CHAPTER skills largely non-repetitive in nature · Projects are

CHAPTER 1 1.

1The nature of the construction industry There are many differentdescriptions of the construction industry, drawn from different specialistdisciplines. This vagueness is compounded by the fact that the constructioninvolves such a wide range of activity that the industry’s external boundariesare also unclear (Murdoch and Hughes, 2000). For example, the term”construction” can include the erection, repair, and demolition ofthings and diverse as houses, offices, shapes, dams etc. Construction isdifficult to comprehend fully because the relationships between the parts arenot always clear and the boundaries of the industry may be characterized as: ·      It isfragmented ·      It is sensitiveto economic cycles ·      There areextraordinary diversity of professions, specialists and suppliers ·      It is largelyaffected by external environments There is no other industry thatrequires the proper application of business practices much as constructionindustry. The many variables and complex relationships that exist betweenvariables that must be considered in the process of building a constructionproject necessitates sound business practices and decisions. The coordinationand use of many types of labor skills, materials and equipment that are used tobuild a project require daily application of proper business practices. Thevariable environment surrounding the construction project complicates thedecisions to be made concerning the use of labor, materials and equipment.      1.

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2Management in Construction ProjectsManagement in construction industryhas generally been characterized as being weak, insufficient, nebulous,backward and slow to react to changing conditions. The reason why the constructionindustry has been slow in applying management procedures that have actuallyproven effective in other industries are because·      Constructionprojects are unique ·      Constructionprojects involve many skills largely non-repetitive in nature ·      Projects areconstructed under local conditions of weather, location, transportation andlabor that are more or less beyond the contractor’s control. ·      Construction firms,in main, are small operations, with the management decisions being made by oneor two persons. ·      There arespecial problems in construction ·      The future cannotbe forecasted ·      Construction isa high-risk business.  Also the Industry is usually not ableto employ the brightest of minds due to it being a secondary industry in anyeconomy. The Lack of bright management talent in the industry even furtherincreases the problem when it comes to effective management.

 1.2Management in Construction ProjectsManagement in construction industryhas generally been characterized as being weak, insufficient, nebulous,backward and slow to react to changing conditions. The reason why the constructionindustry has been slow in applying management procedures that have actuallyproven effective in other industries are because·      Constructionprojects are unique ·      Constructionprojects involve many skills largely non-repetitive in nature ·      Projects areconstructed under local conditions of weather, location, transportation andlabor that are more or less beyond the contractor’s control. ·      Constructionfirms, in main, are small operations, with the management decisions being madeby one or two persons. ·      There arespecial problems in construction ·      The future cannotbe forecasted ·      Construction isa high-risk business.  Also the Industry is usually notable to employ the brightest of minds due to it being a secondary industry inany economy. The Lack of bright management talent in the industry even furtherincreases the problem when it comes to effective management.   1.

4Typical Risks on a Construction Project ·      Occurrence ofaccidents to operatives on site causing physical injury. ·      Failure tocomplete within the stipulated design and construction time. ·      Failure toobtain the expected outline planning, detailed planning or buildingcode/regulation approvals within the time allowed in the design program. ·      Unforeseenadverse ground conditions delaying the project. ·      Unexpected risefor labor and materials due to change in priorities during execution by owners.

 ·      Force majeure. ·      Failure tocomplete the project within the client’s budget allowance. ·      Loss to thecontractor caused by the late production    It is important to distinguish thesources of risk form their effects. Ultimately, all risk encountered on aproject is related to one or more of the following   ·      Failure to keepwithin the cost budget/forecast/estimate/tender. ·      Failure to keepwithin the time stipulated for the approvals, design, construction andoccupancy. ·      Failure to meetthe required technical standards for quality, functions, fitness for purpose, safety and environmentpreservation.  The effect of adverse events will befinancial loss. The task of professional advisors, contractors and suppliers isto identify the discrete sources of risk which cause to failure occur, and todevelop a risk management strategy that provides for the most appropriate organizationsto carry that risk.

 1.5Risk and Uncertainty Risk is defined as the exposure toloss/gain, or the probability of occurrence of loss/gain multiplied by itsrespective magnitude. Events are said to be certain if the probability of theiroccurrence is 100% or totally uncertain if the probability of occurrence is 0%.In between these extremes the uncertainty varies quite widely. Risk= Hazard × Exposure  1.

6Objectives The objectives of this study are: 1.   Identifying keyrisk factors that could stand in front of construction processes by reviewingthe literature and through the additions that could be made by the industrypractitioners, i.e. contractors and owners. 2.   Investigatingthe severity and the allocation of each identified risk factor according to theperspectives of contractors and owners.3.   Examining therisk management actions efficiency that are applied in the industry(contractors and owners).

                                                                                               Chapter 2 RISK MANAGEMENT IN BUILDING PROJECTS. 2.1Introduction The construction industry has changedrapidly over the past few years; companies are faced with more risk anduncertainty than ever before. Clients expect more, most importantly, they donot want surprises, and are more likely to engage in litigation when things gowrong. Risk management has become an important part of the management processfor any project. Risk in construction has been the object of attention becauseof time and cost overruns associated with construction projects. This chapterreviews the literature concerning some of risks faced in the constructionindustry, some of analysis techniques and risk response practices. 2.

2Causes of Risk as Threats There exists no comprehensive studyexplaining the causes of risks among construction companies, moreover researchcovering the subject matter has tended to identify the symptoms rather thancauses, a number of authors have attempted in their studies to ascertain thecauses of threats in the construction industry, Kangari (cited in Rwelamila& Lobelo, 1997) ascribed the high threats to: ·      A highly fragmentedindustry. ·      Industry highlysensitive to economic cycles. ·      Fiercecompetition as result of an over-capacitated market. ·      Relative easeof entry. ·      Managementproblems. ·      Tradingincluding: o     Competitive quoting. o  Outsize projects.o Highgearing.

 o Resistanceto change. ·      Accounting,where inconsistencies occur in the financial data generated for management. ·      Increase inproject size. ·      Unfamiliaritywith new geographic area. ·      Moving into newtype of construction.

 ·      Change in keypersonnel.  2.3Causes of Risk as Threats There exists no comprehensive studyexplaining the causes of risks among construction companies, moreover researchcovering the subject matter has tended to identify the symptoms rather thancauses, a number of authors have attempted in their studies to ascertain thecauses of threats in the construction industry, Kangari (cited in Rwelamila& Lobelo, 1997) ascribed the high threats to: ·      A highlyfragmented industry. ·      Industry highlysensitive to economic cycles. ·      Fierce competitionas result of an over-capacitated market. ·      Relative easeof entry. ·      Managementproblems.

 ·      Tradingincluding: o     Competitive quoting. o  Outsize projects.o Highgearing.

 o Resistanceto change. ·      Accounting,where inconsistencies occur in the financial data generated for management. ·      Increase inproject size.

 ·      Unfamiliaritywith new geographic area. ·      Moving into newtype of construction. ·      Change in keypersonnel. These sources of riskrelate to project-specific and non-project-specific risks, as both these typesof risk need to be considered when identifying the risks in a project or aprocess. The institution, assisted by the project team, need to define theboundaries of these sources and to break down these sources into detailed riskelements. This will allow a common understanding amongst those attempting toidentify the risks in a project.

 The division of risksinto source elements can be difficult. It also creates the potential forincreased personal subjectivity. It can also lead to the possibility of”double-counting” some risks by attributing the same risk to morethan on source. This may, however, beneficial in understanding therelationships between risk sources and elements (Estate Management Manual,2001). The obvious problem with categorizing risk, apart from the culturalperceptions noted by the royal society report, is that there is a danger ofconfusing sources, causes, effects and fields of study for the risk domain. Asource approach to risk categorizations is shown in Figure (2.1). It isproposed that the risks can be considered with respect to six categories:financial and economic, political and environment, design, site construction,physical and Environmental factors .

While the list of potential risks in everycategory is neither complete nor exhaustive, it does represent the majority oftypical project risks and demonstrates the advantage of a logically developedclassification scheme (Enshassi & Mayer, 2001). 2.4 Risk Analysis Risk analysis, acomponent of the risk management process, deals with the causes and effects ofevents which cause harm.

The aim behind such analysis is a precise andobjective calculation of risk. To the extent that this is possible, it allowsthe decision making process to be more certain (Estate Management Manual,2002). The essence of risk analysis is that it attempts to capture all feasibleoptions and to analyze the various outcomes of any decision. For buildingprojects, clients are mainly interested in the most likely price, but projectsdo have cost over-runs and, too frequently, the ‘what if’ question is not asked(Flanagan & Norman, 1993).Risk analysis involvesassessing the identified risks. This first requires that the risks arequantified in terms of their effect on cost, time or revenue. They can beanalyzed by measuring their effects on the economic parameters of the projector process. In terms of risk response, three general types of response can beidentified (Estate Management Manual, 2002): ·      Risk avoidanceor reduction.

 ·      Risk transfer. ·      Risk retention. The use of risk analysisgives an insight into what happens if the project does not proceed according toplan. When active minds are applied to the best available data in a structuredand systematic way, there will be a clearer vision of the risks than would havebeen achieved by intuition alone (Flanagan & Norman, 1993). 2.5 Methods of RiskAnalysis The analysis of riskscan be quantitative or qualitative in nature depending on theamount of information available (APM, 2000).

Qualitative analysis focuses onidentification together with assessment of risk, and quantitative analysisfocuses on the evaluation of risk (Chapman, 2001). Indeed there may be solittle information about certain risks that no analysis is possible. Table(2.1) summarizes the various techniques used for risk analysis.

 Table 2.1. Various risk analysistechniques, adapted from (Ward and Chapman, 1997) RiskAnalysis    Qualitative   Quantitative a. Direct judgment e. Probability analysis b.

Ranking options f. Sensitivity analysis c. Comparing options g. Scenario analysis d. Descriptive analysis h.

Simulation analysis                A.Qualitative Risk Analysis Lowe (2002) introduced a definitionfor the qualitative assessment of risk involves the identification of ahierarchy of risks, their scope, factors that cause them to occur and potentialdependencies. The hierarchy is based on the probability of the event and theimpact on the project. In qualitative risk analysis risk management acts as ameans to registering the properties of each risk (Kuismanen, 2002). Qualitativerisk analysis assesses the importance of the identified risks and developsprioritized lists of these risks for further analysis or direct mitigation. Themanagement team assesses each identified risk for its probability of occurringand its impact on project objectives.

Sometimes experts or functional unitsassess the risks in their respective fields and share these assessments withthe team (Office of project management process improvement, 2003). Componentsof risk analysis were introduced by Kindinger and Darby (2000): ·      Listactivities, tasks, or elements that make up the project. ·      Identifyapplicable risk factors. ·      Developrisk-ranking scale for each risk factor. ·      Rank risk foreach activity for each risk activity.

 ·      Document theresults and identify potential risk-reduction actions.  ·      Qualitative risk ranking guidelines A method to systematically documentthe risk for each qualitative risk factor identified in Figure (2.4) is neededto perform a consistent evaluation of risk across the different project orprogram activities. To make this possible, qualitative definitions of risk factorsare defined for three categories of risk (none/low, medium, and high). A simpleexample of a completed evaluation is shown in Figure (2.5).                    Funding constraints       Prioritization uncertainty       Under funding potential       FUNDING       RISK   Escalation sensitivity     Productivity uncertainty Labor rate uncertainty COST SCHEDULE Area/Facility availability Equip & material $ uncertainty Personnel availability RISK RISK Estimate completeness     Equipment/material availability       Adverse environmental conditions  TECHNICAL RISK  Rework potential     Technology maturity     Design & construction methods maturity     Performance requirements severity     Infrastructure Needs     Design data availability              Figure 2.1.

Qualitative Risk Factor Ranking Criteria, adopted from(Kindinger & Darby, 2000)  System  Element              Element             Element A                       B                      C     RiskFactor I II III Activity Total           Risk Factor A B C Total Low (1) Low (1) High (3) 5 Medium (2) High (3) Medium (2) 7 Low (1) Low (1) High (3) 5 4 5 8    Figure 2.2. Risk Factor Evaluation,(Kindinger & Darby, 2000)Usesof Qualitative Risk Analysis Results  Qualitative risk analysis resultsare used to aid the project management team in three important ways (Kindinger& Darby, 2000): ·      The qualitativerisk analysis factor rankings for each project activity provide a first-orderprioritization of project risks before the application of risk reductionactions. This general ranking process is shown in Figure (2.5).·      The moremeaningful, result from conducting a qualitative risk analysis is theidentification of possible risk-reduction actions responding to the identifiedrisk factors.

Risk reduction recommendations are often straightforward to makewhen the risk issue is identified. ·      The final useof the qualitative risk analysis is the development of input distributions forqualitative and quantitative risk modeling. The integrated qualitative andquantitative risk analysis is shown below in Figure (2.3).