Tuesday, 11 May 2010

Risk Management In The Pakistan Construction Industry: A Contractors Perspective

The Construction Industry in Pakistan has gone through a rough patch with its compound annual growth rate (CAGR) in the three years up to FY2002 being well below the two percent as compared to a CAGR of nearly four percent for the overall GDP of the country during this period. This shows that instead of being a source of economic stimulus, the construction industry has actually lagged behind the rest of the economy in terms of growth. This negative perception regarding the macroeconomic and political instability and the law and order situation has deterred serious investors (JCR, 2003). The problems facing the construction industry of Pakistan has persisted despite efforts made. It is important that the construction industry of Pakistan is more fully understood in order for more appropriate solutions, relevant to its contexts, to be found. This industry requires separate, special treatment. Now there is a need to search the difficulties and problems being faced by the Pakistan construction industry, along with recommended solutions. Researchers, Developers, Builders and Contractors working together can identify the solutions to the problems and can boost the Pakistan Construction Industry. Construction is a high-risk business which haunts every participant in the business, the project owner, construction companies, consultants, bankers, financial institutions, vendors & suppliers and even the service providers, each has his own fears of facing risks in the conduct of business. Risk management is important part of the decision making process in the construction. Risk is also the object of attention because of time overrun associated with the construction projects. Although the risk analysis and management is important to the activities of the construction industry, little is known about the industry response and the techniques employed for the risk management in the Pakistan construction industry. There is a need to investigate the construction industry's perception of risk associated with its activities and the extent to which the industry uses risk analysis and management techniques. Mr. Asif Hameed Malik made a study which main objective to investigate the risk management practices of the construction contractors in public sector projects of Pakistan and to recommend the appropriate risk management techniques, which better fit the Pakistan context and environment. To achieve his objective, the sub-objectives can be identified as follows: a) To evaluate the current attitude of the contractors regarding the importance of risk and risk allocation. b) To uncover the underlying relationships between the identified risks using the factor analysis. c) To investigate the difficulties and the benefits relevant to the risk management and the current usage of risk management techniques in the construction organizations. d) To propose recommendations to the contractors to cope with the major risks in the industry and manage risk effectively in long terms.

Conclusions The following are the conclusions based on the work carried out and the results of the analyses. 1.Risk Importance and allocation a. The ten-top major risks identified are: (1) Delays in resolving contractual issues; (2) Delayed payment on contracts; (3) Political uncertainty; (4) Financial failure; (5) Scope of work definition; (6) War threats; (7) Suppliers/subcontractors poor performance; (8) Change in work; (9) Defective design; (10) Labor and equipment productivity. b. Out of thirty-one listed construction risks, thirteen construction risks are allocated to the contractor; seven to the owner and eleven are shared between the contractor and owner. Although, it is generally recognized that the risk should be transferred to the party that is in the best position to deal with it, the survey indicates that Pakistani contractors are often responsible for most of the risk. Contractors consider themselves responsible to take care of the risks associated with physical and environmental problems. The risks of this type include differing site conditions and adverse weather conditions. c. Experienced engineers have rated the importance of risk events lower than less experienced engineers. The main reasons are experience level and management level of the experienced engineers. The experience gained in construction life may have enabled the engineers to develop additional ability and competency in managing, anticipating and solving possible problems. This result is contradictory to the findings of the Dung (2004) and Thuyet (2003), in which they concluded that experience level has a no big influence on engineers attitude. However this result is supportive to some extent to the findings of Santoso (1999). d. The result shows that the respondents working in large companies have rated the risks less, which are of technical and managerial nature. This may be due to the reason that the large contractors have formal management practices in their organizations and also they have enough resources to mitigate the encountered risks more efficiently than the small contractors. 2. Grouping of identified risks Factor analysis is applied to find any interrelationship existing among the risks in terms of their importance.The components extracted are labeled as managerial and technical risks; project scope and design risks; political, economic and regulatory risks; contractual delay risks and; site and weather risks. 3. Risk management practices The results of risk management practices are similar to the findings of the other surveys conducted in developing countries by Dung (2004) and Thuyet (2003). a. Importance of systematic risk management is well recognized in the Pakistan construction industry while the practice is far behind its importance.

b. The importance of training cannot be ignored in any organization. Conversely, the construction organizations in Pakistan provide poor job training in risk management to their staff. c. There is a lack of formal risk identification teams in the organizations. Also the roles and responsibilities are not stated. Even sometimes only one person is responsible for the risk management process. d. The main difficulties in the risk management process are lack of qualified experts, lack of budget and top management commitment. e. Qualitative risk analysis techniques are more popular due to their simplicity and effectiveness. In qualitative analysis, the most used tools are checklist, brainstorming and interviewing. Quantitative risk analysis techniques have been rarely used due to limited understanding and experience. f. The effectiveness of the risk responses in the descending order are: risk transfer, risk reduction, risk retention and risk avoidance. g. Preventive actions are used to avoid and reduce risks at the early stage of project construction. Produce a proper schedule by getting updated project information and produce a proper program using subjective judgment are the two most effective risk preventive actions. h. Mitigative actions are remedial steps aimed at minimizing the effects of risks. The most effective risk mitigative methods are to coordinate closely with subcontractor and to increase manpower and/or equipment. i. Contract management is quite well performed, helping much risk allocation through contracts. Insurance serve as a second risk transfer for the parties involved. However, in reality they face lots of difficulties on the way of finding the insurance. High premium in insurance buying, long claim coverage procedure and lack of qualified experts are the most perceptible problems in purchasing insurance. Recommendations Based on the research results, the recommendations are made to the construction contractors to cope with the major risks in the industry and to improve their risk management practices. 1. Strategies to Mitigate the Major Risks For projects to be successful, it is extremely important that the major risks affecting the projects should be thoroughly examined. The causes and characteristics must be carefully analyzed in order to propose the most appropriate and practical strategies to mitigate them. For the top-ten major risks, the proposed strategies to mitigate them are shown in the table below.

2. Strategies to Improve the Risk Management Practices a. Integrate risk management in organizational culture in which everybody is a risk manager. This is more important than developing and issuing extensive policies and procedures. Management of risk is embedded in the management philosophy. b. Implementing risk management requires resources. Investments will be required in: training, developing processes and techniques, management systems, specialist groups. Senior management must be committed to support the initiative with the required resources. c. Open communication is necessary for risk management to succeed. Without open communication risk management cannot be "everybody's business". Managers require direct communication channels up, down and across their business units to help identify risks and take appropriate actions. Information must be shared. d. Informal and formal teams are a mechanism that organizations should use to manage risks. Teaming brings together various risk attitudes and brings fresh thinking to issues and solutions. It also focuses diverse disciplines on common objectives. e. A common business risk language enables managers to talk with individuals in terms of everybody understanding. This is important also in cases where everybody is expected to manage risks. f. Set up a responsibility center for risk management. A Chief Risk Officer (CRO) who defines consistent approaches to managing risk should head it. The CRO is the organizational risk champion and is responsible for providing leadership and establishing and maintaining risk awareness across the organization. g. Communicate the risk performance to top management and stakeholders/ shareholders. The reports should outline the major risks and how they are managed. h. There is a need for risk management training, as part of a corporate training curriculum. Topic

areas include: objectives for managing risk: risk-awareness, risk assessments, safety and legislative requirements. i. The authorities should implement the performance assessment scoring system (PASS) as a mechanism for evaluating the effectiveness of a contractor's ability and to change the attitude of the contractors to simply win the projects rather than to deliver the projects to specified standards. j. The internal audit function plays a key role in implementing risk management throughout an organization. Examples of this practice are: monitoring and reporting on the management of significant risks and reviewing processes for managing risks. His thesis abstract is copied and posted. ABSTRACT The research study, on the basis of a questionnaire survey, describes the perception of construction contractors in Pakistan about the risk associated with its activities and the extent to which the industry uses risk analysis and management techniques. The study has investigated the perception of the contractors regarding risk importance and risk allocation. The purpose was to provide insight into the current attitude of Pakistani contractors towards construction risk allocation and also to examine the importance of different risk categories. Risk management practices in the construction industry of Pakistan have also been presented and discussed. First the organizational culture and support to the risk management is described and it is found that the importance of systematic risk management is well recognized in the Pakistan construction industry while the practice is far behind its importance. Then the extent/scope, responsibilities and problems in the risk identification; risk analysis; risk response; risk monitoring and control processes are discussed. The research results indicated that the application of the formal risk management techniques in the Pakistan construction industry is limited. It is also investigated that there is a lack of formal risk management teams in organizations and roles and responsibilities are not stated. The main difficulties during the risks management processes in the descending order are: the lack of qualified experts; lack of budget; complexity of tools and techniques; lack of top management commitment and support; and lack of historical data. This research also presents two types of risk management methods: preventive, which are effective at the early stages of the project life, and mitigative, which are remedial actions aimed at risk minimization during construction. At the end, risk allocation between the parties involved, through contract and insurance, is discussed.