6 minute read
A wide-ranging look at risk management
A wide-ranging look at
risk management
The engineering and construction industry has historically taken an informal and improvisational approach to risk management, often leading to risks being identified too late in the project lifecycle. Results from the June 2020 quarter survey depicted that building projects throughout New Zealand were expected to see delays in completion times lasting between 20 and 60 working days, with the impact of COVID-19 regulations yet to be accounted for.
Proper risk management will help project teams identify potential risks before they are encountered and give the teams time to develop strategies to reduce the issue’s impact. Some firms mistakenly only manage risks at the project level, which leads to an incomplete picture of exposure and performance. Results from a NZ questionnaire survey of consultants and contractors in the construction industry showed 21 risk factors which were segregated into six broad categories in diminishing significance levels: site conditions, main contractor, pricing, subcontractor, external and client related risk.
It’s important to expand that focus, elevating that visibility to the program level. This will allow teams across projects to better synchronise resources and adjust plans to realise successful outcomes.
Organisations managing construction projects (or portfolios) are increasingly looking for ways to incorporate more comprehensive risk management practices, but many in the industry are not sure where to begin. Here are five proven steps to help develop a thorough risk management strategy in construction scheduling:
1) Recognise the risks
The management team, at the beginning of a program or project, should try to identify potential risks. Could poor weather or uncertain site conditions potentially delay construction? Is there a risk that material costs could significantly rise unexpectedly?
It is impossible to identify and manage every possible risk, but the team should agree on any events that are most likely to occur and have the greatest impact. These are the factors that they will monitor and manage.
2) Evaluate your exposure
After identifying potential risks, the team should determine the likelihood of each risk occurring, as well as impacts to costs and schedules.
Risks should then be ranked on the probability that they are to occur, and the impact they may have.
Teams should prioritise how they will manage specific
risks with the help of Monte Carlo simulations and scenario planning tools. This will allow users to create and run various what-if scenarios by changing key variables.
While Monte Carlo analysis can be conducted via a spreadsheet, this approach is not suited to manage large, complex projects with thousands of data points that can change frequently, including calendars, resources, and the relationships between them.
It is also not suited to conducting risk analysis plays an important role here to assess what-if scenarios and determine costs and benefits of each mitigation strategy. While some risks ultimately can’t be avoided, such as building during unforeseen inclement weather conditions, this step can reduce the impact on the project by building in appropriate schedule, labor, and supply chain contingencies.
4) Disseminate for clarity
The project team should communicate this information
Frank Malangone Senior director for Product and Industry Strategy, Oracle Construction and Engineering
across far-reaching programs. For these types of complex scenarios, it is best to use a true risk management application. In addition, new AI tools leverage machine learning to analyse project data – both past and present – to continually assess schedule accuracy and provide predictive intelligence into potential risks on projects. Such tools can empower teams across the organisation to sharpen decision-making and take action on emerging risks before they become showstoppers.
3) Establish a response strategy
Teams should have a detailed plan of action on how they plan to mitigate high-impact risks. Scenario planning technology to the project owner after they have completed their risk assessment and defined mitigation strategies. This demonstrates an effort to take a proactive approach to reducing risk and allows contractors an opportunity to discuss the risks, mitigation strategies, and potential impact on the schedule and cost of the project with the project owner. 5) Track, adjust, and repeat
As risks continue to develop, program managers must build in regular assessments to their mitigation strategies as conditions change. Again, machine learning provides key support here by helping to identify potential risks and inefficiencies early, helping organisations make more informed decisions about the best path forward.
In conclusion
Good risk management strategies require the integration and analysis of diverse sets of information, including budget, cost, and schedule data. With this in mind, organizations managing construction projects will be well on their way to shoring up their risk management practices.
Variations
The word “variation” will often trigger deep concern and red flags for those actively engaged in the construction sector. Stakeholders do not like the uncertainty it brings.
Lawyers and consultants are often walking on eggshells in these circumstances. Contractors fear variations may not be approved or paid, and principal owners fear that the price of the contract will increase.
Lenders want assurance that the project will be finished under budget. The word forever has a negative connotation in the industry with parties wanting to avoid this wherever possible. However, there are some contractors who will intentionally pitch a low price to win the contract and immediately issue copious variation orders. and is not particularly helpful to determine a variation.
The commonly used NZS 3910:2013 terms states variations are “a Variation to the Contract Works pursuant to 9.1 and any other matter which is stated to be a Variation or to be treated as a Variation by the Contract” which again makes the term quite circular. Variations in the construction industry are generally regarded as an amendment to the agreed scope of works. This is unfortunately a common occurrence throughout a construction project and therefore a contentious area.
What is a Variation?
The term “variation” is not expressly defined in the Building Act 2004 (the BA) or the Construction Contracts Act 2002 (the CCA).
However, the BA defines “minor variations” under section 7 as “a minor modification, addition, or variation to a building consent that is permitted by regulations made under section 402(1) (kd)” which then takes you to section 45A “minor variations to building consents”. What can be claimed as a Variation?
Clause 9.1 of the NZS 3910:2013 permits the following Variations to the scope of the Contract: a. Increase or decrease the quantity of any work b. Omit any work c. Change the character or quality of any Material or work d. Require additional work to be done e. Change the level, line, position, or dimensions of any part of the Contract Works.
However, many construction contracts are laced with pages of special conditions to try
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to define, limit, control and manage variations throughout the project.
Each contract will dictate what can and cannot be treated as a variation.
How can you avoid Variations?
Variations are ultimately another form of risk allocation. This highlights the importance of clear and well drafted construction documentation. All parties must clearly understand the risk allocations before a project commences to avoid unnecessary disputes about who should bear the extra costs of a variation.
This article is intended for general guidance only and should not be relied upon in individual cases. Professional advice should be always be sought before any decision or action is taken.
