures and, for FMECA, their outcomes, to identify the critical failures. It may prove useful to determine critical tasks in a construction project and so to be able to pay special attention in monitoring the risks in those tasks.
• Cause-consequence analysis. It combines a FTA (fault-tree analysis) and an ETA (event-tree analysis) to determine the possible paths leading to a specific event. It may be used to determine the probability of an event and as such may prove useful to mitigate the risks linked to this event. It may lead to a bow-tie representation of the result, with the event central, the causes on the left and the consequences on the right, for a better visual comprehension of the study.
• HAZOP (Hazard and operability study). Its main goal is to study a given activity to determine the involved risks. May prove useful during the risk identification process to list all the risk linked to a phase of the project.
• Decision tree analysis. This tool is mostly used as a forecast process, to be able to determine in advance the consequences of a change in the Construction project (mainly during the building phase on site). It may be completed with a MCDA (or Multi Criteria Decision Analysis) which allows to find out the best solution using objective and transparent criteria.
• Risk index. This is mainly the consequence of the risk identification process. It lists all the risk determine and ranks them using some normalized scale.
• Risk matrix. This tool is very useful when assessing the risk as it allows a visual representation of the consequence and the probability of the risk, and therefore its acceptance or not. A risk matrix may for example be built through the FSE (Fuzzy synthetic evaluation), which uses some qualitative and quantitative criteria to assess the risks identified beforehand.
An example of risk matrix. The information on top (consequences) may for example be used as acceptance criteria.
• HACCP (Hazard Analysis and critical control points). It allows a good overview of the phases of a project where a mistake may cause losses (of quality, time, money,…) and as such ease the monitoring control by focusing it on vital areas.
• SCI (Sneak Circuit Analysis). It allows a good identification of design errors that may endanger the good completion of the project and as such can prove useful when reviewing the early phases of a project, like the tendering and design phases.
Qualitative method
This is a more complex method that requires a mathematical approach to study the risks a project may face.
• Monte-Carlo Simulation. This tools permits the simulation of a complex system (like a construction project) and is useful to determine the effects of uncertainty on such a system. It however requires a good investment as it uses probabilities mathematics and a numerical simulation. As such it may be reserved for big projects who justify such an investment.
Conclusion and limitations
The Construction industry has to face several risks during all its projects. However, currently those risks are (more often than not) not well studied and forecasted, when forecasted at all. The methods to deal with them, usually transfer them to another party, is neither a good one.
Having determined that, this article presented the general path to ensure a good management of the risks. It also listed other ways to deal with a risk than transferring it to someone else. In order to promote risk management in Construction projects, it finally summarized some of the methods that may prove useful to determine and assess risks.
Potential through the use of risk management in construction projects. Martin Schieg (2006) Risk management in construction project management, Journal of Business Economics and Management, 7:2, 77-83
if the benefits of a risk management are real as it may reduce several losses, in both health, finance, schedule or reputation, this method is not infallible. It requires first of all an investment, in time, money but also a real commitment of all the stakeholders to make the analysis as comprehensive as possible. The competences to handle a risk management process, whose lack usually prevent the process from being implemented, must be developed. Moreover, the management should be important in the early phases in the project (to avoid or reduce the risks) but must not disappear as it moves on: the enforcing and monitoring processes are where the benefits of risk management are made. Those constraints may explain the poor use of risk management in the industry today, but are not so important compared to the benefits of risk management.
Implementing such management may prove a little bit hard at the beginning, but with experience the benefits will be real for the company. In that risk management is comparable to BIM processes: relatively new and not well known, but with lots of benefits when correctly used. BIM may actually also be used to reduce risks in construction, as it is a formidable tool to improve communication between the stakeholders and visualize potential flaws in the project.
Annotated Bibliography
• Risk Management, Scott CULLEN, Hanscomb Consulting, 2014 This article presents some of the risks a Construction project may face, and their root causes. It also presents some of the methods to face analyse those risks.
• Construction Safety, Peter G. FURST, International Risk Management Institute, 2010 Presents the general history of risk management in the Construction Industry, and how risk may impact the project. Lists the communication issues that may be a source of risk in a construction project as well as the controls ensured by a good risk management policy.
• Risk analysis and management in construction, A.S. AKINTOYE and M.J. MACLEOD, International Journal of Project Management, 1996. A presentation of the results of a study conducted in the UK in the early 1990s to determine how risk management was used. Also details the methods used in risk management and the reasons why it is not really a developed domain.
• Risk management in Construction project management, Martin SCHIEG, Journal of Business Economics and Management, 2006 Details the costs and benefits of a risk management process in a construction project. Defines the general steps of risk management and illustrates how risks should be addressed during all the phases of the project.
• Risk Management in Construction projects, N. BANAITIENE and A. BANAITIS, INTECH, 2012. Presents the results of a study conducted between 2008 and 2011 about risk management methods used by companies. Lists some feedback from those companies on some aspects of risk management, as costs, methods or reasons justifying their limited use.
• Risk Management in Construction, Author unknown, Stakeholder Map, 2009. Details some of the risks a construction project may face as well as some tools one can use in order to assess risks and monitor the risk mitigation process.
• Lecture Notes, Igor KOZINE, DTU course 42171 System Safety and Reliability Engineering, 2016. Introduces some definitions of risks, safety,… and presents the general approach to study and manage risk in a system or in a project in the first notes. The following notes explains some of the tools widely used in risk management.
