Managing Risk and Value
Risk and value management are strongly connected with each other because enhancing value for client also means ensuring that risk is minimized or at least planned and managed. An intention to produce best value for the client must be implemented by identifying and managing risk.
The main objectives are:
Consider the concept of risk and value, people values and attitudes and their connection with decision making and business planning.
- Appraise the responses available for dealing with risk.
- Demonstrate how risk and opportunity are assessed and managed, reduce uncertainty in construction projects and evaluate the tools and techniques.
- Investigate the influence of procurement routes on managing risk and value and supporting best practice in the appointment of the supply team managing risk and value and deriving an ethical approach.
- Understand good practice for change management procedures.
Twenty years ago the application of risk and value management was very limited in construction projects and the industry has lagged behind others in recognizing how critical they are to building client confidence and in meeting their requirements. Traditionally risk control in the construction stage was based on implicit heuristic assumptions and allowed for in the budget or the programme as a pragmatic contingency or, in the case of the contractor’s tender, as a risk premium. Value was considered to be lowest tender cost.
As clients have become more sophisticated they have made more demanding targets, which have left less room for maneuver. These have led to tighter budgets, more innovative technology and less tolerance of time slippage, which is often connected to more onerous penalties for lack of performance.
In achieving their business clients have expected more innovative technologies and design to achieve more for less. The industry has looked at enhancing value for clients and managing their risks better by the use of more advanced techniques. It is now recognized that the scope for changes in design to give significant improvements in value come mainly at the feasibility and strategy stages and that it becomes more difficult as the design is progressed to change previous decisions without disruption and the cost of doing so is greater.
Definition and evaluation of risk
Risk arises out of uncertainty. Risk in the context of project management is a realistic approach to thngs that may go wrong on the site and is used in the context of decision making and in answer to the question, “ what happens if … ? “ once a risk has been identified and defined it ceases to be a risk and becomes a management problem. In this context it needs to be analyses and a response made usually to accept the risk, mitigate it, reduce it or transfer it.
Risk response and management
Risk response occurs to eliminate, mitigate, deflect or accept the risk, and logically will reflect the cost benefit of the risk management process. Mitigation is action taken to reduce the risk and deflection is action taken to transfer the risk. They are not mutually exclusive, but deflection alone is not a way of reducing the probability. Mitigation may have the effect of reducing probability and impact. Eliminating risks is often not economic, or creates too many other risk.
Risk management in Construction Project
Risk management in construction industry is an important part of the project planning and management. Various risks associated with construction projects such as financial risks, environmental risks, socio-economic and construction related risks are studied and dealt in risk management.
The volatility and capriciousness of the environment in the construction industry was never hidden from anyone. It’s easily influenced by external factors (technical, design, logistics, physical, operating, environmental, socio-political, force majeure et cetera) which are capable of not only derailing projects but can also create an irreparable aberration.
Risk management, therefore, becomes a pivotal instrument that helps us deal with the culling out of various risks, their analyses, and the remedial steps that could be taken to avert them in a particular project.
Types of Risks in Construction Project Management
The major risks that usually crop up in front of a project manager while helming a construction project are: financial, socio-political, environmental, and construction related.
Vacillating exchange rates, material costs, market demand, improper estimation, inflation, payment delays, unmanaged cash flow and financial incompetence of the contractor pose a huge threat of financial risks in a project.
Amendments in governmental laws and regulations, law and order, bribery, payment failure by the government, increase in taxes and change in government form this repertoire.
Inclement weather conditions, natural disasters, accessibility to the site, pollution and safety norms constitute the environmental risks.
Failure of logistics, labor disputes, design changes, labor productivity, rush bidding, time-gap for revision of drawings, shoddy work quality due to time constraints et cetera comprise the construction-related risks.