Professional Documents
Culture Documents
STUDY
Risk Management of Construction Industry Managers, the lesson book complied by NICMAR
KEY
i. Describe scope of project in short
ii. Explain type of project
iii. Note down important points of perceived construction risk, project risk, risk
economic risk, insurance.
iv. Risk mitigation is done in construction infrastructure development projects.
STRUCTURE
Name of project
Scope of work
Important details project, cost, time, type risk involved, risk mitigation etc.
Important points from contractors project managers point of view to be monitored/resolved.
Method followed for administer and monitor risk
Recommendations / Conclusion
Bibliography / Readings
TYPE OF PROJECT
XYZ IMPLITZ LTD is a design consultancy providing tower design solutions to the telecom and
power sectors.
The scope of our work includes the following:
Tower design
Design checking
Preparation of Structural Fabrication Drawings
Building analysis for installing a roof top tower.
Preparation of structural drawings of existing buildings (if building structural drawings are not
available)
Supporting beam design for installing roof top tower.
Foundation design of ground based tower
Estimations during tender stages
Dynamic analysis and Non Linear Analysis.
Design Checking and strengthening of towers
Preparation of as built drawings
One of the cellular service providers by the name of TELESERVICES MH LTD asked us to design a
ground based tower.
It was a 60 metre tower based on a piece of land that the client had acquired from the
landowner by entering into a contract with him. The agreement was for a valid consideration
and for a definite period of time. After the lapse of the period the client would either have to
dismantle the tower or renew the agreement with the landowner for a further period.
The parties involved in the project were the client, the consultant, the contractor and the
outsourcing companies who accomplished the work of acquiring the land for the client. The
modus operandi was thus:
The outsourcing agent would acquire the land shortlisted by the client from the landowner by
doing the necessary groundwork and entering into necessary legal agreements for a valid
consideration. The client would then summon the consultant and give his requirements of
tower height and load of antennae coming on the tower, etc. Based on this the consultant
would prepare layout drawings after conducting a prelimnary survey whether the piece of land
would be enough for a tower of that height. He would then furnish the layout drawings and
then conduct the soil investigation of the proposed site to ascertain the safe bearing capacity of
the soil. Depending upon the recommendation of the client, and the data gathered from the
soil investigation and from the client the consultant would then design the tower for the
required load coming on the tower along with its foundation system. He would also design the
supporting beams for the shelter and the diesel generator.
On receiving the design drawings the client would then pass them on to the contractor
earmarked for the project and he would then order the material required for the erection
depending upon the bill of materials furnished by the consultant's drawings. The consultant
would also give the fabrication drawings based on which the steel sections would be fabricated
in situ. Based on the erection drawings of the consultant the contractor would then start
erection of the tower and its accessories namely the shelter and diesel generator. Once the
erection has been done then commissioning would commence in which the client's engineers
would cross check the contractor's work by simulating conditions similar to those that would
prevail under normal working of the tower. Once the commissioning is over then the site would
be handed over to the client by the contractor. The client would then ask the consultant to
prepare as built drawings of the site showing the views of the tower as it is standing. In all these
works there are a lot of risks that each of the parties have to bear and find out ways to mitigate.
Following are the list of risks that each of the parties have to bear.
Design Risk
This risk relates to any defect in the design of the infrastructure facility or the design
requirements stipulated for the project. This is an inherent risk in the project as it is very
difficult to conclusively ascertain that the damage to the facility is actually caused due to the
defect in the construction or design assumptions made by the consultant or design data
supplied by the client or the very design itself. Generally, it is the design contractor who is
responsible for the design aspects of the project. In the case of the project the client has to
indemnity himself from any damage that may be caused by the accidental falling of the tower
due to wind pressure or any other reason. In design risk itself the cellular service provider has
to indemnify himself vide his purchase orders that he is not responsible for any standard laws
that the design contractor may violate, whether they are labor laws or laws governing
structures in that region and national building codes. He also indemnifies himself against injury
to any of the workers of the design contractor during the process of conducting the survey. The
client also indemnifies himself against any false assumptions that the consultant may make in
the designing of the project facility. In our project the consultant had to make various
assumptions based on the standard facts regarding the land strata as the land was such that it
was not possible to collect site data using normal methods.
Social impact
A prelimnary study should be undertaken regarding the impact of the installation of the tower
in a particular area, the extent of hardship it may cause to people living there. There is a
possibility that the owner of the building or land where the tower has been installed will not
allow access to the cellular service provider for maintainance purposes in spite of the fact that
he is receiving rent for the piece of land occupied by the client. This he does as he suffers
harassment when the client's engineers come for maintenance work. He faces the risk that the
building or landowner may discontinue the arrangement due to adverse effects of the tower on
human beings.
Technical feasibility
A prelimnary study of the engineering requirements and feasibility of the project being sought
to be undertaken should be made. There may be a possibility that a ground based tower may
not be suitable on the land earmarked for the same. The soil conditions on the land may not be
conducive to erection of a tower of a particular height. The orientation of the tower that is
required to be provided by RF point of view may not be obtained due to practical conditions
prevailing at site.
Financial Risk
This risk is the totality of all risks that relate to the financial developments external to the
project that are not in the control of the clients. This risk is common to all the parties to the
project. These risks include: 1)risks associated with the fluctuations of foreign exchange rates.
2) risks associated with the devaluation of the local currency. 3)Risks associated with the non-
convertibility or non-repatriation of foreign exchange from India, and 4)Risks associated with
the fluctuations in interest rates. In our case this risk was prevalent as foreign investment was
brought in by the client for the project.
Political Risk
Political risks are a bundle of distinct risks that can include not only political factors but also
administrative, social and economic factors. Political risks associated with a project are closely
evaluated as they are generally outside the control of the parties to the project, other than the
government to a certain extent. But even the government fixing the policies of the telecom
industry do not have control over all the categories of political risks. It should be kept in mind
that many of the political risks arise from the possibility of arbitrary action by the government
and altering the framework on which the very foundation of the project rests. The main
categories of political risks include
Risk of political instability such as riots, revolutions, coup d'etat, terrorism, guerrilla warefare
War, whether declared or undeclared.
International sanctions
Expropriation
Nationalization
Creeping expropriation (discretionary regimes, excessive taxation, import restrictions, refusal to
allow or provide for collection or review of tarrifs, etc)
Failure to grant or renew approvals and Excessive interference in the implementation of the
project, thereby causing severe prejudice to the concessionaire. (in this case the TRAI)
Construction risks
The construction risks are essentially a bundle of various individual risk factors that adversely
affect the construction of a project within the time frame and costs projected and at the
standards specified for the facility. Construction risks generally relate to:
Risks related to the availability of land for the project
Suitability of the land for the construction of the project facility
Delay in completion of the construction
Cost overruns in supplies, transportation, machinery, equipment, new materials, etc.
Availability of the basic infrastructure required for the construction of the facility such as water,
electricity, etc.
Availability of workforce
Occurrence of force majeure events, and
Failure of the facility to meet the performance criteria and standards specified.
In our project this risk was very important as all the above mentioned factors could go wrong
during the project.
Operating risks
Operating risks are similar to the construction risks. They are a bundle of risks associated with
the operation of the infrastructure facility. Operating risks generally relate to:
Operating cost overruns
Risks related to obsolescence
Risks associated with compliance of specified performance criteria, quality and quantity (as the
case may be)
Force majeure risks and
Risks associated with the inability to comply with the maintenance standards and availability of
funds required for the operation and maintenance of the facility
Certainty of Costs
Each obligation each risk and each uncertainty has an attached cost. The aim of the contractor
should be to ensure the project can be determined and controlled in a certain manner. In our
project the contractor was not paid any initial amount for mobilization and he had to do all the
initial investment on his own. Hence it was very necessary that he controlled the costs that he
incurred.
Return of investment
The project and the documentation should be capable of providing an adequate return to
investors in the project. This is a universal necessity in order to justify any private investment in
any venture. In our project the contractor had to arrange for finance on his own at a certain
cost to him and hence he would expect that he earn a certain percentage more in doing the
work than the rate of interest he has to pay funds to execute the work.
Financial Risk
This risk faced by the contractor is similar to that faced by the client. In our case, the contractor
was paid after the work was carried out and he was given no advances for his mobilization, etc.
This resulted in him resorting to taking finance from lenders at a cost. He would then pay off
the debts when he got paid by the client. In such cases the timing of payment made by the
client plays a very important role and the contractor must make the payment terms clear
before he can take up the contract.
Physical Risks
Physical risks relate to the ground conditions, natural conditions, adverse weather conditions,
physical obstructions and other physical conditions that would adversely affect the
implementation of the construction activities at the project site. It happens at site that the
ground conditions are not what the consultant has assumed in his design. In our project this risk
was not faced by contractor as things were laid to rest in the consultant's report.
Construction risks
The construction risk relate to the factors affecting the very ability to undertake construction
activities like availability of resources, industrial relations, safety during construction, quality of
raw material, workmanship, delay in supplies, strikes by transport operators, shortage of
material required for the project construction techniques, failure to comply with construction
milestones, cost of construction, etc.
Design Risks
The design risks relate to, as the term itself suggests, the risks associated with the design of the
project facility. These relate to incomplete design, design life, availability of information,
compliance with standards, completion of design, viability of design, etc. In some cases even
there may be a change of the standards being followed in designing such project facilities. The
contractor in his contract with the client indemnifies himself against any errors made by the
consultant by stating that the erection has been done based on the drawings supplied by the
contractor.
Risk avoidance
This is perceived as the ultimate mitigation strategy implying that the project may be aborted.
This may be caused by eliminating the cause of the risk. Alternative courses of action are
examined. Other examples of risk avoidance include the use of exemption clauses in contracts,
either to avoid certain risks or consequences of risks. In certain cases the project may be
aborted. An example of risk avoidance in our projects is that the client who gives work of as
built drawing to the consultant mentions on his purchase order to the consultant that he be
indemnified from any wrong assumptions made by the consultant or any wrong policies
followed by the consultant and which are against standards laid out by the statutory bodies.
Risk reduction
This method adopts an approach whereby potential exposure to risks and their impact is
alleviated. Here one considers alternative solutions for risk reduction, examining in detail and
obtain more information. Take management or design action. In our projects the client used to
employ this strategy by giving other cellular operators the use of the tower installed at his cost
by charging a monthly fee for the same from the operator. This will reduce his risk to the extent
that his cost of maintaining the facility will become less to that extent.
Risk transfer
This method involves the transfer of risk to other project participants. Commonly, risks are
transferred through the placement of contracts, the appointment of specialist sub-contractors
or suppliers or by taking out an insurance policy. In our projects the cellular operator used to
transfer the risk on the project company, by not paying it any mobilization charges or advances
for the work commencement. The project company in turn was transferring the risk to the
contractors by paying them when they completed the work on a particular tower site. Thus
they used the method of risk transfer to mitigate the risks. Secondly the client used to transfer
the risk of damage to his expensive tower equipment by taking out an insurance policy for the
same.
Risk sharing
Where a portion of the risk is transferred whilst some risk is retained this is known as risk
sharing. This approach may be adopted where the risk exposure is beyond the control of one
party. In such instances it is imperative that each party appreciates the value of the portion of
the risk for which it is responsible. In our project of tower erection once the tower erection and
commissioning was complete then the cellular service provider would share the facility with
some other operator so that he could earn some money in the bargain and thus share the risk
that he bears against the owner of the land.
Risk retention
Once all the risk mitigation strategies are exhausted and there are still some risks remaining,
then this method is adopted to nullify this risk. This means that when the estimate is being
done for tower erection then some contingencies are always considered in the estimates to
eliminate the residual risks that remain after applying all the risk mitigation strategies that are
elaborated earlier. In our project the consultant employed this strategy to mitigate the risk that
he faced from his staff i.e. he used to bear the burden of wrong design and assumptions made
by one of his employees in designing the tower. The consultant paid compensation to the client
for any such eventuality.
Insurance
This is a technique of risk transfer or risk reduction depending upon the nature of the contract
between the insurer and the insurance company. This is a technique to minimize the cost of
loss due to specific risks for a certain consideration. This technique was adopted by the cellular
services providers to transfer the loss due to damage to their towers to the insurance company
for a specific consideration. The contractor who was executing the projects was also resorting
to this method of risk management for covering his loss due to any damage to his equipment
used for execution.
Allocation of risks
This would entail a third party to undertake the measures to control or mitigate a risk, and bear
the adverse consequences, if it is not able to redress the risk, thereby insulating the other
parties to the project from the direct impact of the risk.
The main principle for evaluating an adequate allocation or risks is that the party which is best
placed to control or redress the risk or the circumstances that may arise if the risk occurs
should be allocated the risk.
CONCLUSION
Thus we see that risk can be managed, but to do so, requires a deliberate and structured
approach. A pragmatic approach to risk management should be followed depending upon the
project success depends ultimately on a combination of honest intention, rigorous analysis and
professional judgement