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Guide to risk managementIntroduction |
1.1 |
Why read this document?The decision to construct is likely to represent an important decision for any commercial organisation, even one whose business involves the repeat development of premises for sale or rent. However, the cost of the construction is likely to represent a relative minor cost when set against the business costs of owning or occupying premises that do not best serve the needs of your business. |
1.2 |
The Report of the Royal Academy of Engineering on "The Long Term costs of Owning and Using Buildings" (1998)The above report was based upon an analysis of projects for the construction of new office buildings and produced findings that demonstrated a relationship between construction cost, maintenance/building operating costs and business operating costs expressed by the ratio 1:5:200. In other words, the cost of construction, although undoubtedly a major consideration at the time of construction, was a very small proportion of the costs of carrying on business from that building. In the light of this report it can be seen that focussing too much attention on the initial building costs, without consideration of operating costs, and much more, the costs of carrying on business from the building over the period of your likely occupation is analogous to looking through the wrong end of the telescope. |
1.3 |
What are the client's business objectives?The most important first step for the client organisation is to be clear as to its business objectives and the strategy for achieving these objectives. The procurement of any building (or indeed the refurbishment of an existing building) must be considered against this strategy. For example, a property developer seeking to develop, let and then sell properties as investments, will be concerned to produce buildings that are readily lettable on the open market at the time they are completed. As a result, such a client may be less concerned about the costs of operating the building or the costs of carrying on business from the buildings save to the extent that these considerations enable it to produce buildings that are more attractive to potential tenants in the marketplace. In contrast, a client procuring a new headquarter building, which it hopes to occupy for many years to come, is likely to give far greater consideration to the business operating costs of any proposed building. What is far more difficult to assess is the likely cost of operating the building over the period of a client's occupation and whether the building will help or hinder the client's present business and, indeed, its business as it may be in 3 or 5 or 20 years' time. By way of example of the sort of considerations that may come into play: an organisation involved in the provision of call centre facilities was able, through repeat procurement, to achieve greater efficiency in the design and construction of new call centres based on their previous experience. However, they continued to suffer in the region of a 40% staff turnover per annum. The organisation then decided to experiment with a different form of call centre that was more tailored to the welfare of its employees. Additional space was provided for the operators as recreational areas and greater consideration was given to the layout of the business areas so as not to create the atmosphere of an office sweatshop. The construction cost increased. However, in the new building, staff turnover rates dropped to around 10%. The overall saving to the business from the reduced staff turnover was very many times greater than the additional cost of construction, particularly when viewed over the expected operational life of the new building. |
1.4 |
How does the procurement of a construction project fit with/facilitate the client's business needs?Once the client has established its business objectives, these have to be matched with the proposed need for additional accommodation/facilities and a close match must be established so that the new facilities will indeed further the business objectives. It may well be that there are other means of better achieving the business objectives which do not involve construction. For example, existing premises may be refurbished or working practices may be changed in favour of greater working from home or hot desking. Alternatively, suitable premises may be available to rent at a lower cost, providing greater flexibility and with no adverse effect on the cost of running the client's business. Priorities need to be set between different business objectives which may compete. For example, if the client is in the business of developing investment property where its primary return will be the rent received from satisfied tenants, it may need to prioritise quality, functionality and flexibility of the finished product above simple concerns of lowest cost: by providing buildings that are truly attractive to its potential tenants, it is more likely to safeguard against rental voids than by concentrating on minimising the capital costs of the construction. |
1.5 |
Obtaining advice/involvement of the supply sideClients may require professional advice at any stage of the above process although it is suggested that they alone should be best positioned to decide their underlying business objectives. Professional advice may be helpful when considering possible alternatives to the construction of new premises. However, care needs to be taken to ensure that, until the client has decided that a construction project is the best means of achieving its business objectives, no construction budget is fixed, and no decisions as to the proposed method of procurement are made. Once the above decisions have been made and, perhaps as an assistance to making them (fundamentally, either to construct or not), the early involvement of key representatives of the "supply side" (by which expression we mean those individuals and organisations who will design, construct, and possibly operate, any new or refurbished building) will usually be beneficial. It is vital that the client communicates to them the client's business objectives and involves them in suggesting solutions that are likely to best achieve those objectives. If they fully understand the client's business and aspirations, they will be far better placed to test the suitability of any proposed solution to see whether it best achieves the client's objectives and will also be better placed to identify opportunities and risks that may either enhance or threaten the achievement of the client's business objectives. |
1.6 |
The need for risk assessment/managementAll construction projects are subject to risks and most construction disputes arise where one party has not made provision for the occurrence of a risk. On the client's side, this may amount to a failure to think through its detailed requirements such as that a variation is required. On the supply side, virtually every operation is potentially capable of delay or disruption from the effect of weather, site conditions, market conditions, or the poor interfacing of different links in the supply chain. Risk assessment and management will not necessarily prevent risks from occurring (though often they will; for example, by identifying a potential risk such as adverse ground conditions and taking preventative steps such as ground investigations to identify the nature of subsoil conditions and design around them). However, risk assessment and management should enable the consequences of the occurrence of a risk to be planned for and minimised, for example, by identifying what the monetary consequences of the occurrence of a particular risk are likely to be and making provision for the possible expenditure of this sum. Alternatively, some potential risks can be covered by insurance. Sadly, despite the fact that the science and methodology of risk assessment and management are well known, it was one of the clearest findings in recent research carried out by the BRE ("Simplifying Construction Contracts through Risk Management") that in the vast majority of the projects they reviewed, risk management was being carried out retrospectively, after a risk had occurred. |
1.7 |
Using this documentThe following section of this document sets out a simple methodology that can, and should, be addressed in relation to any construction project, large or small. The sections that follow provide greater detail on the individual steps in this methodology. These sections set out general guidance which is intended to provide an underlying framework to risk management with examples of the way that the general guidance may be applied. The general guidance given is intended to act as a pointer and catalyst for the consideration of risk in relation to any project. It does not, and is not intended to, provide a complete solution: this will be for the participants to any particular project to consider. When considering this document, do not lose sight of the fact that risk management is a tool not a master. Used with common sense, it should enable the delivery of projects with greater certainty and consistency. However, it is the process and the involvement of all relevant parties in considering potential risks and solutions, rather than the paperwork produced, that will best enable potential risks to be avoided or mitigated. |
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