Appraisal of Risk Management in a Medium Construction Firms in Nigeria
CHAPTER ONE
Research Objective
The main objective of the study to carry out an appraisal of risk management in construction firms in Nigeria.
The following are the specific objectives of the study
- To determine types of risks commonly found in construction firms in Nigeria
- To evaluate the level of risks in construction firms in Nigeria
- To suggest measures for managing risks in construction firms in Nigeria
CHAPTER TWO
LITERATURE REVIEWS
Introduction
This chapter present literature reviews. The main areas covered include; current situation of construction industry, risk management in construction firms in Nigeria, risks in construction firms in Nigeria, risk identification methods and identification techniques, risk management process, and types of risks in construction firms in Nigeria
Current situation of construction industry
The construction industry is a sector of the economy that transforms various resources into constructed physical economic and social infrastructure necessary for socio-economic development. It embraces the process by which the said physical infrastructure are planned, designed, procured, constructed or produced, altered, repaired, maintained, and demolished. The construction industry is also a fundamental economic activity which permeates most of the sectors of the economy. In short, it is an engine of growth.
In Nigeria the construction sector is among the very important sectors that contribute hugely to the Gross Domestic Product (GDP). In 2011 it accounted for 7.9% of all the wealth that was generated in the country (UNESCO, 2012). Therefore the construction sector continues to be one of the most exciting sectors in the Nigerian economy.
Unfortunately, in a highly competitive and complex climate that is fraught with risk, unfavorable outcomes can often plague these projects and their participants. Such outcomes might include cost overruns, budget shortfalls, compromised quality, schedule delays; third-party meddling, confusion about scope of work, smeared reputations bruised relationships, and severe financial hardship.
Risks in construction firms in Nigeria
Risk is defined as the possible occurrence of negative or adverse effects that lead exclusively to damage or loss (Valeriano, 2001). Perry and Hayes (2015) define risk as an uncertain event or condition that, if it occurs, has a positive or negative effect on a project objective. Jafar (2001) define risk as the exposure to loss, gain, or the probability of occurrence of loss/gain multiplied by its respective magnitude. Kartam (2001) defines risk as the probability of occurrence of some uncertain, unpredictable and even undesirable events that would change prospects for the probability on a given investment
Risks will be apparent at all stages of the life of a construction project: at appraisal, sanction, construction and operation. The effects, relative impact, and opportunity to avoid, transfer, or retain these uncertainties will change throughout the project. The consideration and assessment of risks therefore needs to be undertaken at all stages of the project so that they can be managed constantly (Perry and Hayes, 2015).
The development of a construction project is fraught with enormous risks. This is due to the uniqueness of every project, the uncertainties introduced by the project stakeholders, statutory or regulatory protocols and other intrinsic and extrinsic constraints. Risks in the construction project development could constrain the achievement of the key project objectives – time, cost and quality targets. Inability to achieve set project objectives has far-reaching implications to all stakeholders in the project.
To the client, it could mean added costs over and above those originally agreed upon, and less returns on investment. To the end-user, the increased costs or poor quality are passed on as higher prices, rental cost, prohibitive running and maintenance costs, etc. To the professionals, it could result in the loss of confidence reposed in them by clients. To the contractor, it could mean loss of profit through penalties for non-completion, and negative word of mouth that could jeopardize their chances of getting further jobs, if found to be at fault. To the construction industry, the prevailing inability to achieve set project objectives due to risks could lead to a perpetuation of the bad reputation of time and cost overruns, inability to procure project finance or procuring at higher costs due to added risks, and clients’ not to investment from the industry to other less risky investment sectors such as shares, bond or foreign investments (Sidwell, 2005).
Early risk identification ensures that team effort is concentrated in critical areas, focusing the project team’s attention on actions and resources where there is a major risk exposure, or where the greatest time and cost savings can be made through streamlined project management.
CHAPTER THREE
RESEARCH METHODOLOGY
Introduction
This chapter will explain how the research was conducted to achieve the objectives of this study. The chosen research methodology is composed of an extensive literature review, questionnaire survey among construction professionals, statistical analysis on the collected data and evaluation of the recognized risks from contractors’ point of view.
Research strategy
Research strategy has been defined as “an action plan for getting from here to there”, where here, may be defined as the initial set of question to be answered, and there, is some set of conclusions about the questions (Yin, 2014). This study is descriptive, designed to obtain views from civil and building contractors regarding risk management in construction firms in Nigeria
CHAPTER FOUR
DATA ANALYSIS AND FINDINGS
Introduction
In this chapter, by using the data gathered and described in the previous chapters, analysis and discussions will be carried out. All the results and findings from the analysis made will be elaborated in this chapter. Analysis and discussions on the data and information gathered will be based on the goals to achieve the pre-determined objectives of the study. The analysis and discussion on this chapter will be divided under several heading base on the objectives. The heading includes analysis on types and classification of construction project risk and analysis on methods available to reduce and mitigate the construction project risks. Under the heading, there would be sub headings to ensure analysis and discussion is carried out in detail and specifically.
Data collection
Response rate
Through a questionnaire survey 60 randomly selected practitioners in construction firms in Nigeria were involved. However, out of 60 questionnaires distributed, only 42 responded and 4 were rejected due to improper answering. Subjects included practicing quantity surveyors, engineers and builders. These professionals were in the employment of construction companies performing contractors’ works. The questionnaire identified from literature and through discussion with industry practitioners, various risk types encountered at the project level.
CHAPTER FIVE
CONCLUSION AND RECOMMENDATION
Introduction
In this final chapter of the research project paper, the overall conclusion and summary of the study were made. The results and findings gathered throughout the study are summarized in this chapter by referring to the objectives of the study as the goal of this study is to accomplish the objectives of the study. Along with that, any recommendation for this study as well as recommendation for further study will also be described in this chapter. Other than that, this chapter will also explore on the problems and limitation in conducting this study.
Conclusion
Type of risks in construction firms in Nigeria
Three categories of risks have been identified some of which have extreme and high risk level. The categories of risks having extreme and high level of risks are financial risks construction risks, and physical risks.
Types of risk having extreme level of risks in financial category of risks are
- Availability of funds
- Cash flow problems due to slow payment & dispute
- Business disruption
Types of risk having extreme level of risks in construction category of risks are
- Ground conditions – inadequate site investigation, inadequate information in documents, unforeseen problems
- Errors or omissions and additions in bills of quantities
- Price Escalation on materials and Equipment
Types of risks having high level of risk in physical risk category are
- Force majeure (acts of God), i.e. inclement weather, fire, landslip, and etc.,
- Pestilence or deadly disease, disease, and
- Unexpected events or unforeseen circumstances, for instance aero plane crashed at the construction site.
- Death
Level of risks in construction firms in Nigeria
Upon completing this study, the level of risks for each type of construction project risks has been identified. On the same tables that represent the outcome of first objective which is table 4.2 to table 4.8 in previous chapter, the level of risk for each type of risk is indicated. For the level of risk, by referring to risk matrix analysis table, the risks are categorized into four level of risk which are low level, moderate level, high level and extreme level.
There are several types of risks considered as having extreme level of risk which is under financial risk consists of availability of funds risk, cash flow problem due to slow payment and dispute, and business disruption risk. Therefore, it is obvious that financial risk have highest ranking of risk factors. This is followed by construction risks and physical risks.
By comparing to other similar study, the results of this study are reliable as in one of the study observed, the result are same which in that study too, the financial risk are considered as having highest ranking of risk factors. Other than those extreme risks, there are also other types of risks in this study ranked as having high level of risk.
For the extreme risk, it requires detailed action or plan. While for high risk, senior management’s attention is needed. In moderate level of risk, it is the responsibility of specific management to overcome the risk and for the low level of risk; it can be managed by routine procedures. By gaining this result, the second objective of the study has been achieved.
Recommendation
In case of measures for managing risks in construction firms in Nigeria; there are several findings gathered especially by conducting literature reviews as well as information gathered from questionnaire. These are the ways identified as the best practice in order to reduce and mitigate risks in the construction projects;
Ensuring the adequacy of project funding
It is important that, the enough funds are set aside for project. This will lead to availability of materials on time; the workers are paid on time etc. Furthermore, contractors need to understand, in advance, that changes and cost increases are virtually inevitable. Accordingly, a reasonable contingency should be incorporated into the budget to deal with inevitable changes and unexpected omissions.
Obtaining more geotechnical information
This is important due the fact that, design of the buildings or any civil works need enough soil information: selection of construction materials, types of construction etc. Accordingly, if the actual underground conditions are worse than the geotechnical information provided, the owner should pay because, if the contractor had been advised of the more severe conditions, it certainly would have increased its bid.
Conducting constructability reviews
Contractors sometimes complain that the designs they are required to follow are not constructible or practical. If this is the case, there may be delays and additional costs incurred in coming up with alternatives. Even if the design is constructible, the owner may have to pay more to get the same results. By having the plans and specifications reviewed for ‘constructability’ before contractors bid on them, owners have been able to modify the designs and thereby make construction easier.
Introducing phased pricing
Phase pricing will lead to realistic coasting of the project. This is true when the project is huge that will take several years. When the project takes some years to be completed, the price of materials may change to the level that cannot be tolerated.
Use experienced project personnel
No matter how enlightened the management and allocation of risk, the project personnel (i.e., people) will still have to design, build and administer the project. Experience counts, particularly for big projects. With a construction boom underway, design and construction firms are often maxed out in terms of experienced project managers and superintendents. Notwithstanding this reality, no design firm or contractor wants to lose a good job. Consequently, many projects are being led and managed by inadequately trained and inexperienced personnel, which inevitably leads to problems, claims, disputes and terminations.
From the results and findings, it is noticed that the research objectives are accomplished. Therefore, it is hoped that this study can be used especially by the contractors in order to manage construction project risks for the successful delivery of their project.
Other recommendations
Here, the writer would like to give some suggestions and recommendations by referring to the outcome of the study especially for the contractors.
- It is noticed that construction project risks are manageable. Therefore, contractors should consider the benefits of managing construction project risks so that they will be able to acknowledge the importance of managing the construction project risks. They should implement the strategies to manage risks as discussed in this study on the real projects.
- ii) The contractors should give sufficient thoughtfulness to the risks elements in their project and manage it according to the priority order as indicated by the level of risk. As in this study, the financial risks are considered as high ranking risk factor. Therefore, the financial risk should be given extra attention in order to prevent from terrible effect to the project. However, other categories of risks also should be managed. This is to ensure the project can be delivered on time, within budget, and in good quality as well as being satisfied by the clients and especially the end users.
Recommendation for Further Research Study on this Topic
Upon completing this study, the researcher had recognized some topic under this area of study to be researched by other researcher in order to expand the outcome of this study in the future. The recommendation is:
Research on managing construction project risk for other stakeholders in construction project
As this study focuses the risks aspects on contractors only, it will be better if the study can be expanded by researching also on risks elements for other parties in construction firms in Nigeria such as risks on clients, consultants, suppliers, designers and so on. If the study can be carried out, it will enhance the risk management process.
In-depth study on financial risks in construction firms in Nigeria
This study will be useful as have been seen that the financial risks has several elements of high and extreme risks in construction firms in Nigeria.
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