Not so risky business

“We don’t desire the complete removal of risks: a risk-free society does not exist and is almost certainly undesirable. What we do want is for risks to be assessed and then managed with a transparent trade-off between the benefits from an activity and the costs of mitigating or controlling associated risks.”

Timothy Walker, director general of the HSE, could have been speaking for the whole of the industry when he spoke about risk at the 27th Mountbatten Memorial Lecture at the Institution of Electrical Engineers last November.

For the industry, managing risk has now become big business. Its use from the start of the tendering process right through to the completion of a contract can be a vital component in saving millions of pounds in disputes and delays.

In the past managing risk was not something that contractors could stomach and regarded it negatively. The ongoing joke by quantity surveyors is that the industry adopt the mushroom approach - keep everyone in the dark, and feed them manure.

And although managing risk is nothing new to the industry, high-profile cases over the past decade have shown that failure to do so can cost companies dear. So now is the time for contractors and clients to get their teeth into it.

So what is it? CIRIA, defines risk management as: “identifying evaluating and choosing strategies to keep uncertainty and risk at a tolerable level for a client or stakeholders so as to be able to maximise the return on an investment made. Good management of risks does not necessarily imply a reduction in risk.”

Be, now known as Constructing Excellence in the Built Environment (CEBE), is of the opinion that certain risks can be predicted and it is better for the industry to plan how to avoid incidents and claims in the first place, than review the way it covers itself should something occur. It stresses there are few common standards when it comes to analysing risk and many firms are unable to communicate their position on risk management.

CEBE suggests that: “Better risk management is required but this depends on better integration of project teams and collaboration between team members. Teams need to sit down in the pre-planning stage of a project to review working methods and processes, share the information and experiences openly, and agree who is best placed to manage the residual risks that cannot be designed or managed out.”

According to the Institute of Chartered Accountants in England and Wales, risk management is now a core business process and should be planned for accordingly.

The Institute notes that the key to success includes clear channels of communication, lack of blame and analysis of mistakes.

There is not just one super solution that fits all. Popular methods already used in construction, for example, include risk registers, decision trees or probability impact tables, but most techniques cover these areas:

• Identifying the risk;
• Selecting the appropriate approach and transferring or avoiding the risk that the business is not competent or willing to manage;
• Implementing controls to manage risks;
• Monitoring the effectiveness of risk management approaches and controls;
• Learning from experience and making improvements.

However, what is more problematic, says the institute, is assessing a company’s appetite for risk. In a 2002 report it states: “There are no standard benchmarks for identifying what level of risk a company chooses to take.” But there is a school of thought that says if you are hungry enough and can manage it, then you can use risk to your advantage.

On a more positive note, the past 10 years has seen a marked improvement in the way in which industry addresses risk. There is certainly more discussion and research on risk management than ever before. This has been followed by a variety of software - such as the CIOB’s Risk Manager for site safety - and a horde of management consultants eager to hand out information for a fee.

Lawrence Waterman, Chairman of Sypol, believes the industry is “definitely” managing risk a lot better. He puts this down to several factors. First, he says, there has been an economic change with the development of PPP and PFI that has led to new skills being forged.

Second, there was the impact of the Turnbull report (‘Internal Control and Risk Management: The developing role of Internal Audit’). Although the report revealed that no single model of risk had gained widespread acceptance, it did (according to later research) raise the profile of internal audit, as well as demand that companies develop a coherent risk management approach that could be scrutinised. Third, as Waterman points out: “Health and safety has gone up the political agenda and major clients are more concerned about it than before.”

Also the Latham and Egan reports have urged reforms and highlighted the need to improve supply-chain arrangements and remove adversarial cultures. They also called for greater efficiency and better value for money.

Another big catalyst for change was the construction of the Cardiff Millennium stadium, which left contractor Laing with a loss of £26m.

Laing had agreed a £99m guaranteed priced contract - which, owing to a design change, would later prove to be its downfall. There were also disputes with neighbouring landowner Cardiff Rugby Football Club. Its construction arm was famously sold to O’Rourke for just £1 in 2001.

Laing later admitted the incident had been a severe wake-up call. Although it did not see a construction company operating without risk, it added that it was strengthening its resources in risk management, management bids and cost planning.

Only a few enlightened companies focus on culture change

Neil Bullen

Such a move was not lost on other contractors. Balfour Beatty announced in 2001 that it was devising a method for managing risk that would be rolled out throughout the company.

Waterman adds that risk management is being integrated into firms at the highest level. “Often the consultants are called in to provide specialist knowledge in specific areas of risk, rather than creating the risk management structure overall. “

According to Neil Bullen, director or management solutions at management consultants Turner and Townsend, there has been an increase in the use of consultants by construction companies.

He says there are a variety of systems that can be used, but it tries to work out a system that covers processes and cultural behaviour – the latter is something the industry is not too good at addressing.

Bullen adds that time needs to be spent on focusing on a culture change, and only a few ‘enlightened’ companies are taking this on board.

He takes the view that risk should not be an isolated project, but integral to a company. There should be a clear structure and ownership of the process. This should be transparent, robust and include performance of individuals.

Although people are good at managing difficult situations, efforts should be made to look at the triggers that could cause problems, rather than dealing with the risk when it occurs, he says.

Many people regard risk management as a bolt-on; a way of just ticking a box. Bullen says it needs to be embedded in meetings and should engage with all stakeholders at the appropriate time. It is crucial in the management decision-making process. And it should not just be limited to a couple of people in a room, he adds.

The advantages are immense. Not only can effective risk management ensure a project runs a lot more smoothly, it also encourages good teamwork, better decision making, certainty and less fire fighting.

Those who choose to ignore it may be left to pay the price. Bullen adds there will be failure to achieve outcomes, and this will also affect the dynamics and the confidence of the team.

Today, risk management is entering a new phase. An approach of the future when looking at risk may be to link it with value Traditionally, risk management and value have been treated separately, but they actually feed off each other.

This concept is explored further in a ‘toolkit’ produced by CIRIA which looks at the advantages of integrating the two.

The publication, Integrating Value and Risk in Construction, states both value and risk need to be considered together from the very start of the project to ensure decision-makers “develop an understanding of opportunities and uncertainties”.

This process also means that fewer workshops and meetings are required and promotes a common understanding and effort to match the client’s objectives.

It says that stakeholders should be involved in the process as early as possible and the toolkit can be used throughout the lifetime of a proposed or built facility. (See box, left).

CIRIA is not alone in its thinking. Reading University has also held a conference that showed how the process of risk and value management can be integrated into the management of projects. Clients are interested, say the organisers, because they want value for money. It also means that a common set of objectives are adhered to.

Clients are also fully aware of risk. “Organisations that adopt a systematic approach to the risk management are less prone to unforeseen disasters and more able to work within tight margins,” they add.

Sandy Mackay, chairman of Risk Management Task Group for CEBE, says there still needs to be greater awareness of risk assessment in the industry. “More people need to talk openly abut risk, because it is a sales opportunity.”