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Jarosław GÓRECKI

UTP University of Science and Technology, Bydgoszcz, Poland

RI R IS SK K F FA AC CT TO O RS R S F FO OR R T TH H E E L LI IF FE E C CY YC CL LE E O

O F F T TH HE E C CO ON NS ST TR RU UC CT TI IO ON N I IN NV VE ES ST TM ME EN NT T PR P RO OJ JE EC CT T

Keywords: Risk, Construction Project, Project Life Cycle

Abstract

This work is a study of risk factors for a construction investment project. These projects are set in the formal and legal conditions specific for the construction industry. They are also involved in relationships with a number of stakeholders having an impact on their progress. Risk factors created during the life cycle of construction projects and their impact on the cost and time of investment implementation were described.

To analyze the risk in the construction investment project, the method of review project documentation can we use, as well as the analysis and evaluation of documentation re- lated to the preparation and implementation of the construction.

Introduction

The term "risk" occurs in sciences about management usually in the analysis of decision-making processes; it refers to the characteristic of events which de- prives (or limits) decisions and resulting action of effectiveness, advantage and economicality. The probability of such events occurring is a touchstone of risk [Bizon-Górecka, Górecki, 2013].

Risk we can see as probability of deviation (difference) between a plan and reality, or as posibility of some negative situation or a negative result which taking place [Pritchard, 2002].

Risk is the attribute of any venture. The risk in the project is connected with an incomplete predictability of the future conditions of its functioning. There- fore, for the need of a project, risk shall be defined as a product of likelihood of events and the consequences of its influence on the processes across the project [Pawlak, 2006].

No construction project is risk free [Renuka et al., 2014].

Academic and advisory institutions dealing with the issues of the effective management have recognized the principle role of risk management within this field. They have conducted a great number of educational activities for the man- agement personnel from various economic sectors.

Project risk management is the processes concerned with identifying, analyz- ing, and responding to project risk.

Long life cycles of investment and construction projects, counted from the ideation, through its materialization, maintenance up to the phase of liquidation

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of erected buildings, make it necessary to take into account the philosophy of sustainable socio-economic development, harmonized with respect for the envi- ronment. Compliance with the principles of sustainable development in relation to construction means designing solutions for building objects (buildings and structures) and ways of their implementation in a manner that is friendly to peo- ple and their natural environment, taking into account the economic calculation [Rak, 2014].

A construction project is plagued with various risks in all the stages of the life cycle of the project. The stages of the life cycle of a construction project represents fig. 1 [Połoński, 2011].

Pre-design works

Projects

Implementation

Exploitation . . .

Initial concept

Feasibility study

Project, arrangem

ents Preparation for implementation

Implementation

Start Exploitation . . .

1 2

3 4

5

6

The cycle of implementation

Investment cycle

Fig. 1. Stages of the life cycle of a construction project

1 - an idea for a new investment, 2 - selection of a specific location variant and technical conditions for the construction of the facility, 3 - decision to continue work on preparing the planned object for implementation, 4 - obtaining a build- ing permit or notification of construction works, 5 - final acceptance and possi- ble removal reported defects, preparation of as-built documentation, transfer of the object to the investor, 6 - liquidation of a building object

Source: elaborated on the basis of [Połoński, 2011].

In each construction investment project, four stages of the investment process can be distinguished [Projekt celowy, 2004; Rogoża, 2014]:

Phase A - preparation, the main products of which are documents establis- hing the general strategy for the implementation of the undertaking, including:

– Project assumptions, specifying the purpose, scope, expected results, ma- terial program, forward plan and necessary resources of the undertaking,

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– Project management plan, specifying the way of proceeding for the im- plementation of the Project's assumptions;

Phase B - design, the main products of which are technical documents de- scribing the final product of the undertaking, including:

– Drawings and technical descriptions necessary for proper performance of the final product of the undertaking,

– Specifications of technical conditions of performance and acceptance of works that constitute the final product of the undertaking,

– Object of works that constitute the final product of the undertaking;

Phase C - construction, whose main products are:

– A completed building object, being the final product of the undertaking, – Documentation containing tips for proper operation and maintenance of

the facility;

Phase D - use / operation, which does not lead to a specific product, but is associated with the assumed operation of the facility and its conservation, and often in further stages with modernization; as part of this phase, after the expira- tion of the warranty period final acceptance of the subject of the investment is made.

The specifics of the construction project

The development of a new building structure, as well as its renovation, mod- ernization or reconstruction of the original state requires taking a lot of con- scious actions and decisions. The sequence of these coordinated actions and activities of a technical, technological, organizational, legal, financial, etc. na- ture, which lead to the implementation and exploitation of the planned construc- tion project in a given time and costs, is called a construction investment pro- cess. On the other hand, the full life cycle of an investment is the time from the idea of investment implementation to the liquidation of an investment with the effects of its existence, e.g. for the environment [Połoński, 2011, Plebankiewicz, 2006].

Construction is a broad field of the economy, covering the problems of sha- ping the natural environment of a man with long-term effects - often irreversible.

The implementation of construction projects differs from production in other areas of management as it takes place under specific conditions.

The following features of building production deserve to be emphasized [Bi- zon-Górecka, 2016]:

- in the course of construction tasks, products (building objects) are perma- nently connected with the place where they are created,

- interference in the natural environment in the course of construction proces- ses implies a number of formal and legal requirements,

- complexity of formal and legal issues, technological and organizational complexities as well as work safety hazards in the course of construction pro- duction make the engineering, technical and specialist staff have a number of

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requirements in terms of necessary powers, including the right to perform inde- pendent technical functions in construction,

- the requirements of stakeholders of investment and construction projects stimulate globalization processes,

- building construction processes are characterized by the need for a large number of diverse production resources, including a significant share of mass materials,

- implementation of construction processes requires successive supply of production resources, which makes it necessary to jointly consider organizatio- nal logistics of production (ongoing logistics service of construction processes) and supply logistics (external supplies of raw materials, semi-finished products and prefabricates) and waste collection,

- diversity of resource requirements for construction investment projects requires the use of diverse logistics systems,

- technology of building processes realization stimulates their sensitivity to climatic conditions.

Tasks of a risk manager in the construction project

A risk manager is a specialist on difficult situation in the construction project.

His role in the project consists in providing dynamic answers to the following question: how to throw a security blanket around the project, enabling to take some risk in allowable limits?

The risk manager in the project is especially responsible for monitoring the policy of risk, rooted in the objective of the project. First and foremost, he should deal with acquiring some knowledge about the future – should explain to employees what factors impact the success of the project.

A risk manager realizes action referring to the issues of risk in the project, being the subject of risk management. Phenomena requiring an active attitude of managers, including among other things: the construction the policy of risk, its identification, measurement, taking action, control, are the subject of risk man- agement.

Mission and aims constitute the subject of risk management in the project.

The degree of not fulfilling mission and not achieving aims of the project can be defined as being risk management in the project (in set periods of time). The loss of profit can be the consequence of risk management defined this way. Projects can insure themselves against the loss of profit, but also managers can insure themselves against civil responsibility for professional risk, connected with the management of the project (e.g. realizing managerial contracts). The risk of management in the project can also be considered individually, with reference to respective subsystems. For example, in quality management it is quality that is the subject of considerations of risk. The level of not fulfilling quality require- ments quality can be a measure of risk in this area.

The tasks of a risk manager especially include:

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- identification and collection of information about risk occurring in respec- tive processes, and also an assessment of dangers to which the given pro- ject is exposed outside,

- specification of the type events which can be the cause of damage and what impact will be on the financial condition of the project,

- building scenarios for risk-taking, which was identified and, if possible, measured, i.e. the prevention of causes, and if the effects of dangerous events are impossible to avoid.

A risk manager must make an up-to-date and detailed analysis of external and internal events, occurring in the project, which can pose a danger to others. Be- sides, he should specify the possibility of damage, i.e. the probability and size of loss. On the basis of proper evaluation of damage, the management of the project will be able to take appropriate measures aimed at lowering the degree of expos- ing the project to the loss of its assets. After identifying and exact evaluation of risk by the risk manager, the management must specify the means of prevention eliminating or lowering the assessed risk. Each time the selection of proper means should be the result of a detailed analysis of the effectiveness and costs of their introduction. One should take into account the fact that costs of limiting risk cannot be higher than the value of damage which might occur [Marcinkow- ski, Koper, 2008].

The function of a risk manager in the project is to serve management. He must take care of there being facilities for effective management in the condi- tions of ubiquitous risk. The major part of these facilities is, generally, the in- formation system along with the data bank about phenomena from the past, serv- ing the planning of the future. The structure of the system of planning, based on the analysis of the situation inside the project and danger from its surroundings, is an essential part of these facilities. The system of planning in risky conditions should be flexible and susceptible to signals. It cooperates in specifying the poli- cy of the project based on the concept of risk.

Risk manager and at least one of his specialists must know the specifics of the construction branch. Both its business problems, and technological methods applied in the project of internal processes.

Risk map in the construction project

Risks encompassing the events that have an impact on project efficiency may be technical, economic as well as economic-technical.

Among technical risks, the following may be distinguished: risk of technical appliances and technological lines reliability, product quality risk (encompassing product safety risk, risk of product use reliability), and others.

Among economic risks, we may distinguish: risk of planning data reliability, market mechanisms risk, competitive position risk, financial risks (risk of offer price, risk of cost assessment, risk of financial liquidity, inflation risk, currency

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risk, credit standing risk, interest rate risk, stock market risk, warranty issuance risk, investment risk).

Among economic-technical risks, the following may be distinguished: risk of engineering product design solutions engineering, risk of employees’ qualifica- tions in the entire product creation process (connected with correlation: the level of qualification and salary costs), risk of synchronizing realisation processes, logistic risk, risk of technical progress.

The mapping of risks, consisting on the risk of a functioning the project. The identification of risk factors is based on ideal recognition of processes, including technological principles. It should be also noted that some elements of risk are unpredictable. Therefore, the analysis of risk factors should be dynamic. In the classification of risk, the division may be made into: universal and specialized risk. The latter is a most common managers’ concern as it implies the threat of loss without any benefits and may imperil some project existence.

The specification of project risks is presented on Fig.2.

An exceptional type of risk is financial risk. It is generally comprehended as discrepancy between the expected and real business entity’s results, which is visible in the variance between the achieved results and their oscillation around the expected value. Some sort of regularity may be discerned in these oscilla- tions, which with assumed level of likelihood (the level of trust), enable as- sessing the scope of results fluctuation.

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CONSTRUCTION PROJECT RISK

UNIVERSAL RISK SPECIALIZED RISK

CLASSES ACCEPTABLE

NORMAL

INDISPENSAB UNACCEPTAB

TYPES OF LOSS

RISK OF HEALTH LOSS

RISk OF ECOLOGICAL

LOSS

ECONOMIC CONDITIONS

RISK

EXSPLOITATION &

LIQUIDATION OF BUILDING OBJECT CONSTRUCTION

RISK PREPARATION

OF INVESTMENT RISK

INVESTOR RISK RISK OF PROPERTY OWNERS

FINANCIAL RISK

TYPES OF LOSS

CREDIT STANDING RISK FINANCIAL LIQUIDITY RISK

RISK OF AFTER PRICE COST ASSESSMENT RISK

WARRANTY INSURANCE RISK OF ADMINISTRATIVE

SERVICE COMPETITIVE POSITION RISK

RISK OF HARMONISATI

ON OF TIME FUNCTION PROCESSES

RISK OF USE OF MACHINES &

APPLIANCES

TECHNICAL PROGRESS RISK RISK OF

TECHNICAL PREDICTIONS

RISK OF MARKET RESEARCH

INVESTMENT RISK

MACROECONOMIC RISK DESIGN OF

CONSTRUCTION RISK

LOGISTIC RISK - DEPENDENCY ON SUPPLIERS &

RECIPIENTS LEGAL

ACCORDANCE

PROJECT SCOPE RISK

TECHNOLOGY RISK

QUALITY RISK

RISK OF ECONOMIC PROSPECTS

RISK OF FORMAL &

LEGAL FORECAST

RISK OF SCHEDULE

COST RISK RISK OF

LIQUIDATION PROCESS RISK OF

INNOVATION

Fig. 2. The specification of risks in the construction project Source: the own study

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The factors causing high economic risk in the project emerge within macroe- conomic environment of project. Importantly, these factors stem from the pro- ject’s specificity and from its branch.

Risk management is related to decision making as regards the risk affecting factors. In the project, risk management is facilitated by deducting the probabil- ity of loss of expected project efficiency.

Basic stages of risk management are [Bizon-Górecka, 2007]:

– risk identification, – risk estimation, – steering the risk, – funding the risk,

– control of undertaken activities.

Strategic aims of risk management, consistent with general aims of the con- struction project can be presented as follows:

In terms of clients’ satisfaction:

– goods and services consistent with the requirements set earlier, – goods safe in operation,

– goods reliable in operation,

– goods and services delivered in time.

In terms of meeting owners’ expectations:

– optimal profitability of production, – good image of the enterprise.

In terms of employees’ satisfaction:

– satisfaction with work, – satisfaction with workplace.

In the sense of realizing social expectations:

– production of goods and realization of services in an environmentally friendly way,

– use of environmentally friendly technology and materials.

Risk management should be considered to be the systematic process of man- agement in the organization, being exposed to risk in terms of achieving set goals, referring to interests of owners, employees, public interest, safety of peo- ple, environmental factors, law, to name only a few.

Risk management should be based on interdisciplinary knowledge and on- target choices. Raising the awareness and competencies of employees through permanent training is the most important element for the system of risk man- agement to function properly and seamlessly [Bizon-Górecka, Górecki, 2014].

The aim of control of the undertaken activities is to check the efficiency of activities aiming to limit the risk. The procedures of internal controls play a great role in controlling and limiting the project risk.

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Conclusions

It is noticeable that the instruments used within the management field have developed into general management concepts, e.g. controlling, benchmarking, outsourcing, Total Quality Management (TQM), etc. Risk management merits a similar occurrence.

The classification of risks according to the probability and overall result as- sessment of certain risks comprises the first step to systemize the issues of pro- ject risk. The next step is to analyse in detail the effects of risk and risk preven- tion.

The systemic risk management in holistic terms constitutes the aspect of the whole functions of management is stands the chance of being the road map for ensuring the sense of safety of the project.

Maximization of safety is the basic aim and direction of action connected with risk management. Safety should be understood to be a total level of safety measured by reverse probability of some damage occurring. Such safety is as a rule the highest when no action occurs.

Determinants of the surrounding influencing the decision-making process of different character, and that is why only a universal tool enables to consider it properly supporting management.

The analysis of the surroundings of project, referring to their situation in free- market conditions, leads to many achievements of cognitive character, which can have application use. It also refers to marketing considerations.

The theory of management by risk stands the chance of being a universal concept of the management of the project.

To recapitulate, the introduction of the proper strategy of risk management in the project enables to:

– raise awareness of the consequences of dangers,

– focus attention on the system approach to risk management, – manage control effectively and centrally,

– effectively process information about potential dangers, reduce long-term expenditure for the benefit of prospective advantages.

REFERENCES

[1] Bizon-Górecka J. (2007), Modelowanie struktury systemu zarządzania ryzykiem przedsiębiorstwie – ujęcie holistyczne, TNOiK, Bydgoszcz, Poland.

[2] Bizon-Górecka J., Górecki J. (2013), Ryzyko budowlanego projektu inwestycyj- nego w perspektywie kosztów budowy, [in:] Przegląd Organizacji No 6/20013, p.

36-44.

[3] Bizon-Górecka J., Górecki J. (2014), Holistic recognition of risk as a condition of organization safety, [in:] Managing Organizations in Changing Environment, Chapter 20, edited by Andrzej Jaki, Tomasz Rojek, Cracow University of Eco- nomics, Cracow, p. 215-224.

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[4] Bizon-Górecka J. (2016), Execution problems of construction projects – case studies (in Polish), [in:] Materiały Budowlane No 6/2016, p. 145-146.

[5] Marcinkowski R., Koper A. (2008), Ocena ryzyka czasu i kosztów w planowaniu produkcji budowlanej [in:] Przegląd Budowlany No 7-8/2008, p. 70-75.

[6] Pawlak M. (2006), Zarządzanie projektami, Wydawnictwo Naukowe PWN SA, Warszawa.

[7] Pritchard C. L. (2002), Zarządzanie ryzykiem w projektach. Teoria i praktyka, WIG – PRESS, Warszawa

[8] Plebankiewicz E. (2016), Koncepcja modelu predykcji rzeczywistych kosztów realizacji obiektów budowlanych [in:] Materiały Budowlane No 8/2016, p. 116- 119.

[9] Połoński M. (ed.) (2011), Investment process and operation of construction works (in Polish), SGGW, Warsaw, Poland.

[10] Projekt celowy Nr 6T07 2004 C/6413 pt.: Krajowy system zarządzania budowla- nymi przedsięwzięciami inwestycyjnymi finansowanymi z udziałem środków pu- blicznych i pomocowych Unii Europejskiej (KSZBPI).

[11] Rak A. (2014), Budowlane przedsięwzięcia inwestycyjne. Środowiskowe uwarun- kowania przygotowania i realizacji, Wydawnictwo Naukowe PWN SA, Warsza- wa.

[12] Renuka S. M., Umarani C., Kamal S. (2014), A Review on Critical Risk Factors in the Life Cycle of Construction Projects, Journal of Civil Engineering Research, 4(2A)/2014, p. 31-36.

[13] Rogoża A. (2014), Wpływ zmian w dokumentacji na proces inwestycyjny, [in:]

Przegląd Budowlany No 11/2014, p. 38-41.

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