• No results found

2C11. Business economics and entrepreneurship

N/A
N/A
Protected

Academic year: 2021

Share "2C11. Business economics and entrepreneurship"

Copied!
37
0
0

Loading.... (view fulltext now)

Full text

(1)

2C11

Business economics and entrepreneurship

Claudiu Albulescu

Lecture 9: Risk management in construction company (12/05/2014)

European Erasmus Mundus Master Course

Sustainable Constructions

(2)

L10 – B.2 – Mechanical properties of cast iron, mild iron and steel at historical structures

Lectures

L1 Trends and challenges for the construction industry

L2 Business strategies and business development in construction companies L3 Financial management in construction companies

L4 Project management – generalities

L5 Project management – support activities

L6 Project management systems applied in constructions L7 Entrepreneurship issues

L8 Standard contracts in civil engineering

L9 Risk management in construction company

L10 Summary and discussion of the exam questions

Applications

A1 General presentation of the case study (WTP – Hunedoara)

A2 Financial analysis and management in construction company (WTP – Hunedoara) A3 Cash flow analysis (WTP – Hunedoara)

A4 Visit – WTP Hunedoara A5 Project’s presentation

(3)

OBJECTIVES

- The student understands how to analyze and evaluate risks (identify risks for

its activity)

- The student understands and adopts a feasible behavior when he/she is

confronting with risks (risk adversity, risks avoidance etc.).

- The student identifies information sources for own business risk

assessment and prioritization

(4)

L10 – B.2 – Mechanical properties of cast iron, mild iron and steel at historical structures

TOPICS

I. RISK AWARENESS

• What does risk represent?

II. IDENTIFICATION OF RISK ELEMENTS • Risk typology

• Behavior in front of risks

III. REDUCTION OF RISK ADVERSITY THROUGH RISK PRIORITIZATION • Risks related to one’s own business

• Risk prioritization

IV. MANAGEMENT OF THE RISKS • Methods of dealing with risk

• Specific examples for risk mitigation V. RISKS IN CONSTRUCTION INDUSTRY

• Business risks faced by most construction companies • International contracting

• Insurance

(5)

TOPICS

(6)

L10 – B.2 – Mechanical properties of cast iron, mild iron and steel at historical structures

What does risk represent?

- The risk, is associated with people’s incapacity to know the future, with the

vulnerability of the enterprise or with the variability of the result attained under the pressure of the environment.

- The risks characterize the economic activity in general, but they are mainly associated with the start-up of a new business

- Risk is associated to failure

(7)

TOPICS

I. RISK AWARENESS

• What does risk represent?

II. IDENTIFICATION OF RISK ELEMENTS

• Risk typology

• Behavior in front of risks

III. REDUCTION OF RISK ADVERSITY THROUGH RISK PRIORITIZATION • Risks related to one’s own business

• Risk prioritization

IV. MANAGEMENT OF THE RISKS • Methods of dealing with risk

• Specific examples for risk mitigation V. RISKS IN CONSTRUCTION INDUSTRY

• Business risks faced by most construction companies • International contracting

(8)

L10 – B.2 – Mechanical properties of cast iron, mild iron and steel at historical structures

TOPICS

• Risk typology

• Behavior in front of risks

(9)

Risk typology

Subjective risks

-In the literature, there are different ways to classify risks

-The risks affecting the entrepreneur’s activity can be grouped in subjective risks and objective risks

- Subjective risks related to the entrepreneur’s character and are associated to

personal failure

- Subjective risks can be grouped in: • professional risks

(10)

L10 – B.2 – Mechanical properties of cast iron, mild iron and steel at historical structures

Risk typology

Objective risks

- Objective risks can be split in business related risks (microeconomic risks) and risks depending on the business conjuncture or climate

(macroeconomic risks). 1. Business related risks

A. Knowing the activity and its operation mechanisms: an innovation risk,

operational risk, risk associated to the technological intensity of the business, IT risk, etc.

B. Change of market conditions: interest rate risk, currency risk, competition

risk

C. Financial risks: default risk, business financing risk

2. General economic risks

A. Macroeconomic risks at national level: legal risk, pure macroeconomic

risks, political risk.

B. Risks associated to the global economy: the risk of the change of the

business climate, the onset of a financial crisis at international level. Lecture 9: Risk management in construction company

(11)

Risk typology

Risks for entrepreneurs (1/2)

Risks in the

entrepreneurial activity

Subjective risks Objective risks

A. Professional risk B. Emotional risk

Business related risk General economic risks

A. Risks related to the knowledge of the business and to the operation method - risk for the innovation

- operational risk

- risk associated to the technological intensity of the activity

- IT risk

B. Risks related to the change of the market conditions

- interest rate risk - exchange rate risk - competition risk C. Financial risks - default risk (credit) - financing risk.

A. Macroeconomic risks at national level

- judicial risk

- pure macroeconomic risk - political risk

B. Risks related to the global economy

- risk related to the onset of an international financial crisis

- risk related to the degradation of the international business climate.

(12)

L10 – B.2 – Mechanical properties of cast iron, mild iron and steel at historical structures

Risk typology

Risks for entrepreneurs (1/2)

(13)

TOPICS

• Risk typology

(14)

L10 – B.2 – Mechanical properties of cast iron, mild iron and steel at historical structures

Behavior in front of risks

- The willingness to accept risk and the consequences of venture failure depends on numerous factors and conditions, including the risk management culture.

- Not all the managers/entrepreneurs take the same decisions when confronting with risks.

- Risk adversity is influenced by different factors related to

managers/entrepreneurs’ personal features, innovation process or factors characterizing the economic context

Risk adversity behaviour and categories of entrepreneurs

- Opportunity entrepreneurs and necessity entrepreneurs

- Entrepreneurs with short-range risk behaviour and entrepreneurs with

long-range risk behaviour

(15)

TOPICS

I. RISK AWARENESS

• What does risk represent?

II. IDENTIFICATION OF RISK ELEMENTS • Risk typology

• Behavior in front of risks

III. REDUCTION OF RISK ADVERSITY THROUGH RISK PRIORITIZATION

• Risks related to one’s own business • Risk prioritization

IV. MANAGEMENT OF THE RISKS • Methods of dealing with risk

• Specific examples for risk mitigation V. RISKS IN CONSTRUCTION INDUSTRY

• Business risks faced by most construction companies • International contracting

(16)

L10 – B.2 – Mechanical properties of cast iron, mild iron and steel at historical structures

TOPICS

• Risks related to one’s own business

• Risk prioritization

(17)

Risks related to one’s own business

- it is necessary that potential entrepreneurs consider both subjective and

objective risks affecting the entrepreneurial activity

-in case of the subjective risks*, it is necessary to put in balance the advantages

and the inconvenient for the entrepreneur person, related to the business set-up

-in relation with the objective risks, it is necessary to understand the particular

features of a business and to evaluate the economic climate

* Subjective risks impact upon the activity of most of the entrepreneurs, while

objective risks depend on the particular features of a business. For example, when assessing the professional risk of starting a business and failing, potential

entrepreneurs can balance between two or three years in the position of manager of an unsuccessful start-up company and the same two or three years as simple

(18)

L10 – B.2 – Mechanical properties of cast iron, mild iron and steel at historical structures

TOPICS

• Risks related to one’s own business

• Risk prioritization

(19)

Risk prioritization

- There are several possibilities to establish a hierarchy of risks to which an entrepreneur or potential entrepreneur is confronted: short-range risks,

respectively medium and long-range risks; impact and probability of occurrence, etc.

- Depending on their impact and probability of occurrence, risks can be grouped as 1st degree risks, requiring an immediate treatment, 2nd degree risks, requiring treatment in an intermediary phase and 3rd degree risks, involving a subsequent treatment.

(20)

L10 – B.2 – Mechanical properties of cast iron, mild iron and steel at historical structures

TOPICS

I. RISK AWARENESS

• What does risk represent?

II. IDENTIFICATION OF RISK ELEMENTS • Risk typology

• Behavior in front of risks

III. REDUCTION OF RISK ADVERSITY THROUGH RISK PRIORITIZATION • Risks related to one’s own business

• Risk prioritization

IV. MANAGEMENT OF THE RISKS

• Methods of dealing with risk

• Specific examples for risk mitigation V. RISKS IN CONSTRUCTION INDUSTRY

• Business risks faced by most construction companies • International contracting

• Insurance

(21)

TOPICS

• Methods of dealing with risk

(22)

L10 – B.2 – Mechanical properties of cast iron, mild iron and steel at historical structures

Methods of dealing with risk

-Reduction of risks by: avoiding harmful events, forecasting or research to remove the uncertainty , combination of risks,

accumulation of reserves, compensation or offsetting of risks

- Acceptance of risks by: owner-managers, investors and speculators, laborers

-Transfer of risks to others: to laborers, through the wage system; to capitalists, through the interest system

-Contracting-out risks: insurance, hedging, guaranty, underwriting

(23)

TOPICS

• Methods of dealing with risk

(24)

L10 – B.2 – Mechanical properties of cast iron, mild iron and steel at historical structures

Specific examples for risk mitigation

Example 1: IT risk

- The IT risk manifests itself by the incapacity of the IT system to function, as well as by the loss of the information related the portfolio of clients, suppliers, contracts, correspondence, etc.

- Solutions:

• Out-sourcing to a company with experience in IT services

• Regularly save the information by implementing a back-up procedure with external storage support

Example 2: General economic risks management

- It is important to analyze the macroeconomic situation because it can provide useful information:

• on investment opportunities or

• on the decisions to be made by authorities in order to correct imbalances. - In order to manage macroeconomic risks, it is necessary to analyze the

macroeconomic indicators trend at national and international level

(25)

Specific examples for risk mitigation

Example 3: Operational risk

- Defining work procedures applicable within the organization: selection and training in respect of human resources, contracting procedure, documents flow, payments, estimation of the cash flow, procurement procedures, risk management procedures - Each procedure has to provide: the purpose for which it is developed, the field of application, the reference documents, the definition of involved terms and concepts, the responsibilities and the work method.

(26)

L10 – B.2 – Mechanical properties of cast iron, mild iron and steel at historical structures

TOPICS

I. RISK AWARENESS

• What does risk represent?

II. IDENTIFICATION OF RISK ELEMENTS • Risk typology

• Behavior in front of risks

III. REDUCTION OF RISK ADVERSITY THROUGH RISK PRIORITIZATION • Risks related to one’s own business

• Risk prioritization

IV. MANAGEMENT OF THE RISKS • Methods of dealing with risk

• Specific examples for risk mitigation

V. RISKS IN CONSTRUCTION INDUSTRY

• Business risks faced by most construction companies • International contracting

• Insurance

(27)

TOPICS

• Business risks faced by most construction companies

• International contracting • Insurance

(28)

L10 – B.2 – Mechanical properties of cast iron, mild iron and steel at historical structures

Business risks faced by most construction companies

(1/2)

- Construction is a risky business, and risk management is an essential responsibility in managing a construction company. This includes the risks:

• encountered by being a business enterprise

• as well as the risks associated with constructing projects.

- Business risks include liability for the activities of employees and potential

loss of or damage to company property.

- When a construction firm executes a construction contract with a project owner, it

assumes the risks associated with constructing the project, as defined in the

project plans and specifications risk of obtaining the needed materials, labor, and equipment within an agreed price and completing the project by the contractual completion date.

(29)

Business risks faced by most construction companies

(2/2)

- Some of this risk may be transferred contractually to subcontractors, but much of the risk remains with the general contractor. In addition, the construction

company incurs the risk of subcontractor bankruptcy and poor workmanship Common risks

• health and safety of its employees while working on the job or at another location,

• injury or property loss to third parties as a result of company activities, • damage or loss to construction work in place but not yet accepted by the

owner, and

• loss of or damage to its vehicles and construction equipment.

!!! These risks and liabilities are so great that most construction firms must purchase

insurance policies to protect, or partially protect, themselves against financial loss that may result from these risks.

(30)

L10 – B.2 – Mechanical properties of cast iron, mild iron and steel at historical structures

TOPICS

• Business risks faced by most construction companies

• International contracting

• Insurance

(31)

International contracting

(1/2)

- International construction contracting is the type of business activities based on supplying international projects and/or when the contractor is engaged in a

permanent business activity of its subsidiary abroad

- Why Contracting? - the main potential asset of construction business is the contract awarded to the contractor as a result of a bidding process

- Problems of the construction industry: the not predetermined form and scope of the products (projects), overall riskiness of the bid assessment and pricing,

problems of performance in given site, existing high competition in the construction market.

- There exists a real opportunity to reach the better results towards increasing the total volume of works abroad and so to raise the share of exports of the total construction output, connected with realizing the appropriate government

(32)

L10 – B.2 – Mechanical properties of cast iron, mild iron and steel at historical structures

International contracting

(2/2)

- Constructors must find answer to a series of questions

• What are the obstacles and factors preventing the quicker increase of the construction export?

• What is the influence of a well-prepared construction firm strategy on the company´s export success including the risk management procedures? • What are the criteria measuring the degree of success in international

contracting of the construction firms?

• What could be the possible improvements of the risk mitigation procedures?

!!! Company´s willingness to go abroad has been clearly connected with the international

contracting risk. The assessment and comparison of home market and foreign market risk is the key issue. That is why the utilization of elaborate company risk systems enables to some large and medium firms do international construction works so prosperously and sustainably for many years.

(33)

TOPICS

• Business risks faced by most construction companies • International contracting

(34)

L10 – B.2 – Mechanical properties of cast iron, mild iron and steel at historical structures

Insurance

Insurance Contracts

- The primary parties to an insurance policy (contract) are the purchaser of the contract (the insured) and an insurance company that provides the required insurance coverage (the insurer or carrier).

- Insurance policies are two‐party contracts under which the insurer promises, for a fee or premium, to assume financial responsibility for specified losses or liabilities of the insured for a specified period of time. The amount of risk transferred is

limited to the amounts stipulated in the individual insurance policies.

- Some policies are written with deductible amounts that are the responsibility of the insured. If the policy includes a deductible amount of $100,000, the insurance company is liable only for the increment of the loss that exceeds $100,000.

(35)

Insurance

Subjects of Insurance Contracts

- Key‐Person Insurance. Is a life insurance obtained by the construction company on company principals. These policies provide protection to the company against financial losses that may result from the untimely death of a principal. They simply are large life insurance policies that are owned by the company. The benefits from such policies are used to finance buy/sell agreements as a part of its succession plan.

- Subcontractor Insurance. General (main) contractors typically require each subcontractor to provide and maintain certain levels of insurance coverage. Usually, the coverage limits required of subcontractors are the same as those required of the general contractor by the project owner. Many general contractors also require subcontractors to list the general contractors as additional insured. - Insurance Certificate. Under the terms and conditions of most construction

contracts, the contractor is required to submit a certificate of insurance. These certificates are issued by insurance companies to certify that the named insurers have in force the coverage listed.

(36)

L10 – B.2 – Mechanical properties of cast iron, mild iron and steel at historical structures

Insurance

Insurance policies in construction

- Property insurance for the construction project as e.g. Builder's Risk Insurance, is a first‐party insurance that provides coverage for the cost of damages to the

project during construction, which include temporary structures and any materials stored on the project site, but not the contractor's equipment. It protects both the owner and the contractor against direct losses.

- Property insurance for the construction company's property, consider the consequences of financial loss due to loss of or damage to owned property. Depending on the type of property owned, a company may need to purchase multiple insurance policies to transfer this risk for Equipment, Transportation, etc. - Liability insurance is needed when in the course of conducting business, a

construction company happens to incur any of the following types of legal liability: (i) Liability for personal injury to third parties; (ii) Liability for acts of parties for whom it is responsible, such as subcontractors; (iii) Liability for latent defects in completed

projects; (iv) Liability that results from design or professional services provided;(v) Liability to employees injured on the job; (vi) Liability for actions taken by company employees.

(37)

claudiu.albulescu@upt.ro

http://www.ct.upt.ro/suscos/index.htm

References

Related documents

There- fore, exercise training in people with dust-related pleural and interstitial respiratory diseases yielded a similar im- provement in endurance exercise capacity as those

Comparing Assistance—Search Engines and Librarians Respondents who indicated they have used a search engine to assist in searching for information and who also indicated they

Dr van Walbeek's evidence was aimed at proposing a method of formulating, quantitatively, the degree to which the income of employees in London has been and

The homophonic wordplay also brings to mind William Carlos Williams’s Kora in Hell : Improvisations (1920) – a work by an author whose prose as a whole epit- omizes the kind of

Several hierarchical regressions were run to determine the relationship between children’s social and emotional development, during their prekindergarten year using the

 To determine if there exists any relationship between students’ English background knowledge and the oral proficiency level they reach at the end of their Intensive

The aim of this study is to investigate if music listening interventions (MLI) are an effective tool to decrease muscle tension in neurologically impaired patients suffering