A risk is any occurrence that has the potential to alter the progress of a project significantly. A risk may be positive or negative. A positive risk results in desirable consequences for a project. On the other hand, a negative risk brings about some form of loss to the project. Depending on the degree of loss, risks range from insignificant to catastrophic. The risk management process has several stages. The first stage is the identification of risk.
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This involves a detailed analysis of all factors that may lead to a significant consequence of a project. The next stage is the evaluation of the risk. This entails determining the probability of the risk event occurring, and the resulting degree of damage. The final stage is prioritization, which involves determining which risks require mitigation depending on the outcome of the evaluation.
Risks in the Healthcare Construction Sector
In the economic downturn of the recent past, the construction industry fared worse than other sectors. The peak of the crisis was the bursting of the property bubble caused by unsustainable consumer debt. The healthcare construction sector invariably suffered from the effects of the downturn. The industry sector nonetheless remained in business. The reason is, “Constant changes in the healthcare environment often require new construction and/or renovations”. (Bartley, 2007, p.70). One such factor identified by Guenther and Vittori (2008, p.26) is negative effects on human health caused by “environmental stress” because of environmental degradation.
There are different types of risks in the construction sector in general. They include financial risks, which can be external to the project or inherent. External financial risks resulting from exposure to the money markets, which significantly influence the costs of inputs and equipment. The causes of internal financial risks are varied. They normally lead to cash flow problems. Construction risks include the delivery of poor quality materials by suppliers, sabotage by disgruntled workers, and poor construction supervision resulting in poor project delivery. Construction risks also include accidents caused by construction staff and to construction staff and other stakeholders.
Other risks include political risks, where changes in the political environment such as construction and procurement laws may affect a project midstream. The changes that may affect the project relate directly to the project or its sponsors. Natural disasters also can be a source of risk, especially in areas prone to adverse weather leading to flooding, storms, hurricanes, extreme temperatures and humidity, and adverse natural occurrences such as earthquakes. Terrorism has joined the ranks of project risks. This happens because of direct terrorist attacks, or because of action by authorities to stem the risk of attacks, which in turn disrupts supplies of materials and equipment.
Legal liabilities present a unique set of risks. These can occur if there is a safety lapse leading to an accident, financial mismanagement, or because of effects on the environment such as the production of noise, dust, or waste from the construction project. Risks unique to healthcare construction especially in renovation and refurbishment projects include health risks to workers by vector exposure, poisoning risks to the patients, and staff through contact with medicine and other chemicals. Speaking of this risk, Petersen (2009) says, “The risk increases during construction and renovation because these endeavors release dust and disease-inducing microbes into the surrounding environment”.
He goes on to describe how this might happen. “Sick patients can pass diseases onto workers, or workers can be sickened directly by the contaminants” (Petersen, 2009). Another risk source is disease management procedures occasioned by a disease outbreak in the general population that the health facility serves. Quarantining of the facility is likely if the disease under management is highly contagious. Such a risk may lead to loss of valuable time, which in turn increases the project overheads.
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Risk Management Practices
Risk management practices involve a harmonized and economical approach to the use of project resources to reduce the probability of a risk event occurring, and the monitoring and management of the resulting consequences if the risk occurs. After risk identification, there are four approaches to dealing with it. They include risk avoidance or elimination, risk reduction or control, risk transfer, and risk retention. Any of these four approaches may fail to fit in a particular situation or may present circumstances difficult to work with. There is a need for discretion during their application in the risk management process.
Risk avoidance means avoiding undertaking the task associated with the risk. While this assures the non-occurrence of the risk, it takes away any possible profit that would have accrued from the task. The second option in the risk management process is risk reduction. This involves taking action that limits the potential effects of the risk, should it occur. This involves the use of fail-safe systems that cut out the risk source and in the process ensures that damage resulting from a risk event remains minimal. The third option in the risk management process is risk-sharing. This means that a third party shares the risk, such that should it occur, the loss does not fully lie with the project.
This may take the form of insurance or outsourcing. It is important to note that while this may take the burden of compensation, it does not take away the risk. It only provides for the indemnifying of the project. The project will still have to deal with the consequences of the risk if it occurs. It is a post-risk compensation method. The fourth option in the risk management process is risk retention. This applies to risks that may not have too much effect on the project should they occur, or cannot be comfortably outsourced. This approach makes sense whenever the cost of insurance exceeds the loss from the risk. It also applies in the case where in-house handling of the risk is a better option, due to technical requirements.
Risk Management Strategies in the Healthcare Construction Sector
The healthcare construction industry uses various forms of risk management strategies to handle the risks in the volatile construction environment. To manage financial risks, some construction companies choose to delay payment to their subcontractors to ensure they do not fall into cash flow problems that may lead to industrial action by workers because of late salaries. This practice exposes the project sponsor to financial risks. The second method they employ is by taking on fully paid projects. This measure offers mitigation against price fluctuations in equipment and materials since the contractors can place orders based on current prices.
Petersen (2009) who says that the Centres for Disease Control and Prevention (CDC) publish guidelines for managing the potential health impact of construction activities discloses one more risk management strategy brought about by an industry stakeholder. Burill (2007) seems to note this development when he says, “Trends to control the potential spread of infectious agents during construction are starting to emerge”.
Innovative Risk Management Case
An example of an institution that employed a significant measure of risk management strategies leading to enviable results is the St Clare Health Centre in Fenton, Missouri. It had a floor space of forty thousand square-meters and wanted to develop a new one hundred and fifty four-bed facilities, with a seven thousand, nine hundred square-meter office space and a seven thousand square-meter care center with related services. The hospital opted to share risks and rewards with healthcare construction contractors to ensure high-quality project delivery. Initially, a project officer set the guaranteed maximum price for the project as directed by the project sponsors.
It soon became apparent to the designers after beginning work that the budget was low. The project sponsor then opted to defer setting the guaranteed maximum price until the completion of the design stage and after the subcontractors had agreed on acceptable prices for their service. In the end, no guaranteed maximum price was set. The sponsor opted to pay for costs plus a fee, to ensure the project did not suffer from cost-cutting initiatives by contractors struggling to maintain their margin.
This made the use of financial incentives aimed at the contractors unnecessary, because of guaranteed fees, and hence the contractors had no exposure to any major financial risk that a shrinking margin would have caused- a common feature in construction projects. Through collaborative decision-making, the sponsors reduced project bottlenecks, and hence the project proceeded with good levels of collaboration. There was a joint setting of targets by the project team, ensuring greater adherence to project timelines. The sponsor’s attorney created a multi-party contract that ensured all parties were accountable to each other.
The contract included a no-sue clause, which eliminated legal risks to the project stakeholders. By removing financial risks from the contractors, the sponsors were able to propose changes to the design fittings late in the project without any problems and with very little effect on the timeline. Such an action would have been impossible to take without much discussions and animosity with contractors if the project was based on the conventional project models where the contractor has to deal with financial risks. The project was late by only two months.
Bartley, J., 2007. Construction and renovation. Washington: APIC
Burrill, G. D., 2007. From construction to infection. Net resources International. Web.
Guenther, R., & Vittori, G., 2008. Sustainable healthcare architecture. New Jersey: John Wiley & Sons.
Petersen, T., 2009. Case study: risk management in health care construction projects. Occupational Health and Safety. 1105 Media Inc. Web.