Risk management: Firm’s plight should ring alarm bells everywhere
Risk management in the construction industry is as important as ever:
The news of Yorkshire contractor Management Cubed going into administration after losses on two major contracts should act as a warning to everyone in the construction industry about the important of risk management.
With 42 of the company’s 58 staff made redundant at the retail, education and medical contractor, the tale is a sorry one to tell.
“The company has incurred significant losses on two major contracts,” read a statement from RSM Restructuring Advisory LLP, who are overseeing the administration.
“These losses have only recently come to light and the directors did not believe that the company could continue to trade without potentially worsening the position for creditors.”
The story underlines the importance of accurate scheduling and financial control in identifying loss-making areas and implementing proper mitigation measures on projects. These measures can ensure that losses are not fatal.
But perhaps the key takeaway from Management Cubed’s unfortunate demise is the need to be vigilant in the current market conditions. The firm’s directors acted as quickly as they could when the losses became clear, but it was already too late. This tells us that risks were not properly assessed through robust risk management.
The importance of a risk register
In our experience at Kenzie Group, losses are typically caused when projects overrun and incur prolongation costs, and the 2016 UK Performance report revealed that only four in 10 projects covered by the report came in on time. These losses are compounded by damages from clients and the end result is a massive hit on the project’s bottom line.
A risk register or log is the first step to take towards the avoidance of unforeseen costs. Setting up a log well in advance of a project commencing is something that a project manager, in conjunction with the project and bid team, should prioritise in order to identify major commercial and technical risks to the project.
The risk register can be enhanced to include potential opportunities, and project managers should seek ways to utilise the register for the betterment of the work being done.
When it comes to identifying risk, the project and bid team should carry out in-depth analysis of the different aspects of the work to be done, looking into the nature of the work, the potential consequences for the team working on it, and where the responsibility falls for all aspects of risk management.
Many risks can be identified long before any work is carried out on a project. One of the first causes of risk is tender assumptions, and these can be addressed right at the start of a project, often in the very first meeting.
Immature design can also create risk of prolongation if work has to be adapted further down the line, and a poorly defined scope of work can also cause unnecessary delays and interruptions.
Onerous contract conditions, as well as souring relationships between contractors, owners and clients, can also present risks of delays and these conditions should be reviewed as part of a risk register, with an appropriate party assigned the task of managing that risk.
Managing programme risk
In addition to creating a risk register, accurate cost forecasting should be carried out and reviewed by a number of individuals to ensure all parties agree that it is fair and appropriate. The same approach should be taken to all elements of the programme of a project; plans must be robust, realistic and achievable in the known circumstances and based on the progress already achieved.
The programme schedule should reflect all known interfaces and outside factors, such as access, approvals and subcontract programmes, and should be updated monthly based on the progress made on the project.
Crucially, all future activities within the programme should be carefully forecasted in terms of their expected end date. Far too often future activities are simply amended during the course of a project to reflect a desired end date, but all forecasting should be brutally honest and realistic to ensure risks are properly managed.
Where slippage does occur along the course of a project, the reason for slippage should be ascertained and mitigation measures properly implemented.
Managing commercial risk
Creating a realistic profit and loss forecast can help to avoid surprises and drastically reduce the chances of a project falling into dispute.
This process begins as soon as all procurement is complete, when a forecast final cost (FFC) should be developed. The FFC should take all betterment or losses from the procurement stage into account, and forecast realistic costs for staff and prelims – without relying solely on the bid cost. By identifying loss-making areas of a project, the FFC can prompt mitigation measures and enable value recovery and re-sequencing of work to begin.
Risk management is not all about being overly cautious; it is about maximising profit and maintaining strong, healthy relationships between all parties connected to a project. Rather than being seen as a time-consuming chore, risk management should be embraced with positivity – it will repay those who do so handsomely.
This article, written by Kenzie Group MD Joseph Bond, was featured online in Building Talk last year.