The response to identified and quantified risks can take many different forms. On any single project several different responses may be adopted, depending on the type of the risks identified. When deciding between alternative forms of response two basic decisions must be kept in mind: whether to avoid or reduce risk and whether to retain or transfer risk.
In the extreme, complete avoidance of risk may mean the abandonment of a project. More probably, however, risk avoidance and the reduction of risk probability and impact will require a technical response. Such a response may include a change in design or further development of the design, or the acquisition of more complete information, e.g. by undertaking or extending the site investigation.
The principal medium for transferring and allocating risks is the building contract. The standard forms of building contract in common use [e.g. JCT (1980)] involve both explicit and implicit allocations of risk between parties. It is not surprising that researchers in construction risk management have devoted much space to the choice of procurement route and formulation of contract documents [e.g. Hayes et al (1986)]. The general conclusions of these investigations are as follows:
a) Contracts should allow the explicit allocation of specific identified risks between parties.
b) Contracts should include incentives for risk control and sound management practice.
c) Risks should only be allocated to the parties who are best able to control them and/or sustain their effects.
Another common method of risk transfer is through insurance. This insurance may cover the physical works during construction (e.g. the insurance required by most forms of contract covering the works for loss or damage), the building in use (e.g. Latent Defects Insurance) or the performance of the design team (e.g. the Professional Indemnity Insurance which most clients require their consultants to carry).
Whether the choice is to retain or transfer risk, there will be a cost implication. This cost may take the form of an insurance premium, a payment to the contractor for risks accepted or a cost allowance for risks retained. Whatever the option chosen for a particular risk, the process will have quantified the likelihood and effects of that risk, allowing the adequate and equitable assessment of payments and allowances.
5
Case studies of risk management
The two projects discussed in the case studies presented below vary widely in nature and size. The first case study covers the construction of a vicarage— essentially a large domestic property. The second discusses the development of a large ‘out of town’ retail complex involving some £20,000,000 of construction work.
Despite these wide disparities in scale, the risks to the organisations and individuals involved were, relative to their size and resources, large in both cases. In fact, it might be argued that the risks were relatively higher on the smaller project. In both cases the early identification of important risks and formulation of a strategy for dealing with them proved beneficial to the project.
5.1
The construction of a vicarage 5.1.1
Introduction
One of the authors has served as vice chairman of the council of an ecumenical church situated in a North West New Town. The members of the team ministry lived in houses rented from the Development Corporation but with the mellowing of the town, the foreseeable abolition of the Development Corporation and formal creation of an Anglican Parish the opportunity arose to
make proposals to the Diocesan Board of Finance for the provision of a purpose built vicarage for the Church of England member of the team. The author acted as unpaid project manager for the Church Council and helped in the purchase of a vicarage at a substantial saving compared to normal prices for such buildings.
5.1.2
The usual procedure for procuring vicarages
Most Anglican parish churches have vicarages nearby, on land owned by the church. New vicarages are normally purpose designed for their sites by consultant architects in accordance with clear guidelines laid down by the Church Commissioners. The design being approved by the incumbent, church council and the Parsonages Committee of the Diocesan Board of Finance. Consultant Quantity Surveyors prepare bills of quantities and selected small and medium sized building contractors invited to tender. A standard JCT contract provides the legal agreement between the Diocesan Board of Finance and the builder. Typically at the time vicarages were costing £80,000 to £90,000 plus professional fees on land owned by the church. There would normally be little change from £100,000. The parsonages committee had a responsibility to provide a vicarage and proved amenable to an unconventional procurement route.
5.1.3
Building Land in New Towns
Land in a new town is all owned, through compulsory purchase, by the appointed Development Corporation. When the Ecumenical Centre was initially built, the Development Corporation had given the site and some adjoining land for a vicarage to promote this important community development. Changes to the plans for the town centre following that early decision had made the vicarage site unsuitable.
Where should the new vicarage be sited? The Development Corporation had a few building plots for sale in the most expensive part of the town. Not only were these in an inconvenient location but they would isolate the incumbent from his parishioners, most of whom live in rented accommodation.
5.1.4