2 Risk and conflict

In document Construction Conflict & Resolution (Page 88-93)

School of Architecture & Building Engineering, University of Liverpool, England

2 Risk and conflict

2.1

Risks in construction

The risks inherent in any project will arise from a variety of sources and vary both in likelihood of occurrence and in potential impact on the success of the project. For example, it is virtually certain that inflation will increase the cost of a project during its procurement, but, currently, the effects of inflation are relatively low and predictable. On the other hand, loss or extensive damage to works during construction caused by fire, will have a major effect on the project (even though the cost of reinstatement may be covered by insurance, the duration will be increased), but is mercifully rare.

Seven broad categories of risk may be identified—physical, construction, design, political, financial, legal and environmental. A sample of typical risks in each category is given in Table 1. A more complete listing of risks may be found in Perry and Hayes (1985a). It will become apparent from consideration of the categorisation, that it is arbitrary and that there is considerable overlap between some categories. Nonetheless, it provides a framework within which the risks associated with a given project may be considered.

2.2

Contractual complexity

Building construction management is concerned with providing acceptable quality buildings which satisfy client’s requirements, on time and at the right

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price. Those engaged in this endeavour are all concerned with some aspect of the three criteria for judging project success—time, cost and quality.

The legal and organisational relationships on most projects are extremely complex. A typical set of relationships for a ‘traditional’ contract is shown in Figure 1. Despite the growth in use in recent years of alternative methods, the traditional procurement route still predominates in the U.K. building industry [Franks (1990)]. Such complex relationships mean that communication links between some parties are tenuous or non-existent. Furthermore, this complexity does little to foster a cooperative, ‘team’ attitude to the production of buildings.

In fact, some would argue that it causes and sustains the adversarial nature of construction projects. Parties seek to gain advantage (financially or otherwise) at the expense of others, with the supposedly common cause of building production merely providing the medium for such struggles.

One method by which parties seek to gain advantage is by amending ‘standard’

forms of contract to include onerous conditions. Few groups can claim to be innocent in this respect; clients pass inequitable risk onto contractors, contractors enforce ‘pay when paid’ clauses on sub-contractors etc. A consequence of onerous contract conditions is that some risks tend to be passed, without consideration, further and further down the line, often resting with the smallest parties involved in the project. From an ethical standpoint this may be unfair, less altruistically, it may be unwise. The smaller parties to a project (sub-contractors, material suppliers or even individuals) may well be the least able to appreciate the magnitude of the risks they are accepting or least able to control Table 1. Typical risks affecting construction projects

them, certainly they will be the least able to withstand their effects. Yet the financial failure of a small sub-contractor, due to inequitable risk loading, can cause considerable difficulties and loss to parties higher up the contractual chain.

Contractual complexity can make the application of Risk Management more difficult. Decisions as to the equitable allocation of risks and which parties can Fig.1. A typical pattern of contractual relationships

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most effectively control the likelihood and impact of risk become much more awkward when the client has no formal relationships with many of the parties.

Accordingly, Project Management must place much emphasis on the choice of an appropriate contract and procurement strategy as well as the application of Risk Management methodology.

2.3

The causes of conflict

Risk and uncertainty can result in conflict between the parties to a project when the following conditions

arise:-a) one of the potential risk events occurs, and

b) one or more of the parties suffers some loss as a result of it, and either c) the damaged party had not identified the risk as relevant to the project, or d) the risk was identified but insufficient steps were taken to mitigate its

effects, or

e) the allocation of risks between the various parties to the contract was not clearly established in the first place.

In these circumstances the damaged party will seek to redress their loss, and the result will often be conflict and dispute. Claims and disputes can damage all parties to the construction process, in the words of the report ‘Building Britain 2001’ [CSSC(1988)]: ‘…claims have attacked British industry like a cancer.’

The link between risks and contractual disputes is also supported by other workers findings [e.g Perry (1986)].

Clearly, poorly managed risks are not the only cause of claims and disputes.

For instance, it is widely accepted that in times of low workload, when tender prices are reduced in order to win work, contractors will be more ‘claims conscious’. Some will devote considerable management effort to identifying and pursuing claims. This is unsatisfactory for it creates uncertainty in both the client’s expenditure and the contractor’s income. However, irrespective of the causes of claims, Risk Management, with its emphasis on the early identification of potential problems and their solutions, can reduce the magnitude and number of claims.

It should not be imagined that problems from claims and disputes will only afflict other people’s projects, or that they only occur on jobs which have little management effort expended on them. Carter et al (1990) refer to claims and disputes suffered by Regional Health Authorities (RHA) on large hospital building projects. RHAs are experienced building procurers, with well established systems for the management of building work—this did not prevent them from falling victim. More recently, the delays and disputes on the channel tunnel project [John (1992)] provide further illustration that even the most prestigious and intensively managed projects suffer from disputes.

3

Project Management and risk

3.1

Project management

Major investigations into the performance of the U.K. construction industry [NEDO (1975), NEDO (1983), NEDO (1988)] have advocated the use an integrated management system for building procurement—Project Management

—as a means of improving time, cost and quality performance. Such improvements also serving to reduce the level of claims and disputes.

The definition of Project Management provided by the Chartered Institute of Building [CIOB (1988)] is considered most apt:

‘The overall planning, control and coordination of a project from inception to completion aimed at meeting a client’s requirements and ensuring completion on time, within cost and to required quality standards.’

It should be noted that the role described in this definition goes far beyond that of contractors’ site and contract managers who are commonly termed ‘project managers’, to embrace the entire building procurement process.

3.2

Risk management in project management

The duties and responsibilities of the client’s Project Manager have been well described by a number of authors [e.g.: CIOB (1988), Rougvie (1987)]. The roles of the Project Manager in planning, co-ordination, communication, contract administration and leadership are clearly identified. Systems for fulfilling these roles have been described by the many authors [e.g.Bennett [1985], O’Neill [1989]). However, little consideration has been given to the responsibilities of the Project Manager for the assessment and control of risk and uncertainty.

General texts on the procurement process and contract administration [e.g.

Aqua Group (1990a) & (1990b) & Franks (1990)] acknowledge, explicitly or implicitly, that the management and apportionment of risk between parties is important, especially when considering contract conditions. However, they devote little space to methods of managing risk or the responsibility for applying them.

This paper argues that the majority of the Project Manager’s duties fall within the definition of Risk Management, and as such, Risk Management is the most important of the Project Manager’s duties. Furthermore, because of its importance, a deeper study of Risk Management will enable Project Managers to perform their duties more effectively and discharge their responsibilities to their clients by minimising conflict in the projects that they administer.

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4

Risk management methodology

4.1

When to apply risk management

Risk Management techniques should be applied as early as possible in the course of a project when the ability to manage and control is greatest. Also, because the type and magnitude of risks and the nature of the project itself may change throughout its life, regular reviews of risk should be carried out.

Perry and Hayes (1986) confirm the above, citing the initial project appraisal stage as an important time for the identification of risks and the development of broad policies for risk response. They proceed to identify two further stages in the life of a project at which Risk Management can play an important role.

Firstly, the time at which proposals are submitted for the client’s approval to proceed. At this stage they cite the development of a contract strategy and the consideration of technical responses to risks as being of importance. Secondly, at the receipt of tenders, though the major decisions on risk control and allocation have already been made, Risk Management principles can still be used to improve the selection process. It is unlikely that all of the contractors tendering will have identified and assessed all of the risks involved. Additionally, the need for changes to the project may affect individual tenders differently. The consequence of these two factors is that the lowest tender may not necessarily result in the lowest final cost to the client. Due allowance when formulating budgets and judging tenders must be made for these effects.

4.2

In document Construction Conflict & Resolution (Page 88-93)