Value and Risk Management in Construction UAE

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Table of Contents

General Structure of the Paper
Introduction
VRM in the UAE
Conclusions
References

An Evaluation of Current and Potential Future Application of Value and Risk Management into Construction Project Management Professional Services in the Construction Sector in the UAE

Abstract: The UAE had an unprecedented boom in its construction sector between 2004 and 2008. This ended during the international financial crisis of 2008. As a result, the UAE Prime Minister issued a decree requiring all contractors to use green principles in construction projects.

The high-end construction market responded by adopting stronger VRM practices. The state of VRM in the UAE is that it is growing in prominence. However, the professionals in the area are very few. In many cases, external consultants provide VRM services. The future of VRM in the UAE requires better training for undergraduate engineers, to supplement the efforts of the existing postgraduate VRM professionals.

General Structure of the Paper

This paper has two main sections. The paper includes a literature review covering the essential background of both value management and risk management, and the result of the combination of the two, into value and risk management. The paper also presents the findings of a survey conducted to determine the VRM awareness levels of professionals in the construction sector in the UAE. The paper concludes by presenting the conclusions obtained in answer to the problem statement.

Introduction

The UAE is a regional leader in the application of VRM principles. This paper seeks to examine the issues that have an impact on VRM practices in the UAE and the implications of these issues for the future. The period between 2004 and 2008 will remain etched in the memory of the UAE as the heyday of the construction industry.

In that time, value management did not command much respect because investors in the construction sector did not demand efficiency in their projects. They favored fast pace construction over cost management. The result of this attitude is that the UAE is now home to some of the most energy intensive skyscrapers in the world.

Value and risk management is slowly finding its place in the construction sector. The rules have changed. It is no longer survival for the swiftest in the UAE, but survival of the fittest. This article examines the current state and future opportunities of value management in the UAE.

VRM in the UAE

In any business, value comes from business processes. The professional process of ensuring that a certain process yields maximum value for the stakeholder at the least cost is value management . The definition of value in this case is not just the financial value. Rather it is value in the context of the balanced scorecard, which covers the financial value, value from internal processes, value for the customer in question, and value in terms of transferable experience for the contractor .

On the other hand, risk management is an active process of finding potential events or circumstances that can affect the progress of a project if they take place during the life of the project . The occurrence of risk must be uncertain. Otherwise, the event ceases to be a risk. Risks associated with the construction sector range from material defects to industrial action by workers. The cost of many construction projects is very high.

This creates the need to manage risks as effectively as possible. Risk management involves the identification of potential events that will trigger the risk and determining the probability of occurrence of that event. After that, the risk manager quantifies the impact of the occurrence of risk-causing event on the project in terms of loss of life, time, money, and business opportunities.

It is possible to view risk management as a specialized form of value management because risk can erode the value of a project. It serves a preventative purpose. Value management on the other hand aims at increasing value from the processes by reducing costs or increasing the utility of the outcomes of the project .

According to Karim, Berawi, Yahya, Abdul-Rahman, and Mohamed (2007) the value management process has three stages namely, value planning, value engineering and value analysis. Value planning takes place during the planning phase of the project. Value engineering occurs during construction, while value analysis takes place after the construction phase.

Value analysis helps in the establishment of measures to ensure that the value gained during the value engineering process lasts throughout the useful life of the building. The risk management process involves risk identification, analysis, response, and monitoring . Risk identification and analysis take place during the planning of the project at the same time as value planning. Risk monitoring takes place throughout the active life of the project.

The construction teams use risk indicators to monitor the risks. Risk response depends on whether the risk events take place or not. If a risk occurs, risk response takes place. The amalgamation of risk management (RM) and value management (VM) into risk and value management (RVM) comes from the relative similarity of the objectives of these two aspects of construction management. Focusing on RM only can erode value while focusing on VM only can introduce high risks to the project .

The rising stature of VRM in the UAE is as a direct result of the events that took place between 2004 and 2008 in the construction sector . In 2004, the construction sector in the UAE was experiencing unprecedented growth. The country was on the path to achieve its dream of becoming a transport, trade, and commercial hub in the Middle East .

This led to an increase in the number of the immigrants looking for work in the Emirates. In addition, many traders were coming to the UAE to close business deals. The result was that the demand for housing and commercial buildings grew. The country saw the construction of an unprecedented number of new buildings to meet the rising demand. Since investment funds were flowing, the speed of construction became the driving force.

VM was not central to project planning in the construction industry. The UAE ended up undertaking projects that delivered buildings with the highest energy consumption in the world . In 2008, the UAE economy went through a downturn occasioned by the global financial crisis triggered by the US real estate market . Since that year, there has been a growing appreciation of the role VM can play in the construction industry.

The shift towards VM goes back to 2007 when Sheikh Mohammed bin Rashid Al Maktoum, the Prime Minister of the UAE, issued a decree that ordered players in the construction industry to conform to a newly established green standard in their projects . The decree took effect in January 2008 just when the global financial crisis was hitting the UAE. From that time, there has been a steady increase in the number of construction companies using VM in order to meet project goals and the regulatory goals.

Evidence in literature suggests that the current state of application of VRM in the UAE is uncoordinated. While there is widespread recognition of the potential saving the use of VRM can bring to projects, the practice is not widespread. It appears that the planning processes of construction projects do not include VRM.

A case in point is the low-income housing project in Musaffah, Abu Dhabi in which VRM principles were not part of the planning process . Some of the design choices made by the project planners seemed unsuited for the construction projects. For instance, the houses contained some utilities such as gas-powered central heating, which is not fitting for low-income housing .

In addition, the water tanks positioned outside on the roofs of the houses started malfunctioning after three years, yet the project requirements stated that the life cycle for each house was to be twenty-five years . The main contention resulting from this situation is that project planners did not carry out VRM with the users of the house in mind.

Rather, the designers used uneconomical design options to raise their design fees since they charge a percentage of overall project cost. The current application of VRM in construction projects in the UAE is also a reflection of the little manpower available to conduct VRM.

The VRM Survey Methodology

A VRM survey conducted for this project revealed several issues regarding the current and future prospects of VRM in the UAE. The survey involved professionals working in the construction industry with decision-making responsibilities.

Results

The key findings of the survey were that only ten percent of the engineering professionals in the construction sector have any form of training in VRM, and none of the respondents have participated in a VM program. VM training in the UAE is available in postgraduate courses in construction management.

The graduates do not all go to practice VRM hence the lack of involvement in any VRM project. The fact that most professional engineers in the UAE without postgraduate qualifications have not formal training in VRM may indicate the low skill levels in the area of VRM in the country.

Other findings in the survey showed that there is a general understanding of what RM is, but the views of respondents on VM did not demonstrate a strong grasp of the concept. When asked about their understanding of VM, most of the respondents used cost savings as the main issue in VM.

The answers included phrases like, “help clients reduce costs”, “managing expenses in construction”, and “having the best quality with least money”. Forty percent of the respondents had no idea what VM meant. There seemed to be a perception that VM is part of project scope management because many responses included phrases talking about time, quality, and money.

The responses for a similar question relating to RM showed a better understanding of RM in a project. RM is a core part of undergraduate construction courses hence it is not surprising that most of the respondents were articulate about RM. None of the respondents had any experience in analyzing the benefits of VRM exercise because none of them had participated in a VRM exercise.

All the respondents felt that the application of VRM in the UAE should continue. The responses depended on their understanding of VRM in the first place. One respondent pointed out that VRM activities take place in large projects only. Therefore, there is a need to downstream the practice.

Another respondent also added that the practice of VRM in the UAE is selective. The project managers choose to implement some elements and ignore others. This leads to low return from the VRM process, which requires implementations throughout the project cycle.

Based on this survey, the need to make VRM conventional is obvious. If the professionals in the construction industry do not have a clear understanding of the basics of VRM, then the construction industry will not have people who can champion for VRM. The best way to tackle this gap is to include VRM in the training curriculums of all construction courses.

Even if this does not produce VRM consultants, it will empower these professionals to evaluate the benefits of VRM in construction projects. The current model where consultants carry out all VRM activities is not sustainable for nationwide impact. If project initiators do not want to spend money on consultants, a project does not benefit fully from VRM. Training all professionals in the industry to understand VRM will increase the appreciation and application of VRM in the industry.

In conclusion, while the data available from industry sources such as The Oxford Business Group may suggest a vibrant VRM environment in the UAE, the data collected for this project shows that there are serious training gaps in VRM in the UAE. Industry publications are niche publications hence they may report in detail issues having an effect on a very small part of the overall environment.

Conclusions

The main conclusions from this project are as follows. VRM is increasing in importance in the UAE, partly because of intervention by the state, and partly because of the lessons learnt after the global financial crisis. The decree by Sheikh Mohammed bin Rashid Al Maktoum, the Prime Minister of the UAE that took effect in 2008 requires all construction projects to use green principles in construction.

VRM is an essential part of ensuring all green projects meet the requirements of the decree. Secondly, there is inadequate capacity in the UAE to mainstream VRM across the construction sector. This conclusion comes from the survey conducted for the purposes of this project to find out the current level of manpower available to push forward the VRM agenda in the UAE. If UAE can train professionals at all levels, then it will improve the practice of VMR in the country.

Thirdly, the Engineering Associations in the can play a part in mainstreaming VRM by conducting training seminars for all engineers working in the UAE. Currently the training levels of VRM are too advanced. Undergraduate engineers do not have the skills and experience needed to implement VRM in their settings.

Finally, institutions of higher learning in the UAE need to include VRM as part of the coursework for all construction courses at undergraduate level. This will serve to increase the capacity of the country to make VRM a part of construction planning for all sizes of projects.

References

Abdellatif, MA & Othman, AA 2008, ‘Improving the Sustainability of Low Income Housing Projects: The Case of Residential Buildings in Musaffah Commercial City in Abu Dhabi.’, Emirates Journal of Engineering, vol 11, no. 2, pp. 47-58.

Davies, RH & Davies, AJ 2011, Value Management: Translating Aspirations Into Performance, Gower Publishing, Surrey.

Gordon, RJ 2012, ‘Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six Headwinds NBER, vol 18315, pp. 1-23.

Jaapar, A & Torrance, JV 2010, ‘Contribution of Value Management to the Malaysian Construction Industry: A New Insight’, Faculty of Architecture, Planning & Surveying, Universiti Teknologi MARA, Selangor Darul Ehsan.

Karim, SBA, Berawi, MA, Yahya, IA, Abdul-Rahman, H & Mohamed, O 2007, ‘The Integration of Value and Risk Management In Infrastructure Projects: Learning from Others’, Quantity Surveying International Conference., Value Management Centre (VMC), Faculty of the Built Environment, University of Malaya, Kuala Lumper.

Koenig, M & Meissner, J 2011, ‘Risk Minimizing Strategies for Revenue Management Problems with Target Values. ‘, Working Paper, Department of Management Science, Lancaster University Management School, Lancaster University Press, Lancaster.

KPMG 2003, ‘Internal Audit’s Role in Modern Corporate Governance’, Risk and Advisory Services, KPMG, KPMG, Hong Kong.

Meredeth, JR & Mantel, SJ 2011, Project Management: A Managerial Approach, 8th edn, John Wiley and Sons, Hoboken, NJ.

Othman, AA 2005, ‘Value and Risk Management Protocol for Dynamic Brief Development in Construction’, Emirates Journal for Engineering Research, vol 10, no. 2, pp. 23-36.

Othman, AA 2008, ‘Incorporating Value and Risk Managemen Concepts in Developing Low Cost Housing Projects ‘, Emirates Journal for Engineering Research, vol 13, no. 1, pp. 45-52.

Siterman, E 2009, Value engineering in Dubai, <https://www.constructionweekonline.com/article-6484-value-engineering-in-dubai#.UK-MnuR1-OH>.

The Oxford Business Group 2008, The Report: Dubai 2008, Oxford Business Group, Dubai.

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