Main Risks That Can Occur for Ashton Wood Homes - Case Study Example

? RISK ANALYSIS here] of [Due paper Introduction Risks are inevitable in construction industry. No construction project of any nature can be called completely fee of (McDonald 2013). The reason is that for construction projects inappropriate climate risks, fire risk, design risk, and acts of God risk always stay in frame for the companies related to construction industry. However, the companies can take some effective measures to minimize the probability of such risks. To do this, proper risk management and analysis must be done because it not only helps in dealing with the consequences of risks but also reduces the effects that any particular type of risk may generate for the project. As Wrona (2010, p. 1) states, “companies that do perform a risk management process on a fairly typical multi-month project (no longer than 12 months) will identify and manage possibly five to ten easily recognized project risks”. According to this statement, risk analysis can reduce the occurrence of some main types of risks, as well as makes companies able to respond effectively to the risks. In this paper, we will discuss two of the main risks that can occur for Ashton Wood Homes which is a Toronto based construction company. The company deals in the construction of homes and buildings and is serving the nation since 1975. According to Zou, Zhang and Wang (n.d.), some of the main risks associated with the business of construction companies are listed in the table below. Ashton Wood Homes Potential Risks Significant Index Scores Design variations 0.49 Occurrence of disputes 0.42 Variations by the client 0.46 Tight project schedule 0.67 Incomplete approval of documents 0.39 Price Inflation 0.41 Inadequate programming schedule 0.38 General safety accident occurrence 0.30 The company considers risk management necessary to conduct to ensure completion of construction projects within available time and budget. As Flanagan and Norman (1993, p. 45) state, “attention to risk is essential to ensure good performance”. It is the job of the risk management authorities to undergo risk management and analysis to save time and budget. As Akintoye and MacLeod (1997, p. 31) state, “risk management is essential to construction activities in minimizing losses and enhancing profitability”. This statement proves the aim of the company to do proper risk analysis in order to minimize the probability of potential risks, as well as to bring improvements in performance and level of revenue. Risk management is imperative for construction companies (Schieg 2006, p. 77; Zu, Liu, & Lu 2012). According to Sharp (2009), proper identification of the risks and assessment of their potential impact is very important for a company to succeed in today’s world of competition. It is because of this fact that Ashton Wood Homes has put its focus on the identification and evaluation of the risks that the company can face at financial, operational, contractual, or any other stage of project management. As Lyons and Skitmore (2004, p. 51) state, “risk identification and risk assessment are the most often used risk management elements ahead of risk response and risk documentation”. The company has developed an effective strategy to analyze the potential impact of all risks, as well as to achieving the balance between potential risks and operational necessities for risk management. As Tatum (2013, p. 1) states, “risk management is a logical process or approach that seeks to eliminate or at least minimize the level of risk associated with a business operation”. Ashton Wood Homes gives attention to all types of risks. Giving attention to financial, contractual, and environmental risks is as important as giving attention to the risks related to quality assurance and employee safety (Edwards & Bowen 1998, p. 339). 2. Probability of Risks Let us now analyze two main risks for Ashton Wood Homes. The paper will cover probability of the risks, their potential impact, overall rating, as well as the way the company deals with each of those risks. The risks to be discussed in the paper include risk of design variations and risk of price inflation of construction material. 2.1 Design Variations One of the main risks that Ashton Wood Homes Inc. faces is variations in the designs approved by the clients and the company. Deign is the foundation of a construction project on which the development of a house is based. For example, when planning to construct a new house, the client and the company’s architect sit together to discuss the design for the house. The engineers analyze the design that the company provides to them so that they can start construction activities accordingly. Design variation risk usually occurs when a company develops the structural design of a house without formal approval of the design by the client. Let us take another example for the same risk. The architect of the company designs the structure of the house and asks the company to arrange a meeting between him/her and the client so that he/she can show the design to the client. However, the client shows negligence and agrees on discussion on the telephone call instead of agreeing on face to face meeting with the architect. Now, in this case, the probability of design variation increases as the client may raise some objection about the design after visiting the construction site at some stage of construction. In such cases, problems occur for the company because clients usually do not get satisfied with the design and ask the company for redesign which costs the company a lot not only in terms of money also time because bringing even a little change to the design of the building is not easy when construction works start. 2.1.1 Probability The probability of this type of risk is high in case the company does not take care of design verification before the start of the project. However, it decreases when the company arranges a meeting between the client and the architect so that both parties can agree on the design on which the house is to be constructed. One probability can be that of client dissatisfaction with the company if the company does not satisfy the needs of the client through redesign. 2.1.2 Potential Impact The potential impact of this risk is not good for the image of the company because clients do not like the company which delays the construction of their houses. To overcome this issue, the risk management department of Ashton Wood Houses analyzes the probability of the risks in all stages of project management not only to minimize their level of severity but also to protect the image of the company among clients. As Edwards (1995, p. 4) states, “risk analysis is the identification and assessment of the likelihood of hazards”. The company tries to eradicate the threat of this risk using a well-organized, properly planned, and cost effective risk management system. Risk management is the need of today because it helps in identification of risks, as well as reduces the occurrence of all possible risks (Choudhry & Iqbal 2013). 2.1.3 Overall Rating High Potential Impact Low Low Probability High 2.2 Price Inflation of Construction Materials Price inflation risk is related to the external economic environment. When the price of construction material rises, it becomes very difficult for a company to complete the project within the cost agreed with the client at the start of the project. The price of the material keeps on changing based on the economic environment of a country. This risk usually occurs when the price of the construction material rises and the company becomes short of capital to continue with the project. In such cases, companies ask the client to pay more so that the project can be completed within time. However, clients usually do not agree to this request because they feel that the company should have told them about risk before the start of the project so that they could decide when they should assign the project to the company or not. 2.2.1 Probability The probability of this type of risk is high in case the company does not finalize the case of price inflation with the client. Prices cannot be controlled by the construction firms; therefore, they should keep some margin in order to deal with raised prices. Moreover, if fixed prices strategy is used, the probability becomes low for the company. 2.2.2 Potential Impact The potential impact of this type of risk is client dissatisfaction with the company because when a company becomes unable to cover the costs of the project as agreed with the client, it is never considered a good prospect for the company because it decreases the level of client satisfaction. Moreover, a decrease in the company’s capital can also result as sometimes companies have to cover the construction costs using their own capital in case the client show unwillingness to pay more money. 2.2.3 Overall Rating High Potential Impact Low Low Probability High 3. Potential Solutions and Strategies 3.1 For Design Variation Risk 3.1.1 Responsibilities of Risk Management Department As Akintoye and MacLeod (1997, p. 31) state, “risk management is essential to construction activities in minimizing losses and enhancing profitability”. The risk management department of the company minimizes the occurrence of such risks by arranging a formal meeting of the contractor with the client in order for them to discuss all design related issues. The company also conducts risk analysis before the start of the project in order to know whether everything about construction is planned appropriately or some issue is left that may cause problems later on. The company conducts three meetings with the client in order to satisfy the client on construction. First meeting is conducted before the start of the project; second meeting is conducted after the first month, where the third and the last meeting is conducted at the half completion stage. 3.1.2 Probabilistic Analysis Technique The company also uses the probabilistic technique to deal with this risk. As risk management appears to be cognitive in the field of construction and engineering, reliance on the probability technique to manage risks seems viable considering its historical roots (Baloi 2012). 3.1.3 Certainty Theory Analysis Technique Along with probabilistic analysis technique, the company also uses certainty technique as a strategy to reduce the occurrence of this risk. This technique supports the fact that organization-related risk factors are easier to handle as compared to global or acts of God risks because in these types of risks the consistency rate is not available to the analysts. By overcoming the weaknesses of inexact reasoning approaches using judgments, this technique can help in managing the risk through knowledge based systems – KBSs (Baloi 2012). 3.2 For Price Inflation Risk 3.2.1 Responsibility of the Company Construction companies try to avoid this risk by setting higher than the normal cost for construction, whereas clients try to avoid this risk by choosing the lump-sum type of contract in which the burden of this risk is transferred to the construction company. Contractors choose fixed price contracts to overcome this risk. However, adding contingency premium seems to be the most effective way to deal with such risks. 3.2.2 Fuzzy Set Analysis Technique As risk management in construction projects always involve a mix of human judgment and assumptions, managers of the Ashton Wood Houses also use fuzzy set analysis technique that works on modern mathematics to model imprecision that is essential for human cognitive processes (Baloi 2012). 3.2.3 Qualitative Risk Management Technique Along with using Fuzzy analysis technique to analyze and reduce the occurrence of price inflation risk, the company also uses qualitative risk analysis that relies on the judgment of the project team instead of statistics and data. The main benefits the company gets by using this technique include accuracy, speed, effectiveness, and ease of implementation. In this process, managers first identify the risks and then work on to identify the potential effects of those risks for the project. After that, they decide whether to transfer, mitigate, avoid, accept, or exploit the risk. 7. Conclusion Summing it up, construction firms usually face a number of risks from different categories that they need to identify in order to analyze their probability of occurrence and potential impact, as well as to reduce their occurrence using a well-organized risk management plan. Companies can use a variety of risk management methods to identify, measure, and cut off the risks as they may cause troubles for the ongoing projects. Managers of construction companies take effective measures which include the use of appropriate techniques to manage construction related risks (Clements 2012). References Akintoye, A & Macleod, M 1997, ‘Risk analysis and management in construction’, International Journal of Project Management, vol. 15, no. 1, pp.31-38. 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