Risk Management In Construction Industry Of India Construction Essay

Risk management is something related to uncertainty as it is not fixed and it is a part of daily life, or it is something we cannot predict and may result in negative outcome (Helmen and Shen Li, 2001). However it’s a process of analyzing exposure of risk and determining how to best handle such exposure. Some firms may use risk assumption, risk avoidance, risk retention, risk transfer or any other combined strategies for proper organized management of future events.

Risk is somewhat calculable, since it has to do with probabilities, whereas uncertainty has no previous history to relate any probabilities to. Uncertainty is rather an epistemic uncertainty, since it has to do with uncertainty of outcome and related to system performance (Aven, 2003).

However, as an extent previous research also suggests that construction industry is likely to have more risk than to any other business activity mainly because of complexity of project, unskilled labor, climate calamities et cetera. Above all, It often seen that lack of practices and development of risk assessment and management techniques for Indian construction projects.

The Construction industry is one of the most dynamic, risky and challenging businesses. However, the industry carrying bad impression in order to manage or deal with risk, along with many giant projects failing to reach its pre determined financial goals. Mainly because of change in weather, unskilled or absence of workers or other labors, improper productivity inside the plant with low level of quality and its raw material. Whenever risk arises whether it gets ignored or dealt with a completely arbitrary way simply adding 10 percent contingency onto the estimated cost of a project is typical. In a business as complex as construction, such an approach is often inadequate, resulting in expensive delays, litigation and even bankruptcy (Hayes et al, 2007). Further supporting this, as per Burchett (2000) risk management is an important part of the decision making process of all construction companies. Risk and uncertainty can potentially have damaging consequences for some construction projects. Risk can affect productivity, performance, quality and the budget of a project. Risk cannot be eliminated, but it can be minimized transferred or retained.

In addition to this (Flanagan and Norman, 2008) also claims that In Construction industry, Risk includes the processes concerned with identifying, analyzing and responding to project risk, It includes maximizing the results of positive events and minimizing the consequences of adverse events.

The characteristics of construction projects usually depends on their transparent nature, value of their business partner and the strong dependability on the basis of their local natural and human environment, which indeed highlights the difficulties of risk management in construction industry. Management of risks in building construction projects has been identified crucially at very best of the processes with respect to achieve project objectives which are in the form of time, cost, quality, safety and environmental Sustainability (Zou et al., 2007).

Further as per (Baloi and Price, 2003) the role of above project objectives becomes more vital when a particular organization merges up with the overseas firm and the risk exposure becomes higher due to lack of information and knowledge about the international partner and their local environment. Hence Lipsy, (2008) suggest that global factors of risk are affecting more to the construction firms specially to contractors, because they are the victim who are less familiar with them. However, (Dikmen et al, 2007) argues that the success of construction companies carrying out projects in international markets significantly depends on how the risks that stem from the host country conditions are managed. Many practices and implementations have been aims to develop a risk model that contains the risks of doing business in international markets and handle the global risk.

Indian construction organizations have increasingly played a vital role in the world wide market in the last two decades. Indian industry minister had a visit to eight African countries in early 2006 which indeed helped to boost up the involvement of Indian construction organization in an African continent as billions of dollars are poured into infrastructural investments (The Business Times, 2007). Indian construction organizations were able to give up the competitive and effective fight with the contractors against the other developed countries (Low et al, 2006).Above all, (Luther and Hensen 2006) mentions that identified the risks prolonged by overseas construction organizations and different ways of facing those risks while undertaking the construction projects at the outside soil. The manageable corporate scenario always needs to improve their approach to risk management and abilities to learn the lessons from both success and failure cases in order to avoid similar mistakes in the future (McGill et al., 2004) and (Luther and Hensen, 2006). Hence, it enables Indian constructors to improve their way of handling construction management ability in an unseen environment turns in to priority issue.

In addition to this (Hastak and Shaked, 2006) describes the construction scenario into three different levels which are country, market and level of project. They further explain the economy stability which linked to the project policy and probability of country’s economy break down. Overall construction market level risk, specifically for an overseas organization does helps in to technological advancement which helps to open up more resources for construction proves and also simplifies complexity of construction process this all indeed turns in heavy competitor against local competitor and also helps to minimize the chances of financial risk.

(Dubois and Gadde, 2006) claimed that complications in construction projects Always arises from the two formal sources which are interdependence of tasks and uncertainty. Further, Uncertainty has four sources where first and foremost is management’s inexperience nature with local resources and local environment lack of knowledge with regards to what exactly happening at construction site, which includes material placement, the current work status and specialized team with regard to place and time, lastly, unpredictability of environment. Again, Dubois and Gadde’s study’s main conclusion was that the unstable and changing network is a major cause of the short-term sub optimization hampering a longer-term productivity, innovation and learning. To reduce this uncertainty, a firm should consider at least four different types of coordination inside the network and think relationships longer than just one project’s perspective.

Risk management is one of the knowledge junction which presented by the US PMI, (Project Management Institute) in the year of 2004. Addition to this Kloman (2004) observed that risk

Management is simply good common sense in coping with possible and actual daily Mishaps, and the occasional major disasters that may lead to financial losses and unfulfilled plans for individuals and organizations, and indeed for society as a whole. Furthermore, risk management in the construction industry could be a Systematic way of identifying, analyzing and dealing with risks associated with a project in an order to achieve the project objectives (Zou et al, 2007).

The Project Management Institute (2004) characterized risks in to four categories which are;

Technical Risks, Organizational Risks, Project Risks and External Risks (abbreviated as TOPE risks). These four categories of risks are regularly faced by an Indian construction firms due to lack of risk management approach towards basic construction objectives and other activities. Specifically while working with the overseas firms which are previously merged with the local firms and invested huge amount of funds as a financial risk that too in metro cities of India. However it is obvious that appears reasonable for the firms, to inevitably face by Indian construction firms when they operate in the domestic firms due to high level of varieties.

Against, the Project Management Institute (2004) (Markand and Aury shake, 2005) presents another risk assessment model specifically for an international construction project which is known as ICRAM-1, further they describes the model for risk assessment which shows potential risks with the identification at all three levels such as project level, market level, macro level. Further, results are obtained from the analysis of ICRAM-1 in the form of potential risk indicators, the overall impact of those risks into market as well as country’s environment where specific projects are under process.

Furthermore, according to (Densen et al, 2008) states that Risk management systems and other guidelines are not new to implement. It jus requires reasonable and effective awareness of risk uncertainty, the way of qualifying the risk, procedure of controlling the certain possible controllable risk along with minimizing the impact of uncontrollable risk with the help of properly allocating those risk by risk allocation or apportionment.

However, According to (Tah and Carr, 2005) the ineffective implementations of risk management are often caused by:

A lack of formalized risk management procedures, which includes identification of risk followed by the risk analysis and risk control

A lack of continuity of risk management in the various stages of the project life cycle, including conceives, project design, planning of project, allocation, plan execution, delivery of certain core areas, review and support

Weak integration between risk management and other key processes, including design, estimating, planning, production, logistics, cost analysis, manufacturing, quality assurance, reliability, schedule analysis, support such as maintainability, and testing and evaluation

A lack of interaction among different parties, which includes customers, insurers, contractors and suppliers. All the different parties indulged in a project usually have different conception with regard to risks according to their own background and interests.

Customer always needs and expects proper scope and objectives of projects and the financial resource. Contractors take the major responsibility to deal with risks during on time construction process. Contractor has to finalize in order to what exactly they needs such as to maintain, minimize, transfer or avoid risks. However, they frequently use three methods to transfer a risk which are as follows:-

1) Firstly, with the help of insurance to insurance companies.

2) Secondly, through handling over or giving subcontract to subcontractor, else through making changes in the contract and in the certain rules and regulations at customers and other parties (Chapman and Ward, 2004; Luther and Hensen, 2006). Further, Insurance companies does not only helps with the insurance to contractors by transferring risks, but also provides special panel of expertise as a mentor to the contractors in order to managing the risk and identifying the potential risk along with reducing chances of probable risk. Again, (Williams et al., 2005) advised that the willingness of insurer to write an insurance coverage reflects favorably on insured’s efforts at risk prevention. The improved understanding and interaction among clients, contractors, and insurers will help in the effective management of risks that will benefit the construction industry (Choy et al., 2006; Liu and Flanagan, 2005). Further in addition to this much has been mentioned on how risk exposure may be analyzed and managed as per the project management institute. However it also reflects that the risk management study also has been done and gives out some points on an Indian construction industry which is booming along with the overseas partners.

Model for Risk management (2005) states that the implementation and information regarding the risk management are not up to the mark or limited mainly in India’s construction industry. This is specifically vital as further it mentions regarding India’s overseas exporting services where rational approach is in action while dealing at first time. The rational approach always seeks a balance or trade-off between the chances of risks occurring and the severity of risk once it has been affected, the aftermath steps to follow. This indeed helps to know whether risks may be managed, but at a cost depending on whether the construction firms decide to mitigate, accept, avoid or transfer (also known as the MAAT) the identified risk.

Finally, Baloi and Price (2003) both argued that having a deep knowledge and discipline of continuous development of the risk management seems that practitioners have not fully appreciated its importance. Further it was concluded that the main barriers to effective compliance are cost of implementing management plan, language, educational barriers employees and other labor staff. Therefore, the main barriers to improvement of risk management may be low awareness of risk management of Indian contractors and the difficulties in implementing such a system.

In addition to this H.R Pitale (2005) suggests that, the better the tools used to communicate during a project to all parties involved will have a lesser risk. This approach provides for better understanding at every stage in the process. The owners can better understand what they are getting, estimators can have a much higher chance of estimating correctly, schedule planners can receive significantly more information to make a better schedule, contractors can better understand their assignments in the context of the overall project, and laborers on the site, who often cannot read drawings, can quickly understand the task at hand when it is described in a model. Now models are being brought to the construction site to ensure that the communication risk is dramatically reduced. The overall construction needed to be taken care by the group of upper level expertise which indeed requires a good Contract management staff because it includes highly critical functional services such as Consultancy service, Project control, Resource scheduling etc.

As per the Indian construction industry and its financial condition along with organizations internal risk and outside risk Davendra Surji (1999) states that financial risk is always depends upon the resources to be utilize, the amount of time a project may take, material, and labor cost. If uncertainty occurs in any of this its increases the financial risk. However Technical staff and Human resource, Environmental control and other Government policies are also plays a key role in overall risk of project. In which environmental control and government policies in India have the highest vulnerable risks. However, (Mishel, 2007) argues that risk analysis and management in Indian construction industry depend basically on intuition judgment and experience. Formal risk analysis and management techniques are rarely used due to a lack of knowledge and to doubts on the suitability of techniques for construction industry activities.

(Alfredo et al, 2005) states that as far as owner’s point of view the overall process of risk management has to be particularized for each and every construction projects which could be undertaken by the owners consultant. Further, author puts more emphasize on complete and generic process of risk management which must be used at construction projects where maturity level of risk is large and more complicated. Author also suggests a Delphi method of identifying the risk and how to deal with that risk as a final validation of the project risk all the identified processes simplified and proposed as a summarization where methodology and final results has to be presented.

As per (Kenn and Y. Ling, 2002) the most of the project risk and failure of construction project depends on the nature of the project, method and documents of contract. However to mitigate this author suggests that appropriate contracting method coupled with clear and equal contract documents which ultimately turn down the uncertainty and complexity of risk against diverse and conflicting agendas. This means attitudes of the contracting partners and co-operative relationships among the project participants are crucial in order to make a successful project B. Vegamally, (2004).

Despite the improvements in the project risk management practices across the construction industry, many contractors still not having proper ‘holistic’ approach where risk is fully integrated into every aspect of the construction life cycle (right from the project contracting to project completion). This is evident from the fact that still notice construction projects suffering from ill defined scope, design and constructability issues and mismanaged vendors. As a consequence there are clear time-cost quality gaps, add to that a considerable tying up of valuable resources when you shift to fire fighting mode (Edward, 2003).

Further, Vegamally (2004) mentions on the basis of Indian construction industries survey that fostering co-operative relationships and better teamwork always turns in to fruitful and riskless completion of project. Again, in order to assessing the risk (Falgun and Rashid, 2001) said that the development of a construction project from the concept, feasibility study and real design which indeed takes huge amount of time and also accommodates many different phases along with it seeks involvement of huge staff which are of different skills and interests, also requires a good amount of materials procurement system and the use of equipment. All of these situation can only possible to handle while skilled staff able to co-ordinate well with a smooth flow of each and every small activities. Above all it becomes important to identify the risk if occurred in between the process, mainly compounded by many external, uncontrollable factors that can generate risk. Risk can manifest itself in numerous ways, varying over time and across activities.

To judge the criteria, whether the level of risk is high or low (Kumaraswamy and Ali, 2005) mentioned that the first is the probability of risk occurrence where chances of an undesirable risk occurrence should be specified then secondly, the degree of risk impact, which is the degree of seriousness and the scale of the impact on other activities if the undesirable even occurs and subordinate issue that should be noticed is that a large number of small losses, caused by risks with little impact, could have a similar effect on a balance sheet to those resulting from a single loss caused by a higher impact. Therefore, degree of risk should be seen both from the probability of occurrence and the degree of risk impact because each will affect the degree of risk.

As per (Mills, 2004) three of the most important risks in construction projects include weather, productivity of labor and plant and quality of material. For example these areas are not easily controllable by a contractor before the project execution. (Cohen and Palmer, 2005) identified risk trends in construction projects. They found that typically, risks are determined at the very early phases of the project (feasibility and planning) while the impacts are not experienced until the construction and production start-up phases.

Further, as per (Hari and Subra, 2004) mentions that process of risk management must be implemented at the beginning of the project life cycle, hence it allows to make basic fundamental changes at project life cycle. Later overall project must be carefully analyzed in order to check the each phases and respective method is being use, if needed it should be customized as per individual characteristics. The underlying reason for risk management is to identify and ensure the well- grounded and unbiased decision making. However, (Artto and Kahkonen, 2006) concludes that risk management processes mainly includes only three core processes which are identification of risk, estimation of risk, and planning of risk response and execution. Further they highlights about five different accessory processes of risk such as risk management planning, risk communication, risk ownership development, risk management strategy and risk management control.

As per (Artto and Kahkonen, 2006) the identification phase is stressed by many researchers (Turner, 2006). Further Turner says that It is quite obvious that if we are unaware of the risks, it’s difficult to manage them, though this view is limited to the event-type scope of risk management. In addition to this (Turner, 2006) presented the concept of risk from different perspectives, which forcing puts more emphasize on risk in a wider level, moving from single even-scope to wide uncertainty-scope. According to (Chapman,2005) the risk management process builds majorly on the initial identification phase, he explains the reason that success of later risk management phase is directly comparable to the quality of the first identification phase.

Further, (D. Ramanand, 2005) explains the detailed steps and methods in order to identifying and differentiates the risks which are presented. He states that, the methods generally include brainstorming, risk checklists, expert analysis/interviews, modeling and analyzing different scenarios and analyzing project plans. In addition to this, author further says, Sources of risk or uncertainty and sources of known unknowns should be listed. In support of this, (Ward and Chapman, 2006) emphasizes using an uncertainty perspective in the project risk identification phase, since they consider such an approach to be the best way to determine all possible sources of opportunities (positive risks), not just threats. The identification lists need to be followed and updated as our knowledge and understanding of the project environment increases.

As per (Artto and Kahkonen, 2006) Risk response planning and the execution- phase must have an effective control process by its side to confirm that the risk management processes are iterative and running successfully, are not dismissed as project starts and it follows that decisions are implemented and have the expected results. Monitoring and controlling usually means writing and checking documents and conducting meetings. Further, Author puts emphasize on the importance of team work and communication as a means of risk management. Monitoring should also include evaluating the basis of earlier decisions, and assessing whether the assumptions made at the beginning are still relevant.

According to Saari (2005) suggests a simple tool for monitoring the risk management process. She proposes using risk status as an indicator of the process phase under every recognized risk. Risk status describes the current situation of a certain risks. Risk monitoring involves monitoring known risks, identifying new risks, reducing risks, and evaluating the effectiveness of risk reduction. The main output at this stage is associated with corrective actions and project change requests. Project risk continuous reassessment involves periodic reviews of project risk status to identify new risks, and to examine changes in probabilities or impacts and Changes in the contractor’s project risk responses.

(Floricel and Miller, 2008) developed five risk strategies for projects, which are mainly for the large scale projects like construction projects, which further elaborated how risks in large scale projects should be handle. Author further state that strategies of every level of projects. A number of institutional anchoring elements must be put in place to tie project strategy to organizational strategy. It means that all organization’s projects (called ‘project portfolio’) should be treated as stock portfolio. Also (Ward and Chapman, 2006) promoted the corporate scale view on risks rather than just a project scale view. They introduced the concept of risk efficiency as a prerequisite of the holistic risk management process and formed a ‘decision rule’ for efficient risk management.