Construction sector must adopt risk management strategies for growth

Construction sector must adopt risk management strategies for growth
Financial Express, January 14, 2010, Page 12

R Ravichandran, Chennai

The construction industry in India is estimated to be around $55 billion and accounts for more than 8% of the GDP. It is also the largest employer after agriculture as it provides employment to more than 3% of the country’s population. The industry has been on a high-growth trajectory, growing at more than 12% per annum in the last four years, i.e. almost 1.5 times the country’s overall growth.

Despite the high growth potential, the industry is subjected to more risk and uncertainty than many other industries. The process of taking a project from conception to completion is complex and entails time-consuming design and production processes. It requires a multitude of people with different skills and competing interests and the co-ordination of a wide range of disparate, yet interrelated activities. Such complexity is further compounded by many uncontrollable external factors.

Unfortunately, in a highly competitive and complex climate that is fraught with risk, unfavorable outcomes can often plague these projects and their participants. Many of the risks emerge over time. Projects that appeared progressing at one time suddenly becomes unmanageable. Risks combine and interact to create turbulence. Many risks are linked to the life cycle of the project. That’s why effective identification and analysis of risk sources is extremely important.

The extent to which these construction risks can be successfully identified and managed largely determines whether a project meets its schedule, budget and quality assurance targets. To succeed, organisations must commit to addressing risk management throughout the project lifecycle.

Projects that face technical risks reflect their engineering difficulties and novelty. Some of these risks are inherent in the designs or technologies employed. Incomplete designs are a widely recognised problem on construction sites.

Resource risks refer to the timely availability of resources — particularly raw material, construction equipment, spare parts, fuel and labour. It also includes the risk that the raw material prices might move adversely. Rising material costs affect profitability and competitiveness, particularly in cases of lump-sum turnkey contracts without any price-escalation clause.

In recent years, India’s liberalised regime has created opportunities and also increased competition in the construction business, which has seen significant interest of foreign players. The competitive environment varies depending upon size, nature & complexity of the project as well as the geographical region where it is to be executed. New competitors entering the market and the current competitors pricing more aggressively intensifies the highly competitive condition that already exists.

A construction company relies on innumerable third parties for timely supply of specified raw materials, components, equipment and services. Some events could result in the complete or partial failure of supplies or in supplies not being delivered on time. Supply disruptions may also be the result of excessive dependence on a single supplier, strikes, lockouts, natural calamities, supplier insolvency or unexpected logistics challenges.