Risk Management in the Construction Industry
Info: 5056 words (20 pages) Example Literature Review
Published: 6th Dec 2019
Risk Management In Malaysian Construction Industry
Risk management is one of the subfields on nine knowledge area in project management. Risk management is about managing uncertainty that inherent in most projects that require formal project management, using ‘uncertainty’ in the plain English ‘lack of certainty’ sense.
Risk management also refer to a series of processes which are required for the identification, analysis, and reaction towards the project’s risk in order to maximize the effects of positive uncertainty even and minimize the consequences of negative uncertainty even.
Risk management also been organise in developed countries. This due to the risk management is better applied in the developed countries. Comparing with other countries with various situations, Malaysia is a developing country which the politic, economy, social and technology have mad specific risks especially related. Unfortunately, in Malaysia, the management of risk is not so systematic and requires more research and development.
Malaysia seems to be developing countries because the demand for founding infrastructures is highly increasing. Currently, the government is enforcing the development plan. National economic will be burden if the plan is falling behind. This means that it is important to recognise the risks that endanger the plan. A lot of budget was spent on investment in the construction industry. The application of risk management will result in taking correct, regulated, and prompt decision through being informed about the environment despite the complication and changes in the construction industries.
1.2 Problem Statement
Knowing the environment and be capable in decision making in a prompt and correct manner is the key to success in managing today’s challenge and risk imminent. In case of not recognise both internal and external risks factor of the project, the managerial decision-making error will take place. Moreover, it will cause problems in time and cost assessment forecasting. Through risk management, it can identify the risk generating factor and control or remove such risk factors through analyzing and choosing the suitable action.
As one of the subfields in the nine knowledge area of project management, risk management is still being paid less attention in Malaysia. In very few organisations, employers or contractors can be seen who have a proper insight into risk management. There are no any practical guidelines to be properly implemented for risk management in this industry. Furthermore, as a result of lack of binding regulations, current regulations cannot force construction parties to undertake risk management.
So, by adopting scientific approach to risk management, introducing its process and eventually its compliance with existing realities in development plans, particularly in project are a necessity.
The issue of risk management was for the first time raised in mid-1990s in the United States. Laws and regulations for applying risk management in projects have now been adopted. Since risk management is a new field, except for several seminars and universities research project, applied research has not taken place in risk management in Malaysia.
1.3 Research Questions
i. What kind of risks occurs in the construction projects and what are their factors?
ii. What are the strategies that been applied in dealing with risk?
1.4 Research Objectives
i. To identify risk factors in construction industry.
ii. To identify strategies of risk management applied in construction industry.
1.5 Scope of Study
This research is focuses on the implementation of risk management in the Malaysia construction industry. Therefore, the scope of this study is only limited in Pahang where respondents have been chosen randomly out of this area.
Moreover, the respondents comprised of contractors registering in Grade 7. The reasons for being such is that the categorization of the grade of contractors reflect, to a great extent, the size of project that being executed in the company and the size of the company. Grade 7 of contractors is regarded as big companies with large-size projects. Depending on their size of project and their company, the risk that they encounter will differ. As a result of this, to make sure the data obtained could be reliable, it’s necessary to limit the respondents based on the size of project and company.
1.6 Expected Findings
This research will achieve some precious advantages. First is to enhance the consciousness of different key personnel of project resulting in performing the project reliably while considering issues like risk management in general management project. To accomplish this, it’s essential to implement theoretical concepts mentioned in numerous literatures in reality. This can guarantee a well project management through attempting to prevent from normal issues in projects like poor quality of products, cost overrun, and delays.
Risk will bring effect on the project cost, time, and scope. This chapter covers the construction project risks. All the risks will be recognised and categories into a number of group. Then, the current trend in risk management researches would be considered. In order to meet the first objective, identification and classification the strategies used by the project manager used to avoid the risk in their project. The second objective will be fulfilling through identification and classification of risk factor in construction projects.
Risk is an uncertain event or condition that, if it occurs, it can bring a positive or negative effect on a project objective (PMBOOK, 2000). Risk also can be defined as an uncertain event or set of circumstances if it occur, it will give effect on the achievement of the project’s objectives (APM, 1997). This definition is widely use and gather welcoming upside and unwelcome downside effects. This definition works in theory but fails in practice. In this study, the effect of risk in construction project is through the way of integrated method, namely size of consequences and probabilities of happening have been measured. In the construction project, there is a lot of risk in every phase. This is the norm of any project not only in construction project. Construction firms want to have projects at international level. In every construction project, risks are present. Risks in international construction projects are more critical as compared to domestic projects especially when developing countries are involved. That is the reason risk is desirable for international construction firms who want to do construction projects in foreign country, to identify the risks as early as possible, so that suitable strategies can be made for the penetration in to the foreign construction market and to manage these risks before the actual execution of projects on international level. Risk consequences in construction projects may reach an undesirable level because of inadequate resources and lack of advancements in technologies, therefore a thorough awareness and identification of risks is essential to prepare suitable strategies. International construction projects have many risks involved due to the nature of their structure. There are more parties involved and more phases are present in international construction projects than a conventional construction project. Each party has its different objectives. This difference in the objectives of parties leads to conflict of interest which is a root cause of risks in international construction projects.
2.2.2 Risk Factor
Construction project is divided into separate phases. At the end of each phase, appraisal can be made and assessment of risk involved in proceeding with the project. The management of risk therefore a continue process and should span all the phases of the project. Since project risks are dynamic, a risk assessment must be carried out at the end of each phase prior to proceeding to the next phase. In fact, active management of risk must continue between the review points until the project is complete. Risk can also change during a phase. The result is a complete re-appraisal may need to be performed. There is a generic acknowledgement that human factors are the most important element that affects the project success. According to (Lynch, 2002), human factors bring affect to project success. A series of errors by a steel contractor lead to a near miss at Canary Wharf when a two-tonne pre-cast staircase fell from a crane and landed on the ground metres from a crowded side office. It was reported that the stairs fell when the left side eyebolt lifting pin of the staircase lifting gear came free. The load was transfer to the right-hand bolt, causing it ti shear. The report confirmed that the eyebolt was not correctly inserted. Independent testing agency Lloyds British examined key parts of the lifting equipment and concludes that the equipment would be sufficient had it been assembled correctly. Shortfalls in the firm’s arrangement at the site were criticised. No risk assessment or method statement had been drawn up specifically for the lifting operation and key decision were left to operators who were not trained to use eyebolt. All these shortcomings fall in sphere of human factors as defined earlier.
2.2.2 Risk Management
Risk management is widely use by the companies or organizations to ensure the control of risk in the business process. In this research, the simplest possible approach to describe the risk management process is chosen due to the context of the construction sector.
According to (Norman, 1993) risk management is a system use to identify and quantify all risk to a business or project that is exposed so that conscious decision can be taken on the way to manage the risk. Risk management also been mention in the PMBOOK as one of the nine areas of project management and has been illustrated as the process concerned with conducting risk management planning, identification, analysis, responses, and monitoring, and control on a project.
2.2.3 Fundamentals of Risk Management
There are a lot of risks in the construction projects, and there is no standard method that can explain about the risk management. According to (Telford, 1998) risk in construction industry is the existence of real or possible chances or dangers affecting projects’ objective while commissioning or operating the project. According to (J. Walewski, 2002) , risks can be categories into two parts. The first part is pure risk when there is the possibility of financial gain. The second part is speculative risk that includes the possibility of both gains and losses.
2.3 Risk Management Process
Project Risk Management involves procedure considering executing risk management planning, identification, analysis, response and monitoring, and control on a project. This procedure can update the majority of the project. Project risk management aims to enhance the possibility and effect of positive event, and reduce the possibility and effect of negative incident to the project. According to the Project Management Body of Knowledge, (PMBOOK, A guide to the project management body of knowledge, 2004), the Project Risk Management Process
2.3.1 Risk Identification
Risk identification has two types which are prescriptive and creative. These two types of risk identification has their own function but they must be cautiously handled in order to make sure the process of identifying risk is economic.
The result in the utilization of checklists of standard risk distinguished to appear in a special context when there is an attempt to modify the risk identification. Even though checklist is fast to make, but it is inclines to prepare the anticipations of the engaged, and the identification of risks going beyond the experience summarized in the list. The result of using the checklist method can be high, but if they are to have a function, it suggest that they better retained for examining the identification process, and make sure there is no familiar issues have been skipped or ignored.
Brainstorming is another method that being hold in a group and it is the favoured method. This is a little more challenging for the participants compared to checklist method but the brainstorming seems more efficient. Brainstorming predict the identification process to gain inspiration from the wide capacity of the participants, due to decreasing the risk that is inadequate consideration will be given to new and more emergent issues, as can occur with the checklist method.
2.3.3 Risk Analysis
The risk analysis is implement in each risk as significance rating structure that is considering any existent factors that might be occur which will function to check the risk. The risk analysis can be implementing with qualitative impact and likelihood scale and a matrix clarifying the significance of different composition of the risk. When risks are complicated by themselves that possibly includes various related impacts and events, some types of modelling might be essential.
The significance of a risk is connected to a well explained event that will be a composition of the impact and likelihood of the risks. The significance of an unsure quantity will be a function of its three type of value which are the maximum, minimum, and most likely values.
2.3.4 Risk Evaluation
Risk can be occurring in any situation. When there are just a lot of risks at the work, the evaluation phase may be proportionately simple and easy. On the other hand, it is a critical step for obtaining an accepted view of the proportionate of the recognized risks.
Risk evaluation takes the primary analysis and examines the risks that occur towards the company’s known preferences. Any risks which is too high or too low significance are adapted, with a record of the fact being hold for the purpose of tracking.
2.3.5 Risk Treatment
Risk treatment comprises what should be done in order to give reaction to recognized risks. Any plans which were thought of before the risk management process commenced are enlarged with actions that been taken to manage the risks before they occur and providing contingency plans with which to get back if a risk happen.
2.3.6 Monitoring and Review
In monitoring and review ingredient of the process, there are two levels of them. The other five steps must be remained under an examination as the time passes. Finding of better information may make the first evaluation out of date. It is now usually essential to start the whole process or repeat it once again when risks occurs, not until the change is especially deep, but those parts which are immediately influenced by changing occasions should be updated from time to time.
The second step is the monitoring of the performance of the other five levels. The implementation of the risk management process attracts sources and should be administered in order to make sure that it is performed cost-effectively.
2.3.7 Communication and Consultation
Communication and consultation is the key component of the risk management process and a major beneficial side effect. Risk management is success when it achieves a high level of creative input and involving all parties with a role to play in achieving a successful outcome for the project or business process being addressed. In both the planning and execution phase in the risk management process, it is prominent to make sure all those individuals who need to be involved are given adequate opportunity to do so and are kept informed of developments in the understanding of risks and the measurement taken to deal with them.
2.4 Tools and Techniques for Risk Response Planning
In every project, the risks can raise when there are a lot of phases and tasks to be done in such a way that the least consideration is delivered to main issues of the project. According to (Bajaj, 2000), individual members of the project are usually focus only on the role that they have in the project risks and voluntarily or involuntarily try to pass these risks on to other project members. This means they do not want to take the responsibility to handle the risk by themselves. The crucial part of risk management is mitigating risk by minimize their effects. A systematic risk management strategy which is executed properly shall decrease the adverse effects. Risk mitigation that been properly planned and well managed is a replacement of uncertain and volatile events with a more predictable or controlled response ( (Chapman, 2002).
A proper risk mitigation strategy is very important in order to reduce the likelihood of happening or possible influence and doubtfulness of a risk event. There are four types of risk management strategy which are:
i. Risk avoidance which when a risk is not accepted and other lower risk choices are available from several alternatives;
ii. Risk acceptance which when a conscious decision is made to accept the outcomes the event should occur;
iii. Risk control which when a process of sequentially monitoring and improving the situation on the project is used. This process includes the development of a risk reduction plan and then pursuing the plan. This means that mitigation strategy is the most common risk management and handling technique;
iv. Risk transfer which when the risk is shared with others. Sharing the risk with others involve contractual shifting, performance encouragement, insurance, warranties, bonds, and so on.
2.5 Classification of Risks in Construction
The first stage in risk management is risk identification. Risk identification is recognising any risks that can be occur in the construction projects. Risk classification is one of the part in risk identification which is the trying to manage different risks that can give impact and influence a construction project. According to (Chapman, 2001), risk has four subcategories which are project, industry, client, and environment. From the other related literature, out of 58 risks recognized connected to construction joint ventures, (Shen, 2001) categorised them in 6 groups according to risks’ nature like financial, economy, technical, politic, and management. As a result, there are a lot of methods that can be use to categorizing risks that can affect to construction projects.
According to other study by (Kalayjian, 2000), in the Third World of Construction classified that some of the most representative kinds of risks that are commonly use in today’s global construction area are:
i. Financial Risk is the economic feasibility in a project that relies on its capital organizing and capacity to draw dependable resources of financing at logical terms. Risks contain the owners’ power of acquiring enough budgets, deposit payment, receive tax incentives, and expect instability of currency exchange rates.
ii. Design and Construction Risk which is in the construction project itself. To be success in construction projects, the managerial teams must have a power decision making. Risks that must be take care are an effective team selection process, obtaining permits and third party concurrence in timely fashion, procurement of adequate labour, materials and equipment, monitoring all changes in project scope, quality control assurance, and ensuring overall compliance with contractual obligations.
iii. Weather and Environmental Risk is about the mother nature situation. In construction sites, there is vulnerable change in the weather and natural disaster like earthquakes, monsoons, and flood. Other risk can be reducing the other dangerous wastes and severe environmental legislation.
iv. Economic and political risk is a risk which also can affect the construction project. The performance of economic in a country and political stability has a significant effect in construction activity and investment. Prominent risks consist of financial policy and governmental monetary responsibility, resources availability, development of infrastructures, internal stability, changes in managerial schedule, and political management.
On the other research done by (Hassanein, 2007), there are several risk that has been identified which are:
i. financial risks: the checklist mentioned about some financial risks which are related to the projects in this study.
ii. Technical risks: the checklist show allowances for similar standards and codes. This is because the two projects studied were tendered internationally which causes contractors from different countries.
iii. Risk related to change: the checklist addressed certain provisions concerning the simultaneous progress of design and construction phases on the two fast track project under study.
iv. Consortium risk: in some contracts, contractors are requested to make partnership including foreign and local contractors as a necessity of tendering qualification.
v. Owner obligation risks: the checklist embraced factors which should be stated in the contract to clarify owners’ responsibilities and to guarantee these responsibilities would be come up with on time. These include an obvious interpretation of these responsibilities, time frame for their execution and declaration of amendments if these responsibilities are not executed shall be contained in the contracts.
vi. Risks regarding interface with other contractors: the checklist included specific items to mitigate risks related to interfaces with other contractors.
vii. Risks regarding interface with other contractors: the checklist included specific items to mitigate risks related to interfaces with other contractors.
According to (Tang, 2007), the most important risks in project are poor quality of work, premature failure of the facility, safety, financial, and incorrect design risk.
2.7 Barriers of Implementation of Risk Management
According to (Liu, 2007), the most dominant risk in the construction industry is the unsupportive culture within the industry. As a result, the lack of proficiency and experience is the general reluctance for implementation of risk management in the China’s construction industry. Lack of proficiency and experience causes contractors to be unable to identify the significance and advantages of risk management. To improve the low understanding towards risk is through changing the culture of enterprise. This is because it is essential for Chinese contractors to agree with the risk management’s concept as well as execute risk management techniques. The professionals’ behaviour seems the most significant issue affecting the improvement of risk management in the Chinese construction industry. Organizational learning becomes the critical element of an incorporated risk management procedure which being the learning structure formed to assist Chinese contractors in developing their performance and knowledge towards risk management. In fact, to transform the modern knowledge to their own knowledge using organizational learning seems become the critical issue for Chinese contractors in order to develop their ambitious.
According to (Baloi, 2003), it appears that professionals have not completely understood the value of risk management. This is because there are advances in the methods of risk management and availability of the enormous body of knowledge of risk management. The professionals recognised language, implementation costs, and educational barriers and a fear of change to be the principal barriers of the efficient conformance.
According to (Hlaing, 2008), Singapore construction contractors on construction risk identification asserted that the reason that preventing the implementation of risk management process is money but it is not the major constraint for implementing risk management program for the companies but the most important risk in the list is lack of time. This is same as stated by (Lyons, 2004), identified that time constraint is a main restriction. The activities of construction industry are really related to time when the manufacture of the construction is basically used just-in-time for the manufacture need of customer.
2.8 Risk Identification Methods
In order to be successful in project management, it requires the ability to predict the risks that affecting the project scope, time, and cost. However, there are a lot of researches about risk identification, risk assessment, and management for executed facilities is focusing on types of projects or categories of risks aspects. It is related to the literature from (Howell, 2001) about the political risks that exist.
Now a day, the construction industry still cannot identify the risks that occur in the project activities. According to (Walewski, 2002), the worth of systematic risk management of activities on project has not been identified. This is because the lack of common vision about risk and the parties that involved in construction industry such as owners, designers, investors, and contractors have different objectives and the relationship among them are prevalent contradict. All of the project parties not systematically make their efforts at organizing risk analysis management among themselves and this particularly correct between contractors and owners.
(Fang, 2004) show a model for risk assessment. The model use for tendering project in Chinese building project based on assessment and identification of critical risks in the Chinese construction industry. As a result, the project’s risk could be evaluated by analyzing the issues such as the competition for tendering and reasonableness of bid price, lack of cooperation between contractors and the owner.
In other study done by (Hassanein, 2007), the marked lack of consistency in the contractors’ risk identification effort been identified as the risk in the power station projects on Egypt. The contractors who have more experience in Egypt were better to identify the relevant risk. Vice versa, the local Egyptian contractors who have vast experience in Egypt but limited project management experience were not really expert to properly identify risks and to take the appropriate exceptions. In fact, the bidders do not include in their proposals on their true lists of exceptions which represent genuine risks to them.
This chapter will cover how the research will conduct to achieve the objectives of this study. The methodology that will be use are questionnaire survey among the Pahang construction professionals, and preliminary interviews with experts will carry out. The steps are as follows:
3.2 Data Collection
Interview is the effective procedure of data collection because the actuality of condition could be perceived specifically and comprehensively while conducting the interview. For the purpose of this study, as the scope of this study is limited to Pahang, the interview sessions will conduct through two main ways which are telephone interview as well as email interview through the internet.
Questionnaire survey is one of the others way of data collection carry out among selected construction practitioners involve in construction projects. This specialist will working in contractor construction companies.
The questionnaire will be identified from interview with construction practitioners and through literature review. The survey questionnaire will administer through e-mail and fax, and postal questionnaire, and secondly through the distribution to selected contractors which are project managers, managing directors, chairman, and head of technical departments operating in the Pahang construction industry.
3.3 Data Analysis
All returned questionnaire will be check from completeness and suitability for use in statistical analysis. Next, all the data collected from the questionnaire will be analyse with the assistance of statistical software program called Statistical Package for Social Science (SPSS). After putting the data in SPSS software program, some statistical method will be apply to the data through frequency analysis and mean index, risk analysis matrix, and single sample T-test. After putting questionnaire data into SPSS, some statistical method will be applied to the using frequency analysis and mean index, risk analysis matrix, and correlation test.
Most of the question will applied using five point of Likert scale, and other question will applied with multiple choice. The most common scale that will be use is 1 to 5. There are three sections in the questionnaire.
Section A will cover about the level of risk in construction project. Participant will be given three choices of answer which is low, medium, and high to scale the risk level according to their perspective.
In section B, the typical Likert scale take the following format:
Table 3.1: Risk factors
In section C, the respondent will be asked to choose the scale between 1 to 5. The scale 1 shows a condition which the probability of strategies been use is minor where scale 5 means the maximum probability of risk strategies usage.
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