Value and Risk Management in the Chinese Construction Industry

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Executive Summary

Value and risk management is a critical component in managing construction projects in the construction industry. It is a process which when integrated into the procurement phases improves and increases project value, enables project managers identify and reduce unnecessary expenditure, optimising resources, enables mangers and stakeholders generate creative ideas, and provides a framework for updating standards and objectives.

Integrating value and risk management provides successful project implementation to identify business needs, and design value and business study to evaluate the potential for implementing value into the project. In addition, value and risk management is critical in minimising minimizing waste, optimizing resources, and in protecting reputation and value of assets.

Value and risk management provides a framework for assessing the contracting process against typical contracts signed in the recent past, which provide a typical example of the procurement contracting for the client. A typical example of the potential value of risk and value management in the construction industry is applied in the Chinese construction industry.

Evidence has shown the potential impact value and risk management has had on the current and future construction projects in the construction industry in China. Typical areas include risk avoidance, reduction or mitigation for project value.

Introduction

Value and Risk Management are critical components in the current project in enabling optimization of team contributions to the value and risk management process to enhance value in the delivery of service by implementing a new-build local government administrative headquarters. The team is obliged to ensure that quality, performance, reliability are upheld while minimising the life cycle costs (Shen & Liu 2004, p.4).

Value management will provide a creative project specific problem solving methodology with stakeholder involvement toward attaining value added solutions to the current project of constructing a new administrative block. The integrative approach of project learning define in value management is evidently optimized in constraining the budget and project complexity.

The results will be sustained performance improvement and reduced costs in the construction of the City Government (Council) headquarters during the projects initial stages (Lin & Shen 2007, p.5).

It will be able to add value to the building project. Mainly, value management will provide maximum value for the project, detailed information about the functions fundamental to a cost effective project which provides value for the users, clearly established and verified project objectives, optimized design solutions, and cost effective project development, making value management identifiably beneficial for the City Government (Council) headquarters project.

Identifying Business Needs

The rationale for constructing a centralized administrative block at the center of the city is to reduce the costs of running different departments located at different parts of the city to optimize governance and service delivery from a centralized location. In this case, the strategic objective of rationalizing the local government service delivery and attain the vision of a progressive and modern city will be attained.

A cost benefit analysis reinforces the rationale for relocating employees to the outskirts of the city while centralizing the provision of services from a single point. In addition, the number of employees requiring to be moved will have to be enumerated, the costs associated with the disturbances, the number of departments to be moved into the central administrative block, the risks to property and other assets when relocating.

Designing Value and Risk Study

It is critical that the risks involved be identified, assessed, and the probability of occurrence of any of the risks evaluated. This study integrating different experts from different disciplines wills benefit the client in many ways. Among the benefits includes identifying and acquiring financial information which is critical for decision making during the deliberations in the workshop.

This includes the costs of the project and accruing benefits. The project can create value if the benefits are more than the costs or if there is value for the money invested. Financial data is useful in his stage because sound decisions can be made based on this information (Shen & Liu 2004, p.7).

The participants in the workshop should be informed about the risks that the City Government (Council) headquarters are susceptible to. Risk will have to be an integral component in value management. Critical data includes the risk categories identified in the project, and countermeasures and controls to address the risks. That is in addition to informing the participants about the costs of mitigating the risks (Shen & Liu 2004, p.8).

The process for managing value for the City Government (Council) headquarters will include testing and validation of planning assumptions. All stakeholders have to agree on the objectives, goals, the changes to be introduced, the impact of the changes on their social and economic lives, and common vision that the project is designed to attain (Graham, Kelly & Male 2001, p.3).

Once the value management team has studied the results of the study of the company procurement rules and policies to ensure no vulnerable points are left susceptible to being exploited in the event of a disagreement, the project manager will develop principles to guide successful attainment of the goals. Critical in this case, is to get value for the money from the project (Graham, Kelly & Male 2001, p.4).

How Studies Will Benefit the Client

Employing value management during the initial stages of the building project will provide the advantage of acquiring greater insight about what the project is all about. The purpose and means of achieving the same will be known to various stakeholders. Often middle managers are not knowledgeable of all the aspects of a project and this will be a good opportunity to gain this insight (Woodhead & Downs 2001, p.4).

Value management will be useful for establishing project objectives, preparing the project brief and the consideration of concept and design alternatives. City Government (Council) headquarters will benefit from value management in many ways. It will be possible to simplify and ease processes in the project. There will be a lot of time, money is necessary to carry out the project successfully.

With proper planning and execution, efficiency will be enhanced hence time and money will be saved. Obsolete and redundant items and procedures can be known and discarded. For instance old technologies with are no longer efficient can be done away with (Dell’Isola 1982, p.3).

Pre-workshop Activities

The pre-workshop activities include identifying any strategic procurement done recently by any department which is of high quality. Typical examples include a contract signed in the recent past, a typical example of the procurement contracting for the client, and a typical example of a contract that had been completed and that can act as an informing example in the review. The components to consider include:

Strategic targets, contract initiatives, goals, and objectives.
The party responsible for the management of the strategic relationships.
The legal requirements and any other legislation framework used in establishing the contract.
Key performance indicators used in the project.
The risk and value management plan.
Any changes introduced in the process of project development.

Identification of stakeholders

The entire project requires the participation of an integrated supply team comprised of supply chain consultants, facilitating managers, constructors, and an integrated supply chain of consultants working as a team. The value management team is managed by the project manager and project sponsor, the project finance team, design team, project cost manager in the construction of the new City Government (Council).

A value manager must be part of the value management team. This individual is charged with the responsibility of understanding the value problems, coordinating value systems and implementing improvements to the company (Woodhead & Downs 2001, p.5).

The finance team has to ensure that the project being embarked on by City Government (Council) headquarters has a sound capital investment plan. The team should also perform a detailed analysis of the project in order to find useful information that will be used during deliberations and decision-making. The finance team should ensure that the project follows the company’s financial policies.

The accounting and financial reporting standards should also be followed. The manager responsibility is to ensure that there is proper planning. This includes asset disposal planning, asset maintenance, planning and capital investments planning. The basis of these plans should be the company’s policies (Woodhead & Downs 2001, p.9).

Agenda for each study

The agenda for the value management study is to enhance its effective operations, customer service and business expansion. In addition, it is important that the process clearly show how the organization will get value for the money they invest in the project.

The individuals in the value management team will come up with measures to improve the business while meeting the customers’ needs. The new project should to add value to the core business of the organization (Woodhead & Downs 2001, p.8; Woodhead & Downs 2001, p.7).

The agenda will be to identify the best methods of managing contract establishment which includes strategic relationships, effective communication strategies, and working with an updated risk management plans.

That could lead to managing contract performance based on good relationship and communication strategies, and clearly stipulated contract and strategic initiatives. It will be important to identify the best strategies to manage contract evaluation with clearly explained up to date risk management plans.

Recommendations

There should be technical documentation provided at each phase of the meeting and during the value and risk management process. A post workshop assessment will include identifying the each of the tasks to follow in managing the whole process. That will include identifying client characteristics, requirements of the clients that City Government (Council) headquarters serves.

In addition, the demographic data, experience, financial capabilities etc., will enable the firm to use accurate methods of adding value to the project. Value will be added in the delivery of services to the public if they will be offered at the central administrative point instead of being scattered across different places.

In addition, the document results will provide a guideline for resolving problems that arise at project level, review design solutions and any changes compatible with new changes in the project, assess each program and activity at each level, evaluate at each stage project stages, and assess the action plan to align it with the project goals and objectives. Tools critical here are cost index, and value index in the project (Shen & Liu 2004, p.9).

Risk Management in Construction

Throughout the construction industry in China, value and risk management is critical in minimizing waste, optimizing resources, and in protecting reputation and value of assets. The potential for effective application of value and risk management is based on the benefits gained into the construction industry at all construction phases to minimise cost overruns, potential for stalling projects, and budget overruns (Ling & Lim 2007, p. 3).

Value and risk management have the potential to enable project managers and stakeholders establish clear project objectives, identify and remove unnecessary expenditure, save money and time, reduce any redundant items, and generate creative solutions to the problems in the industry. The potential for risk in the construction industry is high.

The potential for the value and risk management enables project stakeholders and the project manager to identify specific areas of design, operations, and construction to cut costs without reducing value. Value and risk management enables project managers and stakeholders provide refined project options aligned to project brief and objectives.

Value management has the potential to quantify business benefits associated with working in a better working environment to improving the working conditions and provide value for money. Value and risk management in the construction industry in China is critical because of the potential risks in the construction industry.

Construction risks

Here, the potential impact of value and risk management in the construction industry in China has a potential impact in the construction of residential buildings, office buildings, commercial buildings, hotels, schools, airport terminals, railway stations, harbours and factories (IBIS World 2009, p. 2).

The potential impact of value and risk management in the construction industry in china has had much positive impact because of the new policies of openness the country has had to the outside word. The impact has been accelerated growth, and increases in the total output value with a rapid growth in the construction industry.

Integrating value and risk management in the construction industry in China has experienced rapid growth in the number of foreign investment companies seeking to invest in China. However, because of the high number of risks, many companies get discouraged to invest in China, especially when the country had not integrated value and risk management into the construction Industry.

According to Fong, Fang and Li (2004, p. 4), a comprehensive and clear understanding of the impact value and risk management has on the construction industry is critical in successful implementation of projects that provide value in the industry (Ling & Lim 2007). In this case, the following class of risks are strongly influenced by value and risk management and can be mitigated to provide value for the projects (Fong 1999, p.2).

Technical risk

Here, value and risk management is critical in mitigating the most common technical risks in the construction industry in China, which include equipment malfunction, design inaccuracy, injuries, accidents, and resource shortages. According to Ling and Lim (2007, p.3) default of contactors or subcontractors is a major risk problem that should be addressed to reduce risk to acceptable levels in China.

Value and risk management is critical for project managers to identify incompetent subcontractors and suppliers who push highly qualified and experienced foreign investors out of the market.

Risk management enables managers, organizations, and project stakeholders to identify and address risks such as the breach of contract, delay in the delivery of materials or services and disputes between contractors and subcontractors (Ling and Lim 2007, p.5).

A well-integrated value and risk management strategy in the construction industry has the potential to address the risk that investors are likely to face in the construction industry such as lack or delayed payments. Banks and other financial institutions are usually willing to finance large national projects but reluctant to support small firms.

In this case, value and risk management plays a critical role in facilitating and inspiring confidence in banks and other financial institutions to provide financial support in form of loans to invest in construction projects. That is because the smaller projects have insufficient funds to successfully run the project. With the integration of the strategy, it is possible for smaller firms and projects to be funded to completion.

That will avoid the problem where project managers do not pay contractors in time. In that situation, lack of construction credit facilities and shortage of capital is a disadvantage in that it will be overcome to encourage investment in the construction industry (Ling & Lim 2007, p.6).

Value and risk management is also critical because of the increased demand for construction has led to a very high demand of the necessary resources for investment. With value and risk management integrated into the projects, a decrease in prices of the resources could be experienced in the construction industry.

Despite the increase in labour and material costs due to the increase in demand for the resources, a long term impact on the value of projects and assets could be cost effective.

Financial risks

Value and risk management provides the basis for identifying and eradicating unnecessary expenditure, optimize resources, save money, time, and energy in the construction industry. Among the risks impacting negatively on economic project value in the construction industry includes fluctuation in the foreign exchange rates.

The potential to suffer substantial losses when revenue received and loan repayments are in different currencies is significant. It is possible for an unfavourable exchange rate to plunge a construction company into bankruptcy. In addition, inflation is another risk which affects other variables in the economy such as changes in interest rates and rate of return.

The fluctuation of interest rates has a major bearing on the construction industry as it affects the operations and feasibility of a project. To address the adverse impact of the risks is to integrate risk management strategy to address and mitigate the risks. Here, risk management and value management are integrated and provide the framework for industry players to protect themselves from the effects of inflation.

The higher prices will ensure that the business is not affected during inflation of material of labour costs (Ling & Lim 2007, p.8). Value and risk management could provide the companies with the ability to provide updated standards, optimal use of resources, generation of alternative ideas, and use of simplified methods and procedures in the construction process.

Future Application of Value and Risk Management

It is critical that value and risk management be critically evaluated in relation to the impact on the future of the construction industry. It is evident from the Chinese construction industry that steps have been taken to integrated value and risk management into the construction industry.

Studies by Ling & Lim (2007, p.4) show that firms have evidently attempted to integrate value and risk management into the construction industry to manage and mitigate the risks to acceptable levels for project implementation. One of the solutions include managing foreign exchange risk by making payments for construction in the same currency of the money borrowed for financing the project.

In addition to that, other approaches include identifying and assessing the impact of risks on the interest rate fluctuation in the pricing strategy of resources and project procurement process. It is critical to use fixed exchange rates in contracts to optimise capital fund savings.

Another application of value and risk management in the construction industry is to address high inflation rates by transferring risk of increased material or labour costs to the consumer.

Here, the transfer of such cost risks allows them to transfer the inflation risk to contractors, subcontractors and suppliers (Ling & Lim 2007, p.9). The potential impact value and risk management has in future applications are critically embedded in the risk management process as follows.

Risk management processes

Risk avoidance

Value and risk management will provide strategies for avoid risks all together. In this case, the construction industry stakeholders will identify construction projects that are not vulnerable to any risks. Risks cannot be fully avoided in the construction industry. However, risk avoidance is a difficulty choice when compared with business benefits. Risk avoidance will amount to missed opportunities (Raftery & Reilly 2006).

Risk reduction and elimination

A radical benefit of integrating value and risk management in the construction industry is risk reduction and elimination. While risks cannot be completely eliminated, risk reduction will be achieved by training employees and best practises.

Loosemore, Raftery and Reilly (2006, p.2) argue that risk management can be integrated to enable project managers to positively address technical risks such as by changing projects technologies, project design, and materials while addressing political risks positively.

Risk transfer

Another approach is to transfer risk to another person or firm such as third party bodies such as insurance firms. That is based on the bargaining power of the financier’s requirements, company culture and policies.

Conclusion

Value and risk management has a positive potential impact on the construction industry by providing a framework for reducing project costs while increasing and maintaining the project value. In addition, value and risk management will provide a string framework for construction companies from the local and international market to invest in the construction industry in China.

References

Dell’Isola, A 1982, Value Engineering in the Construction Industry, Van Nostrand Reinhold, New York.

Fang, D., Fong, P., & Li, M. 2004, ‘Risk Assessment Model of Tendering for Chinese Building Projects’, Journal of construction engineering and management, The International Journal of Public Sector Management, Vol. 12, No. 5, pp. 445-454.

Fong, P 1999, ‘Organizational knowledge and responses of public sector clients towards value management’, The International Journal of Public Sector Management. Vol. 12, no. 5, pp. 445-454.

Graham, D, Kelly, J & Male, S 2001. Value management of construction projects Wiley-Blackwell, Oxford.

IBIS World 2009, Building Construction in China. Web.

Lin, G & Shen, Q 2007, ‘Measuring the Performance of Value Management Studies in Construction: Critical Review’, Journal or management in Engineering, vol. 23, no. pp. 2-9.

Ling, F. & Lim, H. 2007, ‘Foreign firms’ financial and economic risk in China.’ Engineering, Construction and Architectural Management. Vol. 14, No. 4, pp. 346-362.

Loosemore, M., Raftery, J. & Reilly, C 2006, Risk management in projects. Taylor and Francis, Oxon.

Shen, L. Y., Wu, C. & Ng, C. S. 2001, ‘Risk Assessment for Construction Joint Ventures in China.’ Journal of Construction Engineering and Management, Vol. 127, no.1, pp. 7681.

Smith, N. K. K., Merna, T. & Jobling, P. 2006, Managing risk in construction projects. Wiley-Blackwell, New York.

Woodhead, M & Downs, C 2001, Value management: improving capabilities. Thomas Telford, London.

“An evaluation of current and potential future application of Value and Risk Management into [QS/CPM/FM/BS] professional services in the construction sector in [my country of study]”.

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