When people talk about risk one of the first things that probably comes to mind is insurance or perhaps the chance of it raining, maybe the board game? Risk is present in everything we do. In the construction environment risk could typically identify potential payment & cashflow issues, safe build practices, training, statutory compliance and the like all under the Technical, Logistical, Financial & Socio-political text-book headings.
One thing that has always worried me is the misunderstood relationship between risk and margin. And the fact that very few people use the term risk margin when tendering build projects further adds weight to that belief. With many New Zealand construction companies going to the wall in the last few years it makes me question if risk is being correctly identified and managed at all?
When tendering a build project, the objective is to cover costs of construction based on a given design, with risk margin added on top (more correctly called mark-up). This premium is added in the expectation that the project will be a roaring success with the takeout at the end being profit.
In fact, at tender stage, the percentage markup should be correctly classified and accepted mentally as risk margin. Risk margin covers the possibility of something going wrong because until the project is delivered with payment in full there is a possibility that margin will be called upon to mitigate an unforeseen or an unaccounted for event. In some instances, risk continues for up to 10 years post completion for example structural defects, so in reality Practical Completion does not eliminate risk entirely.
Depending on how you represent your onsite and offsite overheads, risk margin may end up being buried in the markup calculation and in fact be under-allocated based on project variables and ones’ perception of the risks involved.
The process of defining risk is therefore complicated and requires a deep understanding of construction processes, the risks involved, with adequate margin built in at tender. By understanding the above implicitly, negotiating design and build contracts & keeping as many inputs under one roof as possible, IDB is able to control seen and unforeseen risk factors.
