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By Mylan Vu
May 14, 2018
Managing a construction project or being a construction business owner in Australia requires good risk management in order to avoid losing money. As the potential cost blowout on the M5 construction demonstrates, poor risk management can lead to significant monetary loss.
If you want to prevent unnecessary money loss on construction projects, here are three key areas to focus on:
1. Mitigating Risk
Risk is a significant concern for any construction project. Therefore, a large part of project management involves managing it. Each risk you mitigate or remove reduces your chances of losing money. However, there are hidden risks in project contracts that can often create trust issues and cost you money under the radar. Given that every single construction project is vulnerable to risks, establishing trust can help mitigate risks and reduce uncertainty.
Issues of trust have been particularly problematic between construction project workers and clients, with 28 builders being prosecuted for unlicensed building work over the 2016/17 financial year. This places consumers at risk and causes them to be more cautious, creating possible problems for the construction industry.
The construction industry typically approaches risk management using a transactional procurement approach, despite substantial research proving its shortcomings. This approach is problematic since it places individual interests at the front of project interests, which inevitably results in disputes. Poor contract conditions can result in parties exploiting contracts in terms of prices, errors, and variations, creating inefficiencies. Construction projects can be thus delayed substantially, involve reduced productivity, and ultimately lead to increased money loss.
An alternate risk management approach to transactional procurement is relational contracting procurement. It focuses on encouraging cooperation and effectively allocating tasks to improve risk management. Establishing relational contracts between contracting partners allows stakeholders to explicitly detail sharing of risks and account for the constantly changing construction landscape. Relational contracting allows to develop strong relationships built on trust, helping to improve risk management of construction projects and reduce money loss.
When it comes to managing your own risk, property insurance is often overlooked. Examples such as the recent construction fire at Circular Quay earlier this year demonstrate that damage of property and materials are a potential risk of construction projects, and they can result in significant costs.
Contractors of construction projects should consider turning to business risk policies and insurance floaters. These can protect supplies and property costs so that you avoid losing substantial money. Installation floaters provide contractors with protection for materials and labour, including materials that are in transit or staged at an offsite location. Business risk policies, on the other hand, cover property that is constructed from the ground up over the course of the entire construction process. Both of these types of insurance help ensure the risk of property or material damage during construction projects does not result in significant expenses.
2. Poor Scheduling
There are numerous ways in which money can be lost due to bad scheduling. Unfortunately, this often doesn’t become apparent until the project is over and performance is reviewed.
One of the chief culprits of this is incomplete work sequence breakdown. If work sequences are missing necessary steps for tasks, not only will the activity itself fall behind schedule, but all of the successive activities that rely on its completion will also face delays.
According to a study conducted by Hemanta Doloi, poor scheduling and planning was considered to have the highest impact on cost performance by clients, consultants, and contractors. Practical schedules are required to allocate time efficiently so that tasks can be completed on time. Also, good scheduling is necessary to define the scope of construction projects and establish realistic performance expectations.
Establishing realistic schedules for projects is important to prevent extensive delays which can result in massive cost overruns. Management strategies for controlling the adverse effects of delays should be developed to reduce money loss. Furthermore, identifying the root causes of delays can help schedulers of construction projects guarantee successful outcomes.
Efficient scheduling of construction projects is necessary to ensure that projects can keep pace with growing demand. For example, Melbourne’s population is expected to grow to eight million people in the next two decades, placing pressure on the property construction industry to cater for this growth. Good scheduling is needed to prevent delays and cost overruns and ensure projects get completed on time.
3. Theft of Tools, Materials, and Equipment
According to research by The Construction Mining and Equipment Industry Group (CMEIG), theft of tools, equipment, and materials cost the Australian construction industry $50 million per year.
Theft of heavy equipment is a significant source of theft in the industry. There is increasing evidence suggesting that many of the thefts are being undertaken by organised crime groups. These crime gangs are attracted to stealing heavy equipment because these high-value products can be sold with relative ease. Furthermore, there is no national identification system for stolen equipment, decreasing the likelihood of its recovery.
Increases in construction projects can lead to more incidences of theft. For example, the mining boom and associated infrastructure projects in Queensland have contributed to increases in heavy equipment theft. The thefts can impact workers on construction projects adversely, by causing delays, reducing productivity, and resulting in loss of money. Small contractors and construction owner-operators are particularly affected by the theft of equipment as they are reliant on small amounts of materials.
Controlling losses from theft requires systems and processes that effectively account for and keep track of tools, materials, and equipment throughout the project. Ensuring that your theft prevention policy is known and understood by all personnel engaged in the construction project will help reduce grey areas and prevent the possible money loss.
By following good contracting procedures, managing schedules effectively, and taking care of physical assets, you can save big. This will result in other bonuses, such as reduced stress and better project outcomes.
If you liked this article, here are a few eBooks you may enjoy:
Project Management Guide: Part 1- Planning
Project Management Guide: Part 2- Scheduling
Project Management Guide: Part 3- Project Controls
Saving Time and Money: Satterfield and Pontikes
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