Having invested heavily in risk management over the past decade, most engineering and construction executives believe that this expenditure has paid off, with only 7 percent claiming that their practices and controls are not working effectively.
Such confidence is backed up by one of the respondents, whose business is based in the US: “Investing in project risk management pays off significantly. A strong contract negotiation tracking system is key to identifying the risks, which allows for better pricing of the contract. It is also important in mega-contract negotiations, to understand which terms can and cannot be negotiated, so that risks are identified and considered in the pricing.”
Despite this confidence, more than three-quarters of respondents admit to the presence of underperforming projects, with the prime causes being delays, poor estimating processes, and failed risk management processes. Companies also suffer from poor subcontractor performance and design errors and omissions. One respondent from the Europe, Middle East and Africa region comments that: “Loss-making contracts severely impacted results,” while another executive from Canada admits that: “Project execution is to blame for the decrease in margin.”
In some cases, clients are not as reliable as anticipated, which suggests a lack of due diligence when bidding, as a respondent from a construction business in Ireland mentioned, in reference to a troublesome location: “This country had been identified as a major area of concern for contractors, with incidences of non-payment, and clients not adhering to the contract conditions.”
The potential for such incidents could be reduced significantly by better risk management, so the sector needs to consider why it has not achieved the levels of some other industries, and figure out how to embed a stronger culture. Clients are increasingly ranking contractors on their risk management competency, as another survey participant from Europe explains: “The rise of the PPP model has also meant more qualified people are making decisions and including risk assessment – not just price – as a key determining factor.”
However, good risk management is as much about people and culture as it is about processes and procedures, as one executive from a US contractor observes: “As primarily a very large services organization, we don’t take project risk. When we have projects that underperform, it’s mostly due to the human element, not a failure in controls.” This concern was put even more succinctly by a senior manager from a Canadian company “They knew the risk; they just did not correctly qualify it.”