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Risk management is an approach to identify, analyze and to either accept or to mitigate an event that has a probability of occurrence and could also have an adverse impact on the business of an organisation (BusinessDictionary.com, n.d.). Risk management is one of the most important tasks that the managers have to undertake right from the beginning of a project work as a project can be vulnerable to hundreds of risks that can hinder the operations of a project (Investopedia, 2005)
Most of the times, the success of a project work depends upon the ability of the company to deal with the risks that come in the way of the project. If the management is well equipped to deal with the upcoming risks, the project has a greater chance of success whereas if a management does not have the tendency to deal with risks, it will be affected by uncertainties and will ultimately fail in the project (Mindtools.com, n.d.)
A project related to the planning, coordinating and controlling the construction of residential, commercial, heavy civil, industrial, and environmental buildings is known as a construction project. Construction projects are the costliest projects in the world that account for almost 8-9 percent of the world’s gross domestic product. Due to their large budget and accountability, construction projects are highly vulnerable to a number of risks, which makes it crucial for the project managers to adopt a risk management strategy from the very beginning so that the project has higher chances of success. Further, the involvement of too many stakeholders, in the construction project, makes the project even more vulnerable to risks (Stakeholdermap.com, n.d.).
The construction industry has been prone to high risks die to a number of factors. Below given is the lost of few of the factors that increase the risks to a construction project:
The risks which are not determined before or during a construction project can have a much greater effect on the project as compared to the risks that have previously been assessed by the management and the risks in construction project can cause very huge loss or damage to life, property and finances of the stakeholders. In general, the risks related to a construction project can be classified into business risks, financial risks, technological risks, project risks and political risks. Let us now discuss the risks that are associated with the construction projects:
The risks identified above are the most important risks when considered from the viewpoint of construction project managers as they can have the greatest impact on the operations of the project. These risks also involve the key stakeholders of the project and it makes it even more important for the managers to asses these risks right from the planning phase of the project.
There are a number of risk management strategies, tools or techniques that the management of construction firms can use to assess the level of risks and their impacts that would likely be experienced by the organisation. The techniques and strategies used for risk assessment can vary from company to company, industry to industry and project to project. Let us now discuss some risk management strategies or tools that can be used by the managers to assess the risks in the construction project:
Risk assessment matrix à a risk assessment matrix is one of the best and the easiest ways in strategic and risk management to identify, analyze and manage any type of risks that might occur in the lifetime of a project. The matrix is also known by other names, such as probability and impact matrix. It is a tool that can be used right from the starting of a project to the end of the project and analyze the risks continuously throughout the lifetime of the project (Brighthub Project Management, 2016).
Using a risk assessment matrix, the management aims at rating the risks according to the probability of the occurrence of the risk and the likely impact that it would have on the organisation if it actually occurs. The risks are arranged according to priority in the matrix while the priority is decided by computing the product of probability of occurrence of a risk and the likely impact that it would have on the organisation when it occurs. In general, the probability of the occurrence of a risk can be rated in percentage while the impact can be classified into negligible, minor, moderate, significant and severe. For example, if a risk is identified to have an 80-100% probability of occurrence and would have a severe impact on the project, the risk is classified as an extreme risk while a risk with a 1-20% possibility of occurrence and negligible impact on the organisation is classified as minimum risk. The risks are generally divided in to 4 categories, i.e. extreme risk, high risk, moderate risk, low risk and minimum risk ("What is a Risk Matrix?", 2013).
Further, these risks can be related to consequences too. In general, minimum risks are known as insignificant risks that have a negligible amount of damage to the the project, low risks are known as marginal risks that do not have much significant damage to the project, moderate risks are the ones which are not a great threat but can still cause of sizable damage, high risks are known as critical risks as they can have significantly large consequences while extreme risks are the ones which have catastrophic consequences, i.e. these can render the project completely useless (Risk Matrix, 2005)
The advantages of using a risk matrix are given below:
Risk Register à the risk register is another efficient approach that helps in maintaining a record of all the risks and the results of qualitative risk analysis, quantitative risk analysis and risk response planning. The basic objective of risk register is to keep a detailed account of identified risks, including their description, category, possible causes, possibility of occurrence, impact on the objectives, proposed responses, owners and current status. The risk register is always shared amongst the stakeholders of the project so that they can experience a higher degree of involvement in the project risk management. It facilitates a system of decision making in the organisation by proper definition of the risks and by involving all the stakeholders in the process of risk management (Developing and Populating a Risk Register Best Practice Guidance, 2009)
The main components of a risk register are given below:
Let us now discuss some of the importance of risk registers:
Both the above techniques identified for the purpose of risk assessment and management are two of the best techniques available for any of the organisation to increase the chances of success of its project by successful identification, planning and mitigation of risks. They are not only just flexible but also provide an approach that helps in identification of risks right from the beginning of a project to the end while there can be significant changes made in the running life cycle of a project. Therefore, it is important to undertake such approaches in the life cycle of a project which allows the project management team to have a flexible approach towards risk assessment, management, control and mitigation .
It is never enough to just have risk management strategies until and unless they are implemented along with all the appropriate resources to deal with the risk. An organisation that assesses the risk and is not able to deal with them is never successful in saving the project from the damages of the risks. In general, the risks can be positive and negative. The positive risks are the ones which, if occur, have the potential to get benefits for the company and the project on the overall whereas the negative risks are the ones which, if occur, can have major drawbacks for the company and can result in the failure of the project in extreme cases. Therefore, it is very important to incorporate risk management strategies along with all the required resources to make the best use of the positive risks and at the same time neglect or prepare to deal with the negative risks so that the project can be saved from failure.
A major area where the companies fail in the project management approach is when they are not aware of the stages in a project life cycle where as risk management program should be identified and implemented. In general, there is not such particular position in a project life cycle where the risks should be identified by the managers. Rather, the assessment of risks should be started well before the commencement of the project and should be carried out until the project is completed with success.
In general, a project has to go through a number of stages and the long duration of construction projects greatly increase the vulnerability of the projects to the changes in risk. In construction projects, new risks can arise on a daily basis, which can be extremely dangerous and can be more drastic than the ones which had been already identified by the project management team. In such a condition, it is definitely required that the risks should be identified on a daily basis according to the changing situations. It should be ensured that with the completion of every short term goal and the beginning of a new operation, the management should once again check and identify the risks that might have a greater possibility of occurrence than before. The management should carefully compare the prevailing situations with the risk register and the risk assessment strategies to once again consider the risks that have failed to occur till that particular time while it would also provide an insight to the upcoming risks according to the prevailing situations (Anon, 2016).
The continuous assessment of risks throughout the life cycle of a project would render the following advantages to an organisation:
As discussed above, it is highly important for the project management teams to continuously make assessment of the risks that have occurred, that did not occur and the ones which have increased probability of occurrence. The risk registers require continuous update so that a better approach towards risk management can be ensured and the chances of success of the project can be increased exponentially. It is never enough to just create a register that contains components related to risks while there is no valid information or if the information is not updated from time to time. The risk registers should evolve along with the life cycle of the project.
Let us discuss some strategies that can ensure regular updation of risk registers and other tools and techniques that the organisations or the risk management teams used to analyze and plan to deal with the risks that might occur in the life cycle of a project:
Keeping the risk registers and other strategies used for risk assessment is important not just for the project team but is also important for the stakeholders as it provides timely and important information to all and increases their awareness about what exactly is happening in the project. Some of the stakeholders might not be directly involved in the day-to-day activities of the project but they still deserve to know about what all is happening in the project. Further, as they are not involved in the business directly, they can provide valuable feedback to the management by assessing the information from risk matrix or registers from time to time, which might have been actually overlooked by the project management team.
There are a number of stakeholders in a construction project, such as the contractor, the sponsor of the project, the employees, the end users, etc. and all of them have their own roles and responsibilities. It is obvious that when the stakeholders have their own stakes invested in the project, they too have some responsibilities towards the project and the risks that are associated with the projects.
It becomes the responsibilities of the project management team to involve the stakeholders in the decision making and risk management process and at the same time it is also the responsibilities of the stakeholders to actively participate in the project management process. The stakeholders should be informed of the project status from time to time. The risk registers or the risk matrix should be shared with all the stakeholders as there is always a chance of human error because of which the management could oversee some of the important risks that have a likelihood of occurrence whereas an external viewpoint of the stakeholders and their involvement would ensure that the important risks are not overlooked. Further, the important stakeholders of the project can also arrange for regular meetings or functions where the project management teams would have to come together and disclose all the important information and data to them. In a way, it also falls upon the stakeholders to decide the level up to which the stakeholders want the management to involve them in the decision making process related to risk management.
Risk management is not an easy task at all. There are a number of companies that have tried their best to assess and deal with the risks related to the project but millions of them have fallen victims to identified as well as unidentified risks. One of the major reasons behind the failure of companies and projects due to risks is that they do assess the risks and plan for the mitigation of risks but they do not adopt any approach that could help them reassessing and identification of new risks that come up due to changes in situation. Sticking to the risks and mitigation measures decided before the commence of a project makes a company more vulnerable to the changing environment and any new or unidentified risk can hinder the project lifecycle because the companies are not prepared to deal with them. Even with the implementation of risk registers, a number of companies have reported failure because they do not have proper knowledge and resources that could help the management in proper utilization of risk register strategies. A number of experts have also given arguments that the failure of risk registers is not just because of individual errors but are also a direct result of the organisation culture and nature, which might not fit with the tools or techniques being used. Another major reason for the failure of risk registers is that it limits the thinking capability, gut feelings and emotions of the managers as they become largely dependent on the information that is explicitly available to them. Further, there is also a belief amongst the managers that risk registers mainly focus on the future which increases their chances of failure because the future can never be accurately determined (Budzier, 2011)
Let us now prepare a plan that would help an organisation in preparing and dealing with the risks that might be experienced by them in the near future:
Secondly, the risk management process should be commenced right from the beginning and should be carried out continuously till the end of the project. The management of risk should be focused on the present as well as on the future, rather than just limiting the program to either the present variables or the future possibilities.
Risk assessment and management is one of the most crucial program that must be carefully planned and executed by all organisations that take up any kind of project, small or big. The business organisations, in the present scenario, are working in a global environment which is highly complex and changing with every second. In such an environment, business organisations and their projects become vulnerable to the changing conditions, which introduce new risks at every turn. Therefore, risk assessment and management should be given a greater importance than it is given in the present times so that the chances of the success of the project can be increased exponentially.
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