Valuation management requires the assessment of the functions and risks involved in a project. The author of this report will carry out a functional and risk analysis for a project with a budget of £9.5m. The two are essential in determining the viability of a project. A logic diagram is provided for the functional analysis system technique. A risk appraisal report is highlighted for risk valuation.
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Functional Analysis System Technique (FAST)
Logic Diagram for the Strategic Project
Figure 1 is an illustration of the logic diagram touching on the various functions of the proposed project. The representation is based on RIBA PoW stage 2. It reflects the functions required for the project.
The strategic project envisioned in this proposal is a gated community residence. The unique aspect of the project is that it acts like a satellite city. It will be developed to ensure the residents have access to the local authority, community, and leisure-related services. According to Hill, functional analysis is a crucial aspect of value and risk management (72). Hill argues that the development of a strategic project more than just the construction of buildings (72). Functional analysis ensures that the end-users of the project get value for their investment.
There are two main avenues to address the issues intended to be catered for in a strategic project. A study carried out by Sweis, Abu-Hammad, and Shboul points out that failure to categorize the consumer demands often results in delayed projects (667). In light of this, the logic diagram envisages a scenario where the services sought after by the residents (of the strategic project) are divided into the needs and the wants. A recap of the project’s objectives suggests that it is meant to ensure that the community is transformed and lives are improved in the process.
Based on the logic diagram, three main issues need to be addressed by the strategic project. The community ultimately requires local authority services coupled with community and leisure ones as well. Based on the categorization envisioned by Sweis et al., the needs are the local authority services (667). The community and leisure services make up the needs.
The strategic project intends to factor in the local authority services by creating capacity for healthcare, security, and housing. According to Liebing, developers are constantly coming up with projects that guarantee citizen access to public services (77). In this regard, issues like policing, medical care, and provision of shelter form an integral part of the current project. However, at this juncture, it is important to cite that the strategic project will simply create the framework for local authorities to bring their services closer to the residents.
The two main objectives of this project include the provision of community services and leisure. Bower points out that education and environmental protection are integral aspects of a gated community (73). The development of a schooling facility and some environmental protection system ensures that families find the area ideal to settle. The logic diagram further illustrates spiritual, justice, and welfare wants as part of the community services. Similar to the local authority services, a host of the community services will be realized through a joint partnership.
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Lastly, leisure-related services remain at the heart of the strategic project. Maloney observed that the value of residential areas with sufficient recreational facilities is higher than those without (523). In this regard, the project will come up with a shopping mall complex. The complex can act as a recreational facility and offer other leisure services like entertainment. The development of a shopping mall will also serve residents from far and wide. The same can also act as an attraction to the completed project.
From the functional analysis, it is evident that the strategic project will largely involve public-private partnerships. According to Sweis et al., partnerships of such a nature ensure the speedy completion of given projects (667). As a result, there results in a need for a re-evaluation of the budget. The discussions from the logic diagram suggest that the overall cost might be lower than the £9.5 million proposed. In the subsequent section, the need for a contingency allowance will become necessary in case the budget fluctuates beyond the low value envisioned by this company.
Risk Appraisal Report
Before the commencement of a given project, it is essential to carry out a risk assessment. Liebing holds the opinion that most projects attract several risks (103). To this end, an assessment of the various levels of risk associated with the project is called for. The assessment is more of a benchmarking process against existing standards (Liebing 103). Based on the evaluation, a company can establish an acceptable level of risk.
The appraisal report evaluates the risk factors in the UAE based on stages 0 and 1 of RIBA POW 2013. The establishment of risk will enable the realization of the project program. RIBA POW 2013 calls for the realization of the project program courtesy of a review of previous projects. Morris and Hough suggest that major projects stall due to risk factors like inflation and labor-related problems (Liebing 128).
Priority risk areas
The realization of the strategic project proposed for construction in the UAE often requires political stability. Fortunately, the country enjoys sufficient stability and political will for project developments. According to Maloney, some of the standard risk factors include a project realizing an expected financial performance and ensuring adequate operational efficiency (522). In this regard, Liebing points out that the construction industry in Monaco develops projects that ultimately realize the value for production (57). The same is usually brought about by a concrete assessment of an organization’s financial capacity.
Failure by property owners to meet the full costs of the project act as the main risk factor in realizing the desired financial performance. Sweis et al. argue that the UAE is known for stalled projects due to an interruption in the provision of funds (665). In most cases, such a risk factor is brought about by the absence of a comprehensive cost analysis. Sweis et al. point out that a cost analysis allows a client to make the necessary comparisons with their budgetary allocation regarding the project and the estimated cost (665). The analysis provides insight into the possible financial constraints that might hinder the implementation of a project. The need for contingency budgeting becomes necessary.
Operational efficiency is a major risk factor in the development of projects. According to Bower, industry players are faced with this particular risk in instances where labor is an issue (43). As already mentioned, the project intends to transform the community and improve the quality of life amongst residents. The best way to realize such an objective is to ensure easy access to all the services. Liebing refers to instances in Monaco where unskilled labor reduced the operational efficiency of projects (113). However, Sweis et al. point out that the UAE has sufficient skilled capacity (666). That notwithstanding, there is still a huge risk in ensuring that the gated community lives up to the promise of service delivery.
The development of large scale projects has a direct impact on the environment. Project developers are advised to this end, value engineering and management are called for. Sweis et al. argue that the issue of environmental degradation is of concern in countries like Saudi Arabia (669). Laxity in enforcing ensuring projects meet environmental requirements implies that said projects can be halted by inspectors. Such incidences are common in the United Arab Emirates (UAE) but not in large degrees.
Based on the various risk subjects discussed, the priority is the environment, operational efficiency, and financial performance. Maloney adds that the cost of maintenance, project delivery, and ability to attract occupants are other risk factors (525). Dubai, and by extension the UAE, has managed to come up with contingency measures to minimize such risks. For instance, developers are urged to ensure their projects. Also, the need for full disclosure forces some developers to seek loans that guarantee the completion of projects. Ultimately, the risk factors call for an upward review of the project budget.
An appropriate contingency allowance
The logic diagram and the discussion around it, point to the fact that the project will be realized by multiple stakeholders. Contrary to popular opinion, this company will not be engaged in the construction of all the services sought after. Maloney cites that partnerships aid in a faster rate of project completion (525). In this regard, the local authorities will be facilitated to set up their respective outlets. The community and leisure services will be met by a joint effort of multiple interested services. The company will map out the area and layout the necessary infrastructure.
Infrastructural needs are quite essential in a gated community. To this end, an additional £2 million will be necessary to ensure that the transport, communications, water, and sewerage infrastructure are not delayed. Liebing points out that a thriving commercial center is the best way to attract consumers (33). The same improves the chances of attracting residents. Consequently, an additional £1.2 million would suffice if a private partner for the construction of a mall does not join the project.
The value of the project to all associated parties calls is affected by the cost of maintenance. In this regard, Maloney urges project proprietors to ensure that the cost of maintenance is kept at an all-time low (523). Low costs of construction enhance the long-term sustainability of a project. The cost of maintenance ought to be maintained at an all-time to attract more partners. Minimizing the cost of maintenance ensures that the consumers are not over-burdened by prices. However, the ever-fluctuating prices of construction materials call for the availability of an extra £0.5 million.
The success of a project relies on, among other factors, the funding available. Liebing effectively illustrates that funding is one of the risk factors associated with projects of a similar magnitude (131). In light of this, developers are advised to ensure that their budgets can sustain the dynamism of the construction industry (Maloney 529). Based on the discussion in this section, a total of £3.7 million should be set aside as the contingency budget. The same will ensure the speedy completion of the project. The additional monies can be obtained through loans and other private partnership deals with suitable investors for the project.
4Tactical Project Risk
As already mentioned, risk assessment is quite vital in the realization of a project’s goals. Once the risks have been identified, there is a need to ensure that an efficient management system is put in place (Hill 59). To this end, tools like a risk register become necessary. Hill argues that a risk register identifies the impacts of the risks and identify the necessary countermeasures (59). The countermeasures ensure that the risks do not hamper the implementation of a project.
In this section, the risk register is outlined. The register points out all the parties with a role to play in the implementation of the project. The register is developed along with the requirements of stage 5 of the RIBA POW 2013. Hill suggests that the responsibilities of such parties ought to be clearly defined (65). The same will prompt a re-evaluation of the contingency allowance. There are some instances where projects stall due to a high contingency allowance. A risk register can review the same downwards to ensure project developers do not feel intimidated by the supposed high cost of construction.
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Table 1: Risk register.
|Event||Likelihood of Occurrence||Impact||Owner of the risk||Response strategy||Secondary Risk||Risk transfer|
|Feasibility study failure||Low||Investors could miss out on lucrative business|| ||Engaging the services of expert researchers||Inconclusive research||Local authorities|
|Denial of construction approval||Low||Investors could miss out on lucrative business|| ||Sufficient referral documents||Issuance of temporary approval||Investors|
|Impeded Financing||Moderate||Incomplete projects resulting in losses|| || ||Insufficient finances|
|Capacity building Failure||Moderate|| || ||Professionalism||Lack of goodwill from partners||Local authority|
|Fluctuating prices||High|| || ||A contingency budget|| ||Local authority|
|Failure to attract and retain the occupant||High|| || ||Call for more joint efforts||Market bubble||Local authority|
A risk register, as already discussed, is meant to point out the various parties associated with a project. According to Hill defines the parties to a project as the various individuals or organizations that have a vested interest in the outcome of a project (181). Hill further points out that construction projects are made up of two main parties which include the internal and external stakeholders (181). In the process of implementing a project, it is the prerogative of the project manager to ensure that all the interested parties have extensive knowledge about the project’s objectives.
From Table 1, it is evident that both internal and external parties are included in the proposed project. Liebing considers the internal stakeholders as those who make up the project participants (147). The internal stakeholders ensure that the actual work relating to the project is carried out effectively. The following is an extensive insight into the internal stakeholders and their bearing on risk.
- Project sponsor. The local government authority in most countries constitutes the principal project sponsor. According to Liebing, the project sponsors have an extremely high decision-making authority (90). The core objectives of stage 5 in the RIBA POW 2013 include the resolution of design queries. A project sponsor carries out the resolution.
- Project manager. The control and oversight of the project require an able administrator. A failure by the supervisory party to have a firm grasp of the construction process results in a cessation of construction (Maloney 528). The role of a project manager is necessary to carry out the procurement duties of stage 5 under the RIBA POW 2013.
- Technical staff. The project team should be comprised of members with a variety of skills to ensure that quality production is realized. The integration of different experts into the team ensures that the project all the complexities are dealt with before the commencement of the process (Kelly and Male 45).
The external parties include the occupants, the investors, and the national government. The national government makes taxes while the occupant enjoys the finished product (Liebing 77). The investors get to realize the profits of the project. To this end, there are several parties to a project (Liebing 77).
Sharing of the risk presents a scenario where the contingency allowance can be re-evaluated. The national government can come up with subsidies for the construction industry. To this end, the risk of fluctuating prices is taken away from the internal parties and the investor. Consequently, the initial £0.5 million would be reviewed downwards. A proposed figure of £0.15 million would be ideal. According to Liebing, government subsidies help to boost the construction industry, thereby reducing the need for contractors to get contingency allowances to that effect (154).
The initial estimates of £2million intended to cater to the infrastructure can be reduced upon consultation with local governments. Maloney points out that, local authorities can develop infrastructure like roads and water (523). Also, utility companies would come in terms of power and internet connection. Effectively the entire infrastructure budget could disappear altogether. The contingency allowance of £2million would be non-existent.
In cases where companies come up with gated communities and satellite cities, retail outlets are usually the first to set up shop. The idea is to create a commercial center, which can attract residents from far and wide (Liebing 101). To this end, it would be easy to convince a couple of investors of the need to have a commercial hub. Consequently, the £1.2 million contingency allowance would disappear.
The overall decline of the contingency allowance points to one important aspect of the larger spectrum of value management. Kelly, Male, and Drummond argue that corporate partnerships reduce the risks involved in the development of a project (111). The two major risks are financial shortcomings and delays. The discussion in this paper has demonstrated that joint ventures can reduce the cost of construction. At the same time, they can enhance the efficiency of the investment. The result of corporate-corporate and corporate-public partnerships heralds a new era in project development (Dallas 88).
A functional and risk analysis of the proposed project reveals that it is viable. The functions in the logic diagram in part 3 are achievable. The budget is sufficient and the risk factors are adequately catered for in sections 4a and 4b. The net result of the project is that the proprietors will get value for their money.
Bower, Denise. Management of Procurement, London: Thomas Telford, 2003. Print.
Dallas, Michael. Value and Risk Management: A Guide to Best Practices, Oxford: Blackwell Publishers, 2006. Print.
Hill, Gerard. The Complete Project Management Methodology and Toolkit, Chicago: CRC Press, 2009. Print.
Kelly, John, and Steven Male. Value Management in Design Construction: The Economic Management of Projects, London: Routledge, 1992. Print.
Kelly, John, Steven Male, and Graham Drummond. Value Management of Construction Projects, Oxford: Blackwell Science, 2004. Print.
Liebing, Ralph. The Construction Industry: Processes, Players and Practices, New York: Prentice Hall, 2000. Print.
Maloney, William. “Construction Product/Service and Customer Satisfaction.” Journal of Construction Engineering and Management 28.6 (2002): 522-529. Print.
Sweis, Ghaleb, Ayman Abu-Hammad, and Al Shboul. “Delays in Construction Projects: the Case of Jordan.” International Journal of Project Management, 26.6 (2007): 665-674. Print.