Introduction
There is a lot of progress made in the practice of risk management in housing within the construction industry sector in America. The sector is prone to different types of risks because of a rapidly changing environment. There are few transferable practices since each project presents different operational conditions and different environmental constraints even if based on the same design.
For this reason, the practice of risk management is crucial to the success of projects. Stevens (2002) notes that, “to succeed the risk management process must be treated with respect within an organization and has to be implemented early to achieve the greatest effectiveness”.
Risks refer to events, which cause some degree of disturbance to the flow of a project when they occur. When such disturbance is positive, it results in a positive risk, while if it is negative, it results in a negative risk. Two measures apply in risk analysis. The first one is a risk’s probability of occurrence while the second is the damage that results from the occurrence of the risk event. The probability of the occurrence of the risk measures the degree of certainty within which the risk may occur.
The consequences associated with the risk describe the seriousness of the effects of the occurrence of the risk. These consequences vary from insignificant to catastrophic. Boyd and Chinyio (2002) best summarize the purpose of risk management when they say, “clients need better value from their project, and construction companies need reasonable profits in order to assure their long term future”.
Types of Risks Associated To the U.S. Housing Construction Sector
Various causes of risks characterize the risk source portfolio for housing construction projects. There are a number of ways to categorize then including project homogeneity versus project heterogeneity, environmental analysis and controllable versus uncontrollable risks.
Housing construction projects have various degrees of homogeneity and heterogeneity. Homogeneity encourages transfer of skills and lessons since it hinges on similarities between projects. The biggest risk associated with homogeneity in housing construction projects is the replication of a construction fault across projects based on the same design.
If the contractors use a particular method of construction or a certain type of material that ends up being a source of damage to the houses, the company will face huge project losses. This scenario requires that for large scale homogenous projects, there is need for sufficient time for design and testing in order to stem the risk of a serious fault finding its way across the entire project.
There are more risks associated with heterogeneity. This is because working on a project never done before makes it difficult to determine the effort and resources required. Risks arising out of homogeneity still occur even in very similar housing projects because of differences in environmental conditions. Risks arising out of heterogeneity include unpredictable site conditions and different management styles.
Others are sources of inputs such as labor and materials, and differences in element specifications. Physical conditions for every site, even for housing construction within one area may vary widely. Winch (2010) verifies this by stating, “There are difficulties which cause pressures to reduce levels of standardization”. These differences come about because of different soil profiles, old uses of the land such as quarrying and the presence of pools and depressions.
These conditions have different preparatory requirements, which may alter the timeframe and the resource outlay for the project. The fact that most of them only come to the surface when the project work has begun makes them the source of considerable risk. Management style is a source of risk for large-scale housing construction projects, which require different management teams to work together for the successful completion of the project.
Thompson and Perry (1992) indicate that, “effective management of risky projects demands rapid and realistic predictions of alternative courses of action and positive decision-making”. If there are managers who cannot get along because of personality differences or because of the use of different management styles, the project will suffer. Finally, among the risks associated to homogeneity, are differences in sources of raw materials and labor.
The nature of housing construction projects makes it difficult for contractors to maintain the large and diverse workforce required for the successful completion of housing projects. This discontinuity in labor supply is a source of risk for the housing construction industry. Distance affects the supply of raw materials from the supply source. Other factors include the availability of the materials and their suitability for specific environments. These factors contribute to the risks associated to the housing construction industry.
Another method used to evaluate risks in the housing construction sector in by assessing the project’s internal and external environment. The project’s stakeholders determine the effects of the environment on the project. The external project environment constitutes political, social, and economic elements while the internal environment comprises the project team.
Morledge, Smith, and Kashiwagi (2006) observe that there is, “need for a politically skilled champion prepared to fight for the project against strong opposition”. Housing construction remains vulnerable to political issues such as uncertainties due to elections, wars, legislation, and activism. These impinge on the project’s development and alter its progression, usually in unpredictable ways.
External economic risks to housing construction projects come about because of fluctuations in foreign exchange, and severe economic times characterized by inflation, depression, and recession. The housing construction sector is especially vulnerable to economic risks because of the time span required between the inception of the project and the break-even point.
The whole process takes years, which makes it impossible to forecast the economic environment. The internal environment of a project comprises the project management, the workforce, and the client.
Evidence of Risk Leading To Poor Performance
The financial crisis in the US provides an excellent example of how risk can lead to poor performance in the sector. The housing industry provided the conditions necessary for the entire country to get into a recession. Sowell (2010) notes that, “during the housing boom, there were some voices of sanity that warned against the risky way things were being done”. The property bubble caused by a bulging housing bubble made house prices to rise to artificial heights.
When the market sought to correct itself, the result was a sharp decline in property prices, characterized by widespread foreclosures as financial institutions sought to recoup their investments. The housing construction sector was particularly vulnerable because of the project duration for houses, and the fact that the building of houses is not for ready markets but for projected markets. Any changes in income levels affect the potential market and hence put the entire investment at risk.
Evidence of Established Risk Management Practice in Your Chosen Sector
The Construction Management Association of America champions for housing construction risk management. It advocates for the use of the ‘CM at-risk’ approach to project management, which seeks to ensure that the contractor delivers the project within the Guaranteed Maximum Price (GMP). The International Risk Management Institute (IMRI) recently organized a conference on risk management in the November 2010.
IMRI regularly organizes these conferences targeting various professionals in the housing construction industry. Another body that provides support for risk management in the construction industry is the Construction Financial Management Association (CFMA). It provides financial risk management services to the housing construction industry. These demonstrate that there are different risk management interest groups working within the American housing construction sector.
Risk Management Practices Applicable To U.S Housing Construction Sector
There are some options for risk management in the sector. They include Standardization of construction processes, training of construction on risk management, using risk management consultants to provide risk management training and advice. Housing construction projects have several stages and processes that are similar.
The standardization of these procedures provides the opportunity to reduce the risks associated with them. It would ensure that the processes benefits from learning that take place in the process of project execution, so that transferable lessons contribute to risk management.
Kelly, Morledge and Wilkinson (2002) observe that, “the knowledge obtained from a risk management strategy can assist with preparing the tender, selecting the resources and methods of construction, interpreting the contract and pricing works”. Secondly, many construction managers have inadequate training in risk management. They associate risk management to insurance and not the entire process of construction.
This perception creates a rift that stops construction managers from taking advantage of risk management techniques available to them. Finally, there are consultants who provide risk management services. These consultants provide professional guidance to contractors on various elements of risk management thereby improving the risk preparedness of a given project. One of these consultants, PwC, provides clients with capacity to “implement project and cost controls” (PwC, 2010).
Reference List
Boyd, D. & Chintio E., 2006. Understanding the construction client. Oxford: Wiley-Blackwell.
Kelly, J., Morledge, R., & Wilkinson, S., 2002. Best value in construction. Oxford: Wiley-Blackwell.
Morledege, R., Smith, A., & Kashiwagi D. T., 2006. Building procurement. Oxford: Wiley-Blackwell.
PwC, 2010. Services and solutions risk management. Delaware: PricewaterhouseCoopers International. Web.
Sowell, T., 2010. The Housing boom and burst. New York: Basic Books.
Stevens, M., 2002. Project management pathways. Buckinghamshire: APM Publishing Limited.
Thompson, P., & Perry, J. G., 1992. Engineering construction risks: a guide to project risk analysis and assessment implications for project clients and project managers. London: Thomas Telford.
Winch, G. M., 2010. Managing construction projects. Chichester: John Wiley and Sons.