Risk Management in Construction Projects

1.1 Background1.1.1 Definition of riskDefinition of risk is a state of uncertainty where some possible outcomes have an undesired effect or significant loss. Uncertainly is meaning that the lack of certainly due to limited knowledge that it is impossible to state the outcome exactly, perhaps, more than one possible outcome happens.

Risk concerns the deviation of one or more results of one or more future events from their expected value. Technically, the value of those results may be positive or negative. However, general usage tends to focus only on potential harm that may arise from a future event, which may accrue either from incurring a cost or by failing to attain some benefit.

(http://en.wikipedia.org/wiki/Risk) 5. Nov.20101.1.2 Description of risk managementRisk management is the discipline of identifying, monitoring and limiting risks. In some cases, the acceptable risk may be near zero. Risks can come from accidents, natural causes and disasters as well as deliberate attacks from an adversary.

Risk management applied in the field of construction currently, has been on the agenda for about 25 years. It has focused in the main on large-scale School of technology and business8projects with different kinds of complexity related to them, such as Technology, international collaboration, geography or finance. (Hintze et al., 2004; Jaafari, 2001). More recently, risk management has started to influence an increasing number of companies and not only the largest projects. In spite of this, the small projects in construction do notfeature a great deal of systematic risk management (Azinim & Edum-Fotwe, 2006; Simu, 2006)

1.1.3 Principle of risk managementThe International Organization for Standardization identifies the following principles of risk management:? Risk management should create value.? Risk management should be an integral part of organizational processes. ? Risk management should be part of decision-making.? Risk management should explicitly address uncertainty.? Risk management should be systematic and structured.? Risk management should be based on the best available information. ? Risk management should be tailor-made.? Risk management should take into account human factors. ? Risk management should be transparent and inclusive.? Risk management should be dynamic, iterative and responsive to change. ? Risk management should be capable of continual improvement and enhancement.1.1.4 The process of construction projectsIn general, Idea, Briefing, Design, Production and Maintenance management, are five steps as the process of construction project. (Figure 1) Depending on School of technology and business9the scope of the construction companies’ business concept, they enter this process in different phases. The viewpoint in this study is that client has to take charge of the phases of idea, briefing and maintenance. This description of the construction process is a general one and several different descriptions can be found in other literatures.

Figure 1: A general description of the construction process In the construction process, it is still most common with competition using a tender process to obtain the project and finish it. Such as commercial bid and technical bid is used in popular. According to the client demands, each of the competing companies submits a bid. The client will decide to choose the company as a winner, which is offered by the most favorable price.

The winner is the one that continues with the project into the design and/or production phase of the construction process. In some cases, the constructions companies are exclusive and do not have to compete through bidding. As we know that the many factors have influence on the outcome of the bidding process, such as cost, quality, safety and sustainability determine the outcome of the bidding process, the cost parameter has the greatest influence. Although others, they do have a significant impact from time to time.

1.2 Problem FormulationAs the most common and typical project types, construction projects have several characteristics such as specific objects: time restraints, cost restraints, special organizational and legal conditions, complexity and systematic characteristics. For that, each investment project, it is a complex system, School of technology and business

10especially for the construction project; there are many risk factors and complicated relations, which will influence it. The complicated relations include direct, indirect, obvious, implicit or unpredictable, what is more, the various Risk factors will cause different severity of the consequences. If you do not consider these risk factors at all, or ignore the main factors, they will cause damage because of decision-making errors.

Quality targets、time targets、cost targets are the three major objectives of construction project management. Especially in the construction project, the time objective is closely and inseparably related to the cost objective. Therefore, we cannot ignore risk management of the effect on time objective caused by risks during construction phase.

According to the above description of the background in this thesis, we know that risk management of construction period is the management on the time limit in uncertain conditions.

As the accordance to construction project implementation, the technical and economic analysis is based on the prediction and judgment analysts make of future events. The construction project implementation process can be broken down into several specific parts, and these parts are always affected by the political and economic environment、 sources condition、technical development, so there are uncertainty on their future change, What is more, there are limitation on the predictable methods and working conditions.

Therefore, the assessment and predicting outcomes will be erroneous results inevitably. This makes possible deviation between actual value and predicting value, which bring about large risk to both the owner and the construction companies. For example, investment or time limit prolonged, productivity under design requirement, rising cost of raw materials, increasing labor fee, fluctuating product prices, changing market demand, loan interest rate and rate in foreign money, all these unpredictable effect even damage to an investment project. The uncertainties, which can be considered School of technology and business

11as the reason for postponing time limit for a project in the construction project contract, are the very point of studying time limit for a certain construction project. Only by analyzing the influence, can we make a better predication and control of the schedule and ensure the project complete successfully 1.3 Aim, objective and research questions

The overall aim of this study report is to let everyone know what risk management is, realize the procedure of risk management in construction project and have a deeper study on the application of risk management during construction period, therefore, a better project output and better value for both clients and constructors.

There are two objectives of this study:1. To assess the most major and common risks which cause bad effect on construction period.2. To figure out reasonable solutions.On the basis of the aim and the objectives, research questions have been formulated.1. what is the process of risk management?2. How to apply risk management in construction projects?3. What risks are there in construction projects?4. How risks can be indentified during construction period?5. How risks can be assessed during construction period?6. How risks can be controlled during construction period?School of technology and business12Figure 2: research questions(See figure 2)The first three questions as the basis to support last three ones. 1.4 DelimitationAccording to the statement of related problems in this report, I try my best to narrow down the scope of my study and make my report more pertinent. The original Risk Management: Concepts and Guidance (Defense Systems Management College 1986) classified risk into five facets:

? Technical(performance related)? Programmatic(performance related)? Supportability(environment related)? Cost? ScheduleFigure 3: Relationships among the five risk facetsSchool of technology and business13(See figure 3)Considering that, cost and schedule risks frequently serve as indicators of project status. They are treated somewhat differently from the others. However, cost and schedule can become a major source of project risk. Based on the above, I decide to start from schedule, and narrow down the scope to the risk management in construction period phase which makes my report more specific. Go through the case of study, different realistic constructions have been presented and analyzed . last section of the report lists the most common and major risks during construction period and some countermeasures referred to these risks.

1.5 Research methodologyLiterature study and analytical research are my major learning methods, which play an important role in this report. Analytical research involves analyzing existing facts and information. Today’s world is based oninformation technology and huge amounts of information are available on all kinds of subjects.

In addition, to speak of, the report is more persuasive and practical based on the study of real case and visit of site manager. As a student lacking experience working on building site, the visit definitely has a critical effect on the conclusion of this report.

I also use Internet-searching engine, which is a fast approach to get wanted answers of this time. It offers me much writing inspiration and scientific proof from other related articles.School of technology and business141.6 Structure of studyChapter one is introduction to the background of the research area and sets discuss the problem formulation. The aim, objectives and research questions are stated and delimitations can be found. The purpose of this chapter is to help the reader understand why this report needed to be written. Chapter two is the theoretical overview and the state the literatures which this thesis focuses. This chapter gives the theoretical foundation for the thesis and the aim of this chapter is to ensure the reader that this thesis is at the cutting edge of the research in the chosen area.

Chapter three is the case of study, the different constructions have been built in different place. This section tells the background of each project and describes different type of risks occurred in construction projects. Chapter four is the analysis and discussion, this section’s objective is to combine results of both the case of study and analytical research in order to identify the main findings and their relevance and implications to current risk management practices

Chapter five contains the findings and conclusions of the study. This part points out the main research contributions and thinking about the specific direction what we can still doing further study in future.