Risk Management in US Housing Construction Sector

Introduction

The housing sector, as part of the construction industry, has a number of risks associated with it. Some of these risks are unique to the sector while others are common for most construction projects. The impact of risk is different across different sectors. There are three sections of risk. They are the risk source, the risk event, and the risk outcomes. A risk does not have to be negative. Some actually improve the standing of the project if they occur. Risk is not only an event, but can also refer to project conditions, which might change, and cause difficulties in executing the project. There are internal and external causes of risks. Internal sources emanate from the project itself while external causes on the other hand refer to events that the project management team has absolutely no control. These require appropriate response strategies. It is not possible to control all risks. Some of them are simply uncontrollable and mitigation is the only viable option in their management. Construction project management in the housing sector of the construction industry requires much more risk management processes than other industries. When a risk event occurs, it normally affects the project duration, project costs, and the quality of the delivered project.

Types of Risks Associated with Housing Construction Sector

The construction industry has the highest risk incidence. This is mainly because of the lower degree of homogeneity between projects compared to other industries. While most construction projects follow the same procedures and utilize the same materials for construction, they still have a number of factors that contribute to heterogeneity between them. The differences are significant enough to raise the risk profile of the construction industry. These differences come about because of varying site conditions, element specifications, the style and structure of project management, and the sources of labor, plant, and materials. Housing construction projects have similar elemental requirements. This means that they all must have elements such as foundation, walls, partitioning, and finishing. While this feature promotes homogeneity of housing construction projects, the differences in the types of foundations required, the nature of partitions to use and the kinds of finishes to employ makes even two similar projects unique. When it comes to the structure and style of management, there is a degree of homogeneity in as far as the structure of housing construction management teams are concerned. However, personality differences and leadership styles of different managers negate this advantage in the system. In addition, the unique project environment each project has necessitates additional layers of management, or does away with them. Finally, the varying site conditions make the project portray unique characteristics that add to their risk. Two similar housing units employing the same construction methods could turn out to be two entirely different projects if their location is different. Differences ranging from the physical environment to the economic environment could affect the risk profile of the two projects in very different ways, almost negating all the benefits homogeneity presented to the project.

Depending on the viewpoint, risks fall into different categories. In one such classification having two types of risks, Political, social, and economic factors define first type while environmental risks represent the second category. Political risks occur around events surrounding the perceived suitability of the project for the community, negative impacts on the environment and legislation. Other risks events here include terrorism and war. Economic factors that present risks for the sector include international exchange rates, and currency inflation. The second type categorization of risks arises from the physical environment of the project. A range of risk events may occur during the construction projects. These include accidents and injury, adverse natural conditions and occurrences such as storms and earthquakes, and project execution problems caused by design flaws, or the delivery use of unsuitable materials.

Another mode of classifying risks is by the degree of control exercisable over it. Using this classification, we have controllable and uncontrollable risks. Controllable risks represent all risks whose occurrence the project management can influence. Many internal causes of risk fall under this category. The second category if risks fall under uncontrollable risks. They require the project management to employ mitigation measures to deal with their effect. A special category of risks to the housing sector is financial risks. These risks stem from the fact that it is very difficult to control property prices. The financial risk to the contractor lies in the exposure their client has in the financial environment. If there is a threat to the financial return expected from the project while the construction is ongoing that in turn affects the client’s ability to pay for construction costs, the contractor faces a serious financial risk.

Risk Leading to Poor Performance in the Sector

The U.S. has not fully recovered from the economic downturn occasioned by the bursting of the property bubble in 2006. This case provides a fitting case for examining how a risk leads to poor performance. The economic downturn in the last few years presented the biggest risk that the U.S. housing construction sector had dealt with in the recent past. Property prices fell considerably leading to widespread foreclosures. The natural exposure to financial risk of the housing construction industry comes partly from the fact that production precedes demand. A demand fluctuation while a construction project is midterm often threatens the projects margin directly affecting the contractor involved. Makin (2006) describes the seriousness of financial risk to the housing sector for the whole U.S. economy when he says, “A significant drop in residential investment therefore appears to be a necessary condition, but not a sufficient condition, for a U.S. recession”. He adds that, “Weakness in the U.S. housing sector poses the sternest test of the self-stabilizing capacity of the U.S. economy” (Makin, 2006). The connection between the housing construction sector and the overall economy lies in the fact that housing represents the single largest investment item for many families. Therefore, fluctuations in the housing prices affect the overall consumer budget, which in turn affects nationwide spending.

The occurrence of a financial risk in the U.S. led to the recession suffered by the entire country. The industry sector itself shrunk because the demand for houses went down while the cost of houses was also sinking making further construction work unprofitable.

Evidence of established Risk Management Practice

There seems to be a knowledge and practice gap between risk management techniques and their application in actual construction projects by contractors and other project managers. Flanagan and Norman (1993, p.1) state, “In view of the inherent risks in construction, it is surprising that the managerial techniques used to identify, analyze, and respond to risk have been applied in the industry only during the last decade.” The causes for this situation varies, but is chiefly brought about by lack of knowledge and application incentives. This has led to the emergence of risk consultants who provide risk management advice to clients. Some professional risk consultants advertise their services online to contractors interested in applying risk management techniques in their projects. While addressing contractors, one such consultant states that he can help a contractor to implement project and cost control, reach project goals, and manage construction risks (PwC, 2010). A possible method for mainstreaming risk management is through industry associations. One relevant professional association for the American housing construction sector is the Construction Management Association of America (CMAA) that offers certification for various professionals in the construction management industry. It promotes the application of risk management techniques among other things by its members. There is consensus that the way the construction industry will achieve a reduced risk profile is by the adoption of common standards and procedure in all construction projects.

Risk Management Processes Applicable in the Sector

The housing construction sector has the opportunity to reduce its risks by adopting standard repeatable practices for all construction projects. This will best happen through an industry wide effort since isolated development and application of standards will not have any impact on industry-wide risk perception. Other measures for improving risk management include the early establishment of Time, Cost, and Quality objectives of a project, and the consequences of not meeting them. This is invaluable in determining which risks require consideration and management. The development of a detailed risk profile for the project follows this step. The risk profile enumerates all identifiable risks and the rates them.

After the identification of the risks, it is possible to engage in a risk management process. “If we are unaware of the risks it is difficult to manage them” (Klemetti, 2006, p.24). The process includes risk identification, risk analysis, risk response, development of a risk register, and risk monitoring and control. Risk identification involves listing all the possible risk scenarios during a brainstorming session. Risk analysis classifies the risks according to their probability of occurring and severity of their effects. The resultant data forms the basis for development of a risk register, which list all the risks on a single sheet. The register includes the source of the risk, the consequences from it, the probability of occurrence, and the response required to effectively deal with it. It also shows the desired effect of the response, which includes elimination, transfer, or reduction of the impact. Risk monitoring and control involves the application of measures that mitigate the occurrence of the risk, or limits the impact of the occurrence.

For successful risk management, there is need to include provision for the participation of project stakeholders, both direct and indirect who wield the threat of facilitating an unwanted occurrence. In addition to the project management team and the project sponsor, it is also important to find out who are the most effective representatives of all stakeholder groups including lobby groups, to participate in the risk identification process. If there are known negative impacts by the project on the local community, there is need to communicate measures that the project management plans to use to mitigate the impacts.

Conclusion

The housing construction industry in the U.S. is a critical component of the economy. The conscientious application of risk management techniques will go a long way into ensuring not only its stability, but also that of the entire U.S. economy. There is a need to engage in an aggressive process of getting the information out, and thereafter incentivizing the application of the information.

Reference list

Flanagan, R., & Norman, G., 1993. Risk management and construction. Oxford: Wiley-Blackwell.

Klemetti, A., 2006. Risk management in construction project networks. [pdf] Helsinki: Helsinki University of Technology Laboratory of Industrial Management Report 2006/2. Web.

Makin, J. H., 2006. Housing and American recessions. Washington D.C.: American Enterprise Institute for Public Policy Research. Web.

PwC, 2010. Services and solutions: risk management. Delaware: PwC. Web.

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