Managing risks on construction projects is not a passing fad, but sound business practice and vital for firms bidding for government contracts, says Kate Boothroyd
SIR Michael Latham, in Constructing the Team, his report on the construction industry, called on the government to commit itself to best practice and for more co-operation in procurement.
The government responded in July 1995 with a document from the Cabinet Office Efficiency Unit called Construction Procurement by Government An Efficiency Unit Scrutiny.
The unit examined government construction procurement with the aim of improving efficiency and making the government a best practice client. Construction Procurement by Government identified five main areas for action, the fourth of which was the need to provide intelligent risk management.
Clients in general are no longer willing to cross their fingers and hope that projects come within the budget and on schedule. They also realise the best value for money does not necessarily come at the cheapest price.
Clients nowadays want to know how likely it is that they will get their office, factory, road or airport on time, on budget and to the standard they require. They are becoming more involved in their projects and are taking practical steps to assess and manage the attendant risks.
From the contractors point of view, risk management procedures provide them with more faith in their figures when submitting tenders, a systematic approach to reducing the impact of risks, and a more formal way of considering which contracts should be accepted.
The Cabinet Office Efficiency Unit recommends that government act more seriously, responsibly and professionally with regard to construction procurement and its attendant risks.
But the government is not entirely new to risk management. It has been researching and using the process over the past few years. In August 1993 the Central Unit of Procurement (CUP) published its Guidance Note No 41 Managing Risk and Contingency for Works Projects.
This was regarded as a statement of good professional practice, not as a mandatory requirement, but it became impossible for contractors to win work with the Ministry of Defence without providing the service and increasingly difficult to do so on any other government or Treasury project.
The efficiency unit scrutiny recommends that all departments should have arrangements for risk management in place by April 1 1996.
In its report, government departments are advised to raise awareness of risk management among all staff involved in construction procurement.
The government is keen for project sponsors and their teams to identify and manage risks, to tell the industry side which risks it is expected to carry, and to be aware of what it must do to keep the client informed.
The governments plans to harness private finance as often as possible for public projects will increase the need for government, project proposers, banks and contractors alike to isolate and allocate risk in a sensible manner.
Transferring risks to those most able to control and manage them is seen as another way of reducing the potential for conflicts in construction. The surge in construction claims is due not only to contractors trying to raise margins in a difficult market it also reflects the amount of risk passed on to them by clients.
Clients and contractors should take care to place risks where they can best be controlled. Passing risks to others who do not have the interest, ability or financial capability to accept them will most likely result in increased claims and may even end in bankruptcy.
There are hundreds of books dealing with risk management, with an increasing number addressing construction.
Risk management is also being taken more seriously by organisations such as the Royal Institution of Chartered Surveyors and the Association of Project Managers.
The Institute of Risk Management, as yet little known in the construction industry, is becoming increasingly interested in how assessment and management of risks is conducted on construction projects.
Surely with this level of interest, risk management is not just a passing fad. Clients are now demanding more confidence in achieving their objectives, and contractors need greater awareness of the risks they face.
Risk management is a practical tool that professionals and contractors alike should use to satisfy these requirements.
The government is obviously taking risk management seriously and private clients are following suit. Perhaps it is time for those who provide the service to take it more seriously, too.
Kate Boothroyd is the associate director of the risk management group at Gardiner & Theobald. In 1994 she became the first quantity surveyor elected as an associate of the Institute of Risk Management.
Clients are no longer willing to cross their fingers and hope that projects come within the budget