A Value And Risk Management Report Construction Essay

Several limitations contribute in hindering the success of a construction project, including completion time, budget and technical requirement. Due to the existence of these barriers, value and risk management helps in tackling unforeseen problems in the future. This report focuses on the value and risk management activities involved at the stages of OGC3 project procurement plan. The objectives of this report are to explain how the value for money can be achieved in the project of building a government administration headquarters; to ensure successful completion of government building project through value and risk management and; identifying the business needs so as to achieve the optimum value for money as well as meet the projects requirements.

All the benefits that come with value and risk management are also discussed here including the necessary recommendations. This paper concludes that risk and value management are critical in any construction project.

2.0 Introduction

Value and risk management are very critical in a construction project. When taken into a keen consideration, value for money is always achieved. Achieving value for money is the basic concern of any construction project procurement, while constructing a facility it should be done in such a way that its operation optimizes delivery of public services. Value management refers to a service which optimizes the functional value relating to a project. It manages the development of a project from the inception period to the completion period (Dempster, 2006). In addition that, it commissions all the decisions against the value determined by the owner of the project through the audit. Risk management refers to identifying, assessing and prioritizing risks. It aims at eliminating all the risks both seen and unseen, in the process of setting up a facility or business (Dempster, 2006). Value and risk management can be incorporated in certain stages of the OGC3 procurement life cycle to ensure that, unnecessary losses are eliminated and thereby value for money is achieved at the end of any construction project.

3.0 Value Management to indentify Business needs

The primary purpose of Value Management at the strategic or concept stage is to ensure that the need for a new project is thoroughly analysed before the client is committed to build (Connaughton J.N and Green S.D 1996, p.24).

Client Objective

Main objective of the Client is to achieve best value for money by rationalizing local government service departments in high specification modern building that befits a progressive and visionary city. The Scottish Government’s procurement policy defines Value for Money as the optimum combination of whole life cost and quality to meet the costumer’s requirement. Quality that relate to a number of relevant factors including; functionality, durability, aesthetic appropriateness to surroundings, long-term adaptability and maintenance, environmental implications and ability of consultants and contractors to innovate improve build ability and work as a team (The Scottish Government, 2005).

Benefits of applying Value Management Study

When conducting value management study into a project at the strategic stage the following benefits can be expected to achieve; It ensures that the project achieves an optimum value for money, the need for projects is always verified and supported by data, the project objectives are openly discussed and clearly identified, key decisions are rational, explicit and accountable, the design involves within agreed framework of project objectives, alternative options are always considered, outline design proposals are carefully evaluated and selected on the basis of defined performance criteria(Connaughton J.N and Green S.D 1996, p.6).

Value Management can also provide some important benefits such as, improved communication and teamworking, a shared understanding among key participants, better quality for project definition, increased innovation, and elimination of unnecessary cost (Connaughton J.N and Green S.D 1996, p.6).

3.30 Identification of Stakeholders

Based on the study of (Connaughton J.N and Green S.D 1996, p.23), an important preliminary activity is identifying the project stakeholders. They stated that this can be difficult but it is vital that all the key interest groups with power to influence the project outcome are represented.

For this type of government project, it has been identified that the likely stakeholders are to be; the client, design team, supplier, the contractors, religious leaders, city council employees, community organization and the government leaders. All these stake holders are crucial to this project since it involves both the government and members of the community. The government should be involved since it is the project sponsor, the religious members and community group forms part of the community and since the project bears a lot of impact to the community they should be involved. The client, the supplier and contractors are directly linked to the construction process, besides they have the knowledge and skills needed for the building process. The supplier will be involved in supplying the necessary materials required for the process.

3.40 Pre-workshop

Creativity and imagination are needed to find best value for money solution for stakeholders’ needs. In practice, a particularly good of unlocking this creativity is to hold workshop. Key features of such workshops are that they; coincide with key decision points in the project and intervene in the design/construction process (Connaughton J.N and Green S.D 1996, p.12).

It is identified that the following are likely to be the activities during workshop.

Discussion on the selection of suitable procurement route for the project. For this project. It will be the best to use design and build procurement route as it is guarantees quality and time.

Identification of work packages for risk management for example the project site location.

Identification of risk factors such as the technical risks; selection of technology, economical, financial and political risks such as changes in the local law and government policy.

Statutory clearance risks from the government authorities to be discussed.

Although the selection of procurement system is a bit early to discuss the notion behind is it is for the stake holders to have understanding of advantages and disadvantages associated with the design and build. The stakeholders will also have an idea of all risks associated with the Design and Construct system and will give a chance to recommend or object.

3.50 The design of Workshop

The design of workshop is determined primarily by their timing and objectives. There is little point, for instance, in holding a workshop to help develop design proposals at a very early stage when insufficient information is available (Connaughton J.N and Green S.D 1996, p.14).

The workshop study will be held for one day, all the objectives will be discussed in order of their priority. The study design will follow the outline below.

Planning Questionnaire Onsite Interview Analysis

Kick off meeting

Workshop

2pm-4pm

Financial analysis

Develop results report

Validation Presentation

5pm-10pm

Company profile

Feature needs assessment

11am-1pm

Clarification of objectives

Determination of participants

Schedule meetings

8am-10am

3.60 The procurement strategy and the risks associated

There are several factors which will have to be considered while setting up the new facility, the risks involved in the setting up of the facility, may be categorized into two; fixed and variable risks. The fixed risk involved in the facility is setting up of a new electricity substation that will supply the necessary power during and after the building process. Variable risk likely to be experienced in the process is the demand for a new car park station. Other risks might emanate from the following; the health, safety and welfare of the employees, the type of delivery strategy, the source and price of the raw materials and the welfare of the public(Gary, 2009).

All the risk involved in the project should be assessed in terms of cost, time and their performance. The risk involved in the employees may lead to injuries sustained are the time of building process, this may occur at any time. The risks involved to the public might also be costly and may also happen at any time, there might be damage to the property and to the environment during the process of building. Accidents may also occur during transportation of raw materials to the building site, there might be risks resulting from delays especially if the source of raw materials is located farther. The owner might also select a delivery strategy that may not be sustainable, thus resulting into losses (Gary, 2009).

This will take into account; hazard identification, classification of the risks identified, ways of mitigating risks and details of the risks involved in the risk register. For risks which bear particular interests, a comprehensive risk analysis should be carried out comprising of the following; causes of the risks, an event tree examination of the impacts and full quantification of the risks involved (Segal, 2011). This helps in evaluation of the cost benefit-ratio, in the enforcements of risk mitigation procedures.

This project is categorized as a high risk project since it involves the following characteristics; it may have political influence, it is done for the first time and it may have an impact to the general public. There is a need to come up with a comprehensive procurement strategy that will ensure that all these factors are taken into consideration.

The risk associated with the Design and Construct procurement strategy adopted by the owner include; The client should state his or her requirements clearly; any future alterations may be expensive, this strategy is unsuitable for complex projects, the design and build contractors usually offer a limited design liability, since the building is based on performance basis, the client has little control over the quality standards and design once the contract is allowed. The benefits of this strategy include; the cost of preparation and tendering is low on the client side, all the risks related to design and cost have a single point responsibility, the overall design and construction periods are short, and it is more economical.

The benefits of design and build strategy seem to have outweighed the risks associated with it. The project will also be completed quickly through this strategy. The budget involved in this project will have to cover for the following; disposal, insurance, VAT, maintenance, operating costs, fit out costs, land cost, way leaves and compensation. Each element of the budget should consist of the base estimate and a risk allowance (Eskesen, 1998).

4.0 Options to Meeting the Identified business needs

4.10 The Value and Risk Management

Risk Management is also important part of Value Management, even though it may seem unhelpful to try to identify and mange risks until there is an agreement about what objectives are. In fact, a strategic diagnosis of the risks may well influence how the objectives are set. Value management and Risk management can be combined in the same workshops. Indeed, it is difficult to truly to separate them. But workshops are demanding and it is important not to overload the participants by trying to achieve too much. If separate workshops are to be held, then Value management workshops should normally precede Risk Management workshops (Connaughton J.N and Green S.D 1996, p.20).

The risks involved in this construction project can be solved through several ways. The project being a high risk, the government can partner with a private entity to ensure that they manage it in a proper way. Risks involved in employees, community, and procurement strategy can be mitigated through the following ways; avoidance, reduction, transfer and retention (Louche, 2010). The government may partner with a private entity in order to spread the risks involved in the project. The stakeholders involved in the identification of the business needs, will also be involved in the identification of the options to meeting the business needs. The Design and Build procurement strategy adopted by the client is suitable for this project. This owes to the fact that when compared to the other procurement strategies, it has got several benefits (Mark, 2006). Thus value for money is achievable by this strategy. The work study design used in the identification of the business needs will be used at this stage.

The risks which are involved in construction in the project will be managed the same way as in other jurisdictions. The methods involved in management of risks include; sub contracting, insurance, subcontracting and reliance on local partners who are familiar with the local conditions.

The major categories of risk that are most probable to be faced by the client may arise from the capital project. These are potentially much more extensive than any additional construction costs. This could include the project risk which is mostly concerned with time and cost: the consequential risk which are the unplanned effects of project underperformance on the client’s project; benefits risk are the effects of the project bring about more than the expected benefits; finally the effect on share price which is related to the public perception of the project. (Rawlinson, 1999)

Assessment of the options

Procuring new facility is not always the viable solution to meet client’s business needs. The truth is that it is very seldom that all buildings in the city are fully occupied. Renting of an existing facility may be one of the solutions. Another solution could be is a refurbishment of an existing facility of a new government. it would have been a viable options as long as the found existing building to be refurbished has an area of 12500m2 and renovated it in a way that suits the business needs.

6.0 Conclusion

It is identified that a combined approach to value and risk at the beginning of a project, in order to address some of the objectives the industry is attempting to achieve i.e. maximizing functionality, minimizing whole life costs and improving the integration of the supply chain (Ellis et al. 2005) is the way forward and was advocated by fifty percent of participants during their research study and survey. They also find out that integrating Value and risk management in a planned and structured process could help the project team make the best decisions at the right time. Rather than perpetuating a process of ‘adding things in because of risk’ and ‘taking them out because of value’, it is suggested that the two techniques once put together will eliminate the constant recycling of ideas (Ellis et al. 2005).

There is also some evidence found that integration is already being attempted and it could be that, as Hiley and Paliokostas found, practice is ahead of theory in this respect (Hiley and Paliokostas (2001) as cited by Ellis et al. 2005). However, an equal number of respondents are concerned that a combined VM/RM workshop could lead to confusion and while it may offer time savings, it could reduce the overall effectiveness. There is also a concern that it is commercial pressure which is forcing the two together (Ellis et al. 2005).

So, by having value and risk management employed into the OGC3 certain project procurement stages, the project will be proved to be feasible. It eliminates unnecessary costs which makes capital cost savings of between 10% and 25% of 25 Million project budget whilst these savings more than offset the additional cost of Value Management – estimated at 0.5% and 1% of project costs – they should not be seen as an end in themselves (Connaughton J.N and Green S.D 1996, p.6). Value for money will also be achievable and the project will be allowed to proceed to the next level of the OGC3 process.

7.0 Recommendations

1. Establishment of a building risk policy at the initial stages of the project enable the team members have uniform attitude. Identification of risks involved and the risk mitigation measures as early as possible in the construction project.

2. Expected Recommendations from Options to Meeting Business Needs are The Design and build strategy be adopted, as it ensures that value for money is achieved, the government to come up with a comprehensive insurance cover to take care of the possible risks involved in the project, a register book which gives the details of the risk to be established, the project to proceed to the next step, after the above mentioned requirements have been achieved.

3. Recommendations expected from the Identification of Business Needs are. There should be a method set up to take care of the risks involved in the study, adoption of a suitable procurement strategy, suitably the design and build, The welfare of the community and the employees should be safe guarded, there should be team work is needed to achieve the set objectives, use of incentives to provide motivation to the workers, and engagement in partnership agreements.

8.0 References

CONNAUGHTON, J.N and GREEN S.D (1996) Value Management in Construction: A Client’s Guide, London SW1P3AU: Construction Industry Research and Information Association, pp 6-24.

DEMPSTER F., 2006. Value at Risk and Beyond. Cambridge: Cambridge University Press.

ELLIS R., WOOD G., KEEL D (2005), Value Management practices of leading UK cost consultants, Construction Management and Economics (June 2005) 23,pp 483-493.

ESKENSEN S.D. & SUMMERS J.W., 1998. Risk assessment helps select the contractor for the Copenhagen Metro System. ITA World Tunnel Congress, Tunnels and Metropolises, Sao Paulo, Balkema.

GARY C, 2009. Integrating Strategy execution, methodologies, Risks and Analytics. . New Jersey: John Wiley & Sons, Inc.

LOUCHE C. & IDOWU O, 2010. Innovative CSR: From Risk Management to Value creation. Texas: Green leaf publisher.

MARK, R., GALAI, D. & CROUCHY, M., 2000. Risk Management. Ottawa: MC Greenhill publishers.

MICHAEL F, 2006. Value and Risk Management: A guide to Best Practice. . New Jersey: John Wiley & Sons, Inc.

OLIVER T, 2007. Corporate Risk Management For Value Creation: A guide to Real life Applications Risk Books publishers.

RAWLINSON S. (1999) Risk Analysis and Risk Management, Notes to support Television Education Network.

SEGAL S, 2011.Value of Risk Management: The next Step in Business Management. New Jersey: John Wiley & Sons, Inc.

THE SCOTTISH GOVERNMENT, 2005 Construction Procurement Manual [WWW]. Available from: http://www.scotland.gov.uk/Publications/2005/11/28100404/04084 [Accessed 04/11/12]

Part 2 – Value and Risk Management Essay

“An evaluation of current and potential future application of Value and Risk Management into Quantity surveying professional service in the construction sector in Oman”

1.0 Introduction

Value and risk Management has been optimized by the Oman government in all the construction sectors. The main aim of integrating value and risk management in construction and also in some professional studies is to achieve the value for money. The Oman project performance is at a better condition, a lot of funds have been issued to take care of the infrastructure and construction projects, in addition there are a number of professional bodies concerned with offering relevant training regarding value and risk management. All these efforts are targeted towards achieving value for money.

2.0 The Quantity surveying profession

Royal Institute of Chartered Surveyors (RICS) defined that a Quantity Surveyor (QS) are the cost managers of construction. They are initially involved with a capital expenditure phase of a building or facility, which is the feasibility, design and the construction phases, but they can also be involved with the extension, refurbishment, maintenance and demolition of a facility. They work in all sectors of the construction industry worldwide. In real estate this covers residential, commercial, industrial, leisure, agricultural and retail facilities. In infrastructure it covers roads railways, waterways, airports, seaports, coastal defences, power generation and utilities. They may also work in process engineering, such as chemical engineering plants or oil rigs. As a quantity surveyor they may be working as a consultant in private practice, for a developer or in the development arm of a major organization (eg retailer, manufacturer, utility company or airport), for a public sector body or for a loss adjuster. On the contracting side they could be working for a major national or international contractor, a local or regional general contractor, for a specialist contractor or sub-contractor, or for a management style contractor. Their work may include the following: preparing feasibility studies or development appraisals, assessing capital and revenue expenditure over the whole life of a facility, advising clients on ways of procuring the project, advising on the setting of budgets, monitoring design development against planned expenditure, conducting value management and engineering exercises, managing and analyzing risk, managing the tendering process, preparing contractual documentation, controlling cost during the construction process, managing the commercial success of a project for a contractor, valuing construction work for interim payments, valuing change, assessing or compiling claims for loss and expense and agreeing final accounts, negotiating with interested parties, giving advice on the avoidance and settlement of disputes(RICS, 2006).

3.0 The Quantity surveying and the Value and Risk management

Quantity surveying refers to a mathematical method which is used in cost estimation, improvement and reproduction in a building construction. Value and risk management has been applied in quantity surveying to take care of various areas of construction, in Oman. These areas include; early cost advice, cost planning, Value engineering, life cycle costing, Bills of quantity, advice on other costs, cost control during construction, Monthly valuations and in final account settlement (Rawlinson, 1999). The integration of risk and value management is aimed at ensuring that value for money is achieved in any construction project. These parameters are discussed below.

The process of value engineering has also benefited from value and risk management. This has been achieved through assessing the viability of construction projects so that the clients can be able to achieve value for money. The clients design and the requirements of the operation, in addition to the future maintenance costs of facilities, have been closely evaluated (Rawlinson, 1999). This has enabled most clients to achieve value for money throughout the entire life cycle of buildings.

In determining the bill of quantities, value and risk management has also been incorporated. This begins right from the drawings of the architects to itemized facilities, plant and labour cost for each building area. In order to facilitate the client from getting tender of the best value, the bill of quantity is sent out for to be tendered.

Risk and value management has also aided in making decisions relating to other costs. The costs involved in construction, may include; survey fees, development costs, furniture fittings and equipment, design and professional costs. Establishment of these costs enables real development cost and identification of financial losses before their occurrence (Alfaro et al., 2006).

Cost control in the process of construction. In the process of construction, it is essential to keep both the monitor cost and the original plan of the cost. This is important as variations of the project are recorded and reports made to keep the client updated. The client is therefore able to make necessary adjustments in the cost overruns, in addition to cost reductions.

Integration of risk and value management in quantity survey as also assisted in monthly valuation. The progress of construction; has been monitored in order to make payments of different stages, to the contractor. The measurement of work is normally done at the site; and it involves monitoring of materials and construction on a regular basis. Thus the monthly expenditures can be determined throughout the project by establishing the initial cash flow projections (Ahmed, 1995).

Lastly, value and risk management has also been used to establish a policy which enhances final account settlement. This has enabled the easy payment negotiations with the contractor; successful completion of signoff work has also been achieved. This has aided in the reduction of unnecessary hustle, thus successful completion of construction projects.

4.0 Professional Bodies Representing Quantity Survey in Oman

The professional bodies that are concerned with quantity survey in Oman include; The Royal Institution of Chartered Surveyors (RICS), the Chartered Institute of Building (CIB), Project Management Institute and the Association for Project Management (APM). These professional bodies are discussed below (Rawlinson, 1999)

The Royal Institution of Chartered Surveyors (RICS), this body is involved in the regulation of property professionals such as those concerned with value and risk management and surveyors. It was founded in London in 1868; it provides education and training standards, protects consumers with strict codes of practice and advises. Currently this body emphasizes on value and risk management; since it is concerned with regulation of property professions, such as facility management and planning and development project.

The Chartered Institute of Building is concerned with provision of information, institute, regional pages and industry to members. It also establishes technical documents that relates to the construction environment. The issues that have been studied in this body include; Building services and Segal, 2011)

The third body is known as the Project Management Institute (PMI). This is concerned with establishment of project management standards. These standards are aimed at describing good practices, globally recognized credentials which meeting project management skills and resource for professional development. The body holds that clear understanding of value and risk management enhances achievement of these values (Alfaro et al., 2006).

The last body which is involved in quantity survey is the Association for Project Management (APM). This institution was founded in1946 in United Kingdom. It has a universal reputation for teaching and research. It also has links with the most successful identities in industry and commerce. This body also recognizes value and risk management.

5.0 Overview of the General Project Performance in Oman

5.10 Trends in the Local Construction and Project markets

The building and project health in Oman is in good condition. Taking into account Oman’s low population of only 2.8 million people the level of the construction and development in infrastructure already committed or those are still in construction are impressive. The largest procurer of building services is the public sector, in the sultanate of Oman. In the year 2011, the government of Oman announced its eighth five year plan. This was to run from the year 2011 to the year 2015. The amount of capital envisaged by the Oman government is 79million US dollars; the bulk of this is set aside for construction projects. The chief beneficiary of this fund will be; Transportation, tourism, oil and gas, projects in power generation and housing sectors. The major projects under construction are listed below (Alfaro et al, 2006).

Oman Convection centre; this has a budget of 1billion US dollars; the estimated completion date is late 2015.

Sohar Airport; this has a project budget of 400million US dollars, the date of completion is expected to be in 2014.

Salalah Port expansion; this has a budget of350 US dollars.

Oman’s national rail network, the cost is not yet known and the approximated date of completion is2017

Salalah Independent Water and Power Project which has an estimated budget of1billion US dollars.

5.11 The Forms of Security and Contractual Protections Required by the Sponsors Security

The security taken by lenders in Oman is not different from the norm in other jurisdiction. It includes the following; a legal mortgage over the land or site, guarantee from the shareholders of the company and a commercial mortgage which involving the company assets. The employer will require production of the following by the contractor; performance bond in which the person who issued it, has to pay if the contractor fails to meet obligations specified in it and a guarantee by the parent company (Ahmed, 1995.)

5.12 Contractual

The employer will target at transferring the risks; in a way that is cost effective to the contractor involved in the construction project. The funders will also ensure that the transfer facilitates the risk profile of the borrower and the project. This case involves situations in which finances do not reflect in the company’s balance sheet as liability.

5.13 Management of Risks

The risks which are involved in construction in Oman are managed the same way as in other jurisdictions. The methods involved in management of risks include; sub-contracting, insurance, subcontracting and reliance on local partners who are familiar with the local conditions.

The major categories of risk that are most probable to be faced by the client may arise from the capital project. These are potentially much more extensive than any additional construction costs. This could include the project risk which is mostly concerned with time and cost: the consequential risk which are the unplanned effects of project underperformance on the client’s project; benefits risk are the effects of the project bring about more than the expected benefits; finally the effect on share price which is related to the public perception of the project. (Rawlinson, 1999)

The value management aspect is relevant to the construction sector as it reduces the precise causes of avoidable costs. These redundant costs can result from unnecessary aspects which provide no useful role; those that arise from unnecessary specification due to unreasonably expensive supplies/components); and cost of poor build ability (failure to regard construction repercussion during the design phase of the project. Other costs may arise from avoidable life-cycle cost which regard to the failure to put into consideration the future operational costs; superfluous opportunity cost which is the cost of losing prospective revenue (Arafa, 2010).

Value management techniques can be used in the construction industry in order to deliver the clients project requirements. The use of innovation can have a considerable effect on the overall outcome of the project. Innovative solutions need to be adopted at the earliest possible phase of a project. This is because for the opportunities to add value you must use of manufacturer’s standard workings rather than modified products.

5.14 Contractual Provisions covering Material delays to the Project

The provisions which are concerned with extension of time are found in the forms of the international standards contracts and also in the standard conditions of Oman. Allocation of risk profile plays a major role in determining the extent of relief as provided under the contract. The following entitles the contractor to an extension time; Changes of scope generated by the employer, employer acts as the prevention and force majeure events (Segal, 2011).

5.15 Appointing Construction Professionals

In Oman, the tender law is used in the selection and also in the appointment of the construction professionals; this is done by the public authorities. The appointment is usually done under the professional service contracts which are convectional. The most widely used is the white book known as the FIDIC (Client/Consultant Model Services Agreement)

5.16 Value and Management Principles to be adopted

The country seems to have optimized the application of value and risk management in all the aspects of construction. There should be investment in new opportunities within the country; strategies should also be formulated at all the holding levels of the organization (Segal 2011).

6.0 Conclusion

In conclusion, value and risk management is well optimized in the Oman government. There are several professional bodies which are concerned with risk and value management. The government has invested so much in construction and infrastructure. The major contribution of value and risk management is that value for money has been achieved.