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Corporate risk defined: Exposure to loss resulting from inadequate or failed internal processes, people and systems, and from external events.
Increased pressure from stakeholders, tighter regulatory requirements, external environment threats, global competition and increased operational complexity has seen risk management elevated to senior management responsibility.
In the construction industry, as in business generally, risk management involves identifying risks, assessing them and then developing strategies to manage them. Organizations that manage risk well enjoy financial savings, greater productivity and service quality, improved success rates of new projects and better decision making.
It is clear that, in today’s complex business environment, risk factors are wide reaching, and are intrinsically linked to achieving organizational objectives. It has been said that “no business is more exacting or requires greater effort and determination than construction.”2 Delay, financial, contractual, legal, design, operational, environmental – a construction project is exposed to such a wide array of risks, it’s amazing anything gets completed on schedule and within budget.
The level of risk in construction is due to the uniqueness of every project, the uncertainties introduced by the project stakeholders, regulatory protocols, and many other factors that are unknown or unknowable at the start of any project. Adding to the variability is that construction projects are open systems, rather than closed, meaning the risk management process has to be adjusted to the collaborative environment. It is not surprising then that risks are an inherent and expected part of the construction process, making it crucial for organizations to recognise potential sources of risk and to take steps to mitigate their exposure.
Risks in the construction industry can prevent the meeting of time, cost and quality targets, and inability to achieve these targets can have hugely detrimental implications for the parties involved.
Specific to the client/owner, failure to manage risk can result in costs in excess of those agreed, lower return on investment, damage to reputation and brand and, most importantly, financial loss through not being able to utilize the built asset. To the consultant, the result can be loss of confidence placed in them by clients and loss of future business. To the contractor, it can mean loss of profit through penalties for non-completion and negative word of mouth that jeopardizes future business.
In practice, you only need to look as far as the examples of a hotel or major transport development to recognize the implications of not controlling risk. If a hospitality development is not completed on time, each day delayed could cost the owner thousands (and, in the case of a casino, millions) of dollars in lost revenue from room bookings, retail leases and supplementary services. If the facility’s quality is compromised, the entire brand’s reputation can suffer, resulting in lost revenue through reduced business and an inability to charge premium prices. As delays mean extra costs, the contractor’s reputation is also damaged, impacting financially in the short and long term. Depending on the reason for the delay, claims, disputes and litigation can often follow.
When applied to a civil infrastructure development, particularly major transport projects, the result of delays and quality issues can impact, not just owners and contractors, but entire regional economies. Roads, airports, rail systems, bridges and ports can underpin the economic expansion of developed countries and be the lifeblood of smaller communities. Europe’s Channel Tunnel, which opened in 1994 at a construction cost of £10 billion (US$14.7 billion at the time), is a case in point with several near bankruptcies caused by overruns of 80%. Operating problems with Hong Kong’s US$20 billion Chek Lap Kok airport, which opened in 1998, not only impacted revenues at the airport, but spread to the wider Hong Kong economy, having a negative effect on GDP growth. After nine months of operations with quality issues and further delays, The Economist magazine reported that the “fiasco” had cost the Hong Kong economy US$600 million.
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