CHAPTER ONE
INTRDUCTION
1.1 RESEARCH BACKGROUND
Literally, risk simply means danger or hazard. Every activity in human endeavor is incumbent with its own risk or risks inimical to identify, analyze and mitigate such risk or risks cannot be over-emphasized. From personal or domestic through business activities including construction, individual and organization as have gone a step further to establish risk management departments to control the risks to which they are or might be exposed.
Construction works is generally associated with many hazards and uncertainties because it involves long production cycle and input of different professionals, thus making the generality of the industry and its clients widely subjected to a high degree of risk due to nature of construction business activities, processes, environment and organization. Akintoye and Macleod (1997) opined that risk in construction has been the object of attention because of time and cost over-runs associated with construction projects. Risk is defined as an unwanted negative consequence of an event of which the possible outcome can be identified, predicted and estimated. Risk is then said to be a function of probability of occurrence of an undesired event together with a measure of its adverse consequences (NISP, 1980). When related to construction, risk can be described as a construction project whose variation results in uncertainty as to the final cost, duration and quality of the project, according to Bufaied (1987). Risk is the probability of occurrence of an event or activity that might have an adverse effect on the project, including on cost, schedule, safety, scope, or quality. It is therefore important to plan for risk management (Quiplash, 2010).
Risks are uncertainties, liabilities, or vulnerabilities, which may cause a project to deviate from its defined plan. While risk in a project environment cannot be totally eliminated or transferred, it can be monitored and minimized or mitigated wherever possible. To succeed, organizations must commit to addressing risk management throughout the project lifecycle (Alvarez et al, 2002). Risk is uncertainty of outcome, whether positive opportunity or negative threat, of actions and events. Risk
and uncertainty characterize situations where the actual outcome for a particular event or activity is likely to deviate from the estimated or forecast value (Raftery, 1994). Risk can travel in two directions: the outcome may be better or worse than originally expected. These are known as upside and downside risks. It can be summarized as follows: Threats — a risk that will have a negative impact on a project objective if it occurs (what might happen to jeopardize the project’s ability to achieve its objectives). Opportunities — a risk that will have a positive impact on a project objective if it occurs (what might happen to improve the project’s ability to achieve its objectives)
Triggers — symptoms and warning signs that indicate whether a risk is becoming a near-certain event and a contingency plan/response plan should be implemented. The distinction between risk and uncertainty is usually that risk is taken to have quantifiable attributes, insurable, and it was possible to make a statistical assessment of the probability of occurrence of a particular event, whereas uncertainty does not. Risks and uncertainties can cause losses, which lead to increasing costs and time delays, both during the project and at the end. It requires more rigorous construction technology and construction management.
Some years ago risk management was theoretical concept seldom used in the construction industry. In recent times, it is referred to as one of the most fundamental components of construction best practice and widely recommended as essential activity in the research. However, the risk management in our country is still in its infancy, and managers are short of awareness to risks and lack of ability to manage it. Owners, contractors, construction managers, designers and others have a number of options to protect themselves from the hazards of business. Barrie and Paulson (1992) defined risk management as an organized approach to identifying and dealing with potential exposures. The risk has to be assessed in respect of the combination of the likelihood of something happening, and the impact which arises if it does actually happen. Risk management is a discovery of existing risk, by observation and imagination, the estimation of the probability and seriousness of these potential impacts and the consideration of methods of mitigating these risks and the implementation and evaluation of the decisions made (Regal et al, 1976). Risk management is a
system, which aims to identify and quantify all risks to which the business or project is exposed so that a conscious decision can be taken on how to manage them (Flanagan and Norman, 1993). Risk management includes the identification and assessment of risks together with the development of strategies to minimize them and with the development when they do occur, to mitigate any adverse effects or take advantage of beneficial ones (Lockyer and Gordon, 1996). It involves the systematic application of management policies and tools to analyze and assess potential impacts of uncertain future events, such as fires, explosions, toxic releases and natural events. The practice of risk management allows managers to anticipate and evaluate potential risk-based losses from such events
and make responsible decisions. This also includes identifying and assessing risks (“inherent risks”) and then responding to them (Treasury, 2004). It is a generally recognized phenomenon that those within the construction are continually faced with a variety of situation involving many unknown, unexpected, frequently undesirable and often unprecedented factors. It should also be noted that these situations are not limited to construction industry; it is recognized that risk is built into the profit structure of any commercial organization and is a basic feature of free enterprise system as agreed by Ashley (1997) and Kangary and Riggs (1989).
Thus, proactive risk assessment and sound risk management is necessary to protect an organization’s competitive position. The construction industry, more than most industries, is particularly plagued by risk, but it has been slow in realizing the potential benefits of sound and systematic risk management (Al-Bahar and Crandall, 1990; Ward et. al. 1991; Thomson and Perry, 1992; Flanagan and Norman, 1993; Raftery, 1994; Fellows, 1996; Edward and Bowen, 1998).
Risk analysis and risk management had their origins in the insurance industry in the USA in the 1940s. Using this logic, the actual risk to be carried was quantified as follows:
Risk = Probability of Event x Magnitude of Loss/Gain ……………..………………………….. 1.1.
There is several risk analysis tools used to assist in decision making; from relative risk ranking of risk reduction strategies to comparison of quantitative risk estimates to established risk tolerability criteria. ioMosaic’s professionals are experienced in the application of simplified and quantitative methods of risk analysis and can provide guidance on the appropriate level of analysis for a give problem. Methods we have utilized for our clients include:
♦ Matrix risk ranking
♦ Level of protection analysis (LOPA)
♦ Event tree and fault tree analysis (FTA)
♦ Reliability/vulnerability analysis
♦ Quantitative risk analysis (QRA)
In view of the foregoing, risk management is expected to commence with project inception through the planning stage to the construction and quality control stage. In other words risk management should be the integral part of cost planning and control of road construction project. But rather disheartening to realize that insofar as risk analysis and management is important to the activities of the construction industry, little is regarding the industry’s response, and in particular the techniques employed for the performance of all-important function in this part of the world. It would be noted that emergence of the professional project management practice in United States and Europe in the two decades and created a more awareness towards risk management, which is gradually being passed on to other part of the world.
In Nigeria today, risk management as an integral part of project management is yet to attain the level of unequivocality it deserves in the process of assuring quality, coupled with time and cost effectiveness, the construction industry is supposed to provide for the effort being put into construction projects. Barrie and Paulson (1992) opined that risk management in the construction industry includes an organized effort to indentify and quantitatively evaluate explosives along with an advance plan designed to eliminate or mitigate the consequences of the risks. Construction projects have a bad reputation of failing to meet the deadlines and cost targets. That’s why identifying risk sources is extremely important, since it is not necessarily possible to identify single risks. Odeh and Battaineh studied the most typical reason for construction delays: owner interference, inadequate contractor experience, financing and payments, labor productivity, slow decision making, improper planning and sub-contractors. Authors emphasized the meaning of experience and capability of project participants to have the most effect on these causes of delays. These kinds of risks can be seen as network-related. Thus in order to have a successful project, it should be guaranteed by some means that all participants are experienced and trained to do the project: it matters what kind of network is conducting the work. To improve the present situation, authors suggest different kinds of improvements to the contracts, incentives for good quality and awarding capabilities more than just the price.
Safety program is a very crucial element applied in safety risk mitigation. In addition to greatly reducing the chances of having an accident or incident in the first place, a good safety program will lead directly to higher employee morale, performance and profitability. If maintained over a period of time, it can lead to more positive benefits, such as lower employees’ compensation and liability insurance rates for your company, greater participation and support from our supplier community as industry professionalism increases, and the attraction of a larger pool of qualified people into our industry. The vast majority of construction safety literature focuses on identifying and describing the various methods of improving site safety (i.e. safety program elements). Strategies such as job hazard analyses, record keeping and substance abuse programs are well-defined. Literature will also provide excellent justification and guidance for implementation of some safety program elements. Some publications, such as Hinze (1997) and Hill (2004), go as far as to identify the essential elements of effective safety programs. Another publication, Rajendran (2006), evaluates the relative ability of safety program elements to improve site safety. One study combines construction safety risk identification with mitigation techniques. Jannadi and Almishari (2003) introduce The Risk Assessor, a knowledge-management program, which quantifies risk using the common risk formula below which is the modification of equation (1.1) above:
Activity Risk Score = (Severity) x (Exposure) x (Probability) ………………………………. 1.2
Each of the publications discussed above operates under the same fundamental assumption: a firm should implement as many safety program elements as their budget permits.
This research provides the industry with some confirmation that safety programs are, indeed, effective. The degree of these risks and uncertainties depends on the size, historical data, predictions about the future, complexities, and the decision-makers subjective judgment, novelty and techno-sophistication of the project. The researcher will make his or her decision to invest in a project on the basis of achieving the greatest value for his/ her money and it is during the initial project appraisal stage that the client will try to establish project parameters that will ensure that (s) he realizes the most reliable information possible as to the likely value and for profit which they can expect to gain if they proceed with the project they are evaluating and if potential risks from the project will balance the risks.
In order to understand the implications of the proposed model, one must fully understand the current safety management practices that dominate the industry.
1.2 STATEMENT OF PROBLEMS
Whenever a construction project is embarked upon, there are some degrees of risks elements inherent in it. During the pre-contract stage of a projects life, some risks and their probable outcomes, consequences and likelihood are not properly identified and quantified in order to effectively manage them. In this regard, there is need for urgent investigation, control and accommodation of various forces that tend to prevent construction development from actualizing its primary goals and objectives.
In a nut-shell, the Nigeria construction industry is still lacking in the area of proper risk identification and management, the alleviation of which this research work is being focused especially at cost planning, risk mitigation strategy and control stage of road projects with a special reference to how the safety officer, and risk manager function in these aspect of construction work.
1.3 OBJECTIVES OF THE STUDY
The objectives of the research are as follows:
(a) Examine risk management as it applies to initial project appraisal with a view to identifying various risk elements associated with road construction project.
(b) Identify the various risk analysis and management techniques available to risk management.
(c) Assess the relative impact/probability of each risk.
(d) Determine the necessary degree of safety management required to mitigate risk for a particular construction process.
(e) Formally select a subset of the available 17 safety program elements based on the risks posed by a process and the ability of individual safety program elements to mitigate a portion of such risk.
(e) Minimize the impact of unplanned incidents on the project by identifying and addressing potential risks before significant negative consequences occur.
1.4 SIGNIFICANCE OF STUDY
This study will hopefully be relevant in the following respects:
(1) Minimization of uncertainty on projects or during changes in construction industry.
(2) Ensuring that strategic decisions are well-founded in the industry.
(3) Provision of a hard focus on critical problems such as risks associated with design, construction and maintenance/operation.
(4) Balancing of high- risk projects with lower-risk projects for better work planning.
(5) Minimize adverse impacts to project scope, cost, and schedule (and quality, as a result), and minimize management by crisis.
(6) Maximize opportunities to improve the project’s objectives with lower cost, shorter schedules, enhanced scope and higher quality.
1.5 SCOPE AND LIMITATION OF THE STUDY
Construction work is very wide in scope ranging from heavy engineering, electrical and mechanical engineering as well as road works. Furthermore, the road projects are conveniently being executed by the three categories of clients available in Nigeria (private, cooperate and public clients). Over 50% of construction works being executed in Nigeria are in the area of road works. Based on this fact therefore, this research will be limited to road projects.
The scope of the study is restricted to informal and variable project safety risk management means in road construction industries; informal referring to all risk management means other than legally binding contracts. Earlier studies concerning risk in construction projects had shown that risk management in the construction industry relies heavily on contracts, and contract clauses are estimated to raise project costs by 8-20% (Hartman, 2000). This gave clear financial justification for the study of informal as a possible way to decreasing contractual extra costs and increase flexibility. The scope will also include construction practitioners and experts like Engineers, Land Surveyors, Quantity Surveyors, Project managers, Safety officers and Risk Managers across the four selected sites in Enugu State.
In the focus of the study, are those risks that relate to the successful project execution, known as operational risks. Therefore also interviews are limited to those partners that took part in the project execution phases. The study focuses on appreciation of risk as it affected construction industry.
Despite the potential implications of the proposed model, there are many confounding factors that must be considered. For example, interaction may occur among safety program elements. That is, some program elements may be more or less effective when used in combination with other elements.
Likewise, the ability of certain safety elements to mitigate a portion of the safety risk may be heavily dependent on what other elements have already been implemented. Other confounding factors may include: weather, geographical location, the ability of the construction crew to work safely, effectiveness of the safety/ risk manager etc.
1.6 DEFINITION OF TERMS
Hazard: Anything (including work practices or procedures) that has the potential to harm the health or safety of a person.
Risk: This is defined as the likelihood that death, injury or illness might result because of a hazard.
It is the possible occurrence of an uncertain event or outcomes, which will cause significant variations or consequences such as extra cost or delayed completion. It is also said to be the possibility of suffering loss (or harm) and the impact that loss in terms of the severity where severity= likelihood of occurrence x magnitude of the impact.
Risk (in this study’s context): Risk is defined as a potential event that results in an outcome that is different from planned. For construction safety, risks are defined as potential accidents.
Actor: A network member, a party or an individual who has one or more ties to other network members.
Network (in this study): Those actors that have a role in the project execution phase. Here namely a main contractor, a client and subcontractors.
Risk source: Things that can cause variation from what is planned or expected (Caponnetto and Rakhlin, 2006)
Management: Management is the effective use of human resources to achieve human needs.
Project: It is a temporal endeavor undertaken to create a unique product or services.
Project risk management: This includes maximizing the result of positive events and minimizing the consequences of adverse events.
Project management network: A set of relations, where no single actor is a legitimate authority for the network as a whole, the network is open in the sense that there are no definite criteria by which boundary of network may be identified and controlled and where the network is temporarily limited, dynamically changing and (partially) reconstructed from one project to the next (Hellgren, and Stjernberg, 1995).
Informal means: Those means to manage project risks that are no legally binding, i.e. all other means than contracts.
Managerial approaches: These are those techniques that are employed in the process of getting things done effectively and efficiently.
Opportunity: The possibility of realizing a favorable outcome and the impact, this outcome has on the involved party. Opportunity is positive risk and can be identified and managed in a similar way.
Uncertainty: The gap between the information required to estimate an outcome and the information already possessed by the decision maker.” (II 1989). It also defined as the doubt in our mind concerning our ability to predict the future.
Liquidity Problems: Cash problems, lack of money or trapped money.
Risk Analysis: The process of identifying risk factors and the quantification of those factors (estimating likelihood and magnitude of imparts).
Risk Mitigation: This is process of developing a plan to respond or deal with risk on a project.
Risk Management: The process of discovery of existing risks, by observation and imagination, the estimation of the probability and seriousness of the potential impacts and the consideration and evaluation of the decisions made.
Work Elements: The project work elements are all the components of the work breakdown structure (WBS).
Risk Probability: Is the likelihood that a risk will occur.
Program: A plan of action for achieving something. It is also a system of procedures or activities that has a specific purpose.
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