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RISKS & DETERRENTS IN CONSTRUCTION PROJECTS

Technology & Engineering | 12 Chapters

Author: Pawan Dua

2.19 K Views

Risks add threats and thrills in projects. Risks have the ability to fail or cause losses, or even doom to projects.  Projects always have higher risks than reflected in the risk registers. Under the current VUCA environment, construction projects are exposed to the highest risks, uncertainties and deterrents.   The best-planned projects also encounter risks and even experts cannot zero down the risks completely. Thus, it needs a culture, syste....

Introduction

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Construction projects are subject to higher risks, uncertainties and deterrents as compared to other industries or businesses. The prime reason for high risks could be the diverse scopes, activities, processes, resources, environments, and organisations’ complexities involved in projects. As most of the large and complex projects are executed on a turnkey basis, the contractors take the major chunk of risks and responsibilities. The risks start from the selection of the right project, right customer, right partner, conceptualisation of the scopes or assuming responsibilities.

Changes are inevitable in projects and so are the risks. These are integral parts of the projects and cannot be viewed independently and dealt with without a complete understanding of the project’s scopes and deliverables.

Projects can have risks related to scopes, technical, technology, schedules, financials, quality, supply chain, legal and compliances etc. In projects, the impact of risks could be minor to devastating. There is no standard rule or guideline which can mitigate all the risks in projects, despite replicating the same design, resources, tools, methods and technologies. It is also a myth that by deploying the best experts and resources, an organisation can zero down the risks in the project. However, with professional and matured risk management processes, these can be mitigated in the best possible way and curb losses, damages, and disputes.

Projects are unique, as they differ in one or more parameters related to the scope, sites, schedule, resources, dependencies, conditions, or environment under which these are executed. Such uniqueness makes the projects risky and adds risks to the projects. Project risks can adversely affect the goals or objectives. Consequently, such outcomes can not only demotivate stakeholders but also attract financial or goodwill losses.

Project risks occur when deliverables are affected with unexpected events or conditions, thereby derailing the forecasted timeline, budget, scope, quality, or the objective itself.

Projects can fail, cause losses or doom due to dozens of reasons. Though project teams can recite a long list of reasons, justifications or causes of such risks which have the ability to doom, fail or cause losses to the projects. Even the best-planned projects can have unexpected risks related to:

  • Land selection, acquisition, right-of-way, encumbrances, disputes, or litigations.
  • Grids & transmission networks readiness, allocations, restrictions, or unavailability.
  • Approvals & permissions long and complex processes, rules, guidelines, documentation involving multiple stakeholders private and government agencies.
  • Material costs currency and commodity fluctuations, besides availability, delivery and cost.
  • Logistics – availability, mode of vehicles, routes, clearances, weather, strike, documentation, customs and exemptions.
  • Funds & Payments – Delays or disputes in receipt of timely payments.
  • Resources – unavailability of adequate manpower or construction equipment.
  • Force majeure – Including extreme weathers can impact performances and productivity.
  • Change in law – Government rules and laws can change anytime.
  • And many other known or unknown risks.

Thus, risk management process is required to identify and manage the potential risks and problems that can endanger the project. All such risks require incessant assessment, analysis and appropriate actions or mitigations to avoid damage once occurred.

Overall risks in any project are always higher than the risks covered in the risk register or as perceived by its stakeholders. Unless organisations are matured and rigorously follow professional risk management processes, risks can continue to hit the projects and businesses severely. Risk management in construction projects is essential to minimise the losses and enhance the chances of improving profitability. Thus, the risk register does not reflect the true and complete picture of project risks. Additionally emergent risks and uncertainties, which are neither foreseeable nor predictable can also affect the project materially.

For all practical reasons, one cannot identify all the risks and document them in the risk register. As the project progresses, risks keep emerging and it makes the risk management an iterative process which is followed over the project lifecycle. In order to handle risks effectively, the project team should know the level of risk exposure and risk appetite of the organisation, so as to manage the same in the most effective and efficient manner.

The purpose of this book is to guide and support professionals, aspirants and students who are practising or willing to make their career in construction management, risk management or project management. Throughout the book, emphasis is given on the risks and deterrents commonly experienced by the construction fraternity and strategies applied to overcome the same and protect their project or business interests.

Predominantly, this book covers the interest and perspective of various types of contractors, suppliers, consultants and service providers. This may include MEP, EPC contractors, sub-contractors, equipment and material suppliers, consultants, consortium partners, and other associated services providers.

Contractors or suppliers may use different types of contracting structures or models like composite, divisible, lump-sum turnkey (LSTK), BoQ-based, framework agreements, etc. However, managing risks are critical and crucial for the success of the projects as well as the organisation.

The terms ‘contractor,’ ‘supplier’ and ‘service providers’ are used interchangeably for the sake of convenience. However, all represent the same party, meaning and carrying huge vistas of risks, responsibilities, and liabilities.

At times, a contractor may participate in tenders or opportunities along with other partners in a consortium arrangement, which bring radically a different set of risks, challenges, issues and liabilities. The risks associated with consortium partners and mechanism have also been touched upon in this book so that the interests of all consortium parties are protected.

A genuine attempt is made to translate actual experiences and challenges into this book, rather than theories, which may be less practised. The author has tried to migrate thoughts and experiences from “Mastak” to “Pustak” (Brain to Book), so that project practitioners can easily resonate with their own project environments, situations, or experiences.

It is important to understand that the risk management is not the sole responsibility of sales managers, tender managers, project managers, legal counsels, contract managers or risks managers, but is a collective responsibility of wider teams, groups, or organisations. Involvement of complete project team is important to develop the sense of ownership, responsibility and accountability in identification of the risks and working out the suitable risk response actions collectively.

Each team member has a specific role and purpose in the project and organisation. No project can succeed until all the relevant stakeholders and team members have fair inclination to support and perform their respective duties and obligations diligently commensurate to their roles, function or domain in the projects or organisation.

Many project personnel are unable to differentiate risks with requirements, issues, or problems. Rather, they interchangeably use or populate their risks register with issues, requirements, or problems. Whereas the actual risks are about future uncertainties. Thus, the risk register should reflect future events which matter most to the project.

This book is expected to serve as a bible or reference guide for many new and practising project professional or aspirants. This shall help them to develop the culture of risk management in their organisation and carry out 360-degrees risk management of each project before deciding whether to pursue, abandon or drop the project.

Lastly, risks may occur at any stage – starting from inception, selection, bidding, planning, designing, execution, construction, development, closure, or operation phases of the project. So watchful risk management helps to decide what can be absorbed and what can be avoided. Promoting a risk-awareness culture can help to set up a strong defence layer against any risk and respond if any risk surfaces and threatens the project or organisation.

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Chapter 1

Understanding Projects & Risks

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“Risk comes from not knowing what you’re doing”

– Warren Buffett

What is a Project? As per PMBOK Guide version 6.0, “A Project is a temporary endeavour undertaken to create a unique product, service or result. Projects are undertaken to fulfil objectives by producing deliverables… Deliverables may be tangible or intangible… Projects are undertaken at all organisational levels. A project can involve a single individual or a group. A project can involve a single organisation unit or multiple organisational units from multiple organisations.”

However, the exact definition of a project may vary for different organisations, depending upon their business model, requirements, manageability, or structure, etc. Some can define the project as simple as a supply of material or equipment (single item or a few quantities) to as complex as full-fledged construction of infrastructure like buildings, industrial plants, highways, or such large facilities or contraptions.

Different organisations execute projects, which may include comprehensive or limited scopes like:

  • Design, engineering, manufacturing, supply, (civil, mechanical & electrical works) construction, erection, testing, commissioning and hand-over of complete facility
  • Supplies of workforces or consultancy services
  • Operation and maintenance of plants, facilities, or infrastructure
  • Develop or revamp systems, structures, processes, or organisation
  • Design, develop, integrate, customise, or enhance system software or application
  • Develop and diversify in a new niche, segment, markets, regions, countries, etc.

Generally, construction projects are executed with higher risks and responsibilities. Most large contracts are preferred and performed on a turnkey or composite basis thereby transferring higher risks, rewards and liabilities to the contractors. Such projects involve diverse scopes, risk and responsibilities for the complete design, engineering, procurement, manufacturing, supplies, logistics, construction, erection, testing, commissioning, operations, etc. These projects may involve the supply of various material and equipment, deployment of large workforces, specialised consultancies, softwares, integrations with existing systems or plants or networks.

Large projects may have a crucial dependency upon gig economy, political systems, sizeable land banks, readiness of grids, transmission systems, vast supply chain, fund availability and many other compliances and permissions. These activities not only involve high risks but may also heavily impact project rigorous plans and objectives. Thus, the responsibility and accountability of such activities must be explicitly defined and agreed between parties so as to complete the projects on time and meet the objectives. If there is lack of clarity or shared accountability, there is a high probability of conflicts or avoidance of responsibility.

Construction projects mainly carried out either on ‘green-field’ or ‘brown-field’ basis.

  • Green-field projects are the construction of new buildings, plants, or other facilities and are carried out on barren, waste or agricultural land, post-conversion of land utility. Work on such areas is done for the first time with initial land development. Such projects generally do not require demolition or remodelling or renovation of the existing infrastructure or plants. However, existing hurdles may need to be removed or diverted like telecom, water, gas or electric lines, pathways, tube-wells, tombs, crops, etc.
  • Brown-field projects are related to upgradation, renovation, revamping, expansion or augmentation of any existing infrastructure, facilities, or plants, etc. Such projects may also include demolition, remodelling or redevelopment of the existing setup, infrastructure, plants, machinery and other systems.

Project life cycle (PLC) definition may vary from organisation to organisation. Some organisations can define the start of a project from the identification of a new lead or opportunity, or launch of tender, or upon winning an award, or split a large project into multiple sub-projects suiting to the business units, functions, structures and processes. Many organisations assume project life cycle by getting along with potential customers in defining scopes or specifications thereby influencing or enabling them to make prescription or tender formation, which are more conductive for them. By doing so, these organizations may incorporate the specifications or conditions, which are more favourable to them and increase their probability of winning.

Projects can be of multiple combinations like (a) minimum resources of a function, (b) multiple resources from multiple functions, (c) involving multiple organisations, locations, cross-countries, etc.

Project Lifecycle in an organisation may look like this:

Projects can be as simple as supplying a tailor-made product or as complex as setting up a new industry or plant or even bigger customized contraption.

In case of multi-company projects, cross-functional experts from all organisations can collectively be involved and contribute to identify project deterrents and risks and find suitable mitigation plans to achieve win-win situations.

What is Risk? There are plenty of questions with numerous definitions, understandings, theories, and opinions about risks. In a true sense, a risk is an uncertain futurist event or condition, or set of events or conditions which can impact, negatively or positively, the project baselines or objectives.

It is commonly perceived that the project baseline is limited to project timeline schedule. Whereas project baseline is not limited to project schedule only, rather all the basis, conditions and assumptions agreed at contract-formation become the baseline. This include scopes, specifications, deliverables, schedules, performance parameters, obligations of parties, warranties and representations, assumptions, and other agreed provisions. This also covers the prevailing laws and regulations, standards, taxes and relaxations as applicable and agreed at the time of entering into the contracts. Any changes in baseline can impact one or other conditions of the project, regardless of who owns the risk and reward, as a consequence of such change.

Ironically, some professionals assume that risks are only negative and should be avoided or neglected. Irrationally avoiding, hiding, or escaping risks may breed new secondary risks, sometimes. For example, it is safe to stay at home to avoid the risks of accidents, but by doing so, we may lose many opportunities for earning, enjoying, or exploring the world. Rather than neglecting or avoiding, the best way is to manage the risks.

Project risks signify the likelihood or potential of a future event. The world is full of uncertainties. Risk is a sub-set of uncertainty. However, it does not mean that all uncertainties of the world are risks to your project. Hence, knowing fully well the content and context of the project is far more important than knowing the uncertainties or risks in isolation. Risks are those futuristic uncertainties or occurrences, which matter the most to the project.

Fundamentally, risks have two components – (1) Uncertainty – may or may not occur, and (2) Impact – positive or negative. So, any event which if occur may impact project scope, time, cost, or scope (objective/deliverable) is a risk.

Uncertainties may impact the projects differently, depending upon the stage, complexity and mitigation plan. Some of the scenarios include:

Scenario – 1: One common risk – Affecting multiple projects

Unknown risk of force majeure event like recent outbreak of pandemic Covid-19 coronavirus had impacted most of the ongoing construction projects for most organisations in infrastructure sector.

Scenario – 2: Risk of currency fluctuations – No Impact

In a project that involves incomes and/or costs in local currency within the country, the fluctuations of foreign exchange rates may not impact project directly, as all the materials and services are manufactured or available within the same country.

Similarly, in a project that involves incomes and/or costs in currencies (other than local currency), if the currency fluctuation occurs at the fag end of the project when all purchases are completed, it may also not impact the project even if the project involves the multi-currency transactions.

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Technology & Engineering | 12 Chapters

Author: Pawan Dua

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RISKS & DETERRENTS IN CONSTRUCTION PROJECTS

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