Building risk management strategies into the vertical construction sector
A preliminary report
BRANZ Project LR10481, The Building Research Levy 2018/2019
Alice Chang-Richards, Charlotte Brown, Nicky Smith
Executive Summary
Achieving a high level of productivity in the construction industry remains challenging. Within the sector, there are also differentiated performance outcomes between the horizontal and vertical construction sector. The recent successes of horizontal infrastructure projects such as the Northern Toll Road Gateway, Waterview Project, and Christchurch Infrastructure Recovery are in contrast to ongoing challenges faced by the vertical construction sector and hence present a unique opportunity for cross-sectoral learning. To understand what causes the varied performance between the two sectors, interviews were undertaken with fifteen industry practitioners. The focus was on understanding the differences between the two sectors, the factors that contribute to difficulty in managing risks, and the measures taken by the horizontal sector that have proven to be effective risk management mechanisms, resulting in heightened productivity.
Compared to the horizontal sector, most projects in the vertical sector by nature tend to be more complex, involving a larger number of activities, trades, specialists, and construction materials; and coordination of all these prove to be more challenging and difficult, creating opportunity for risk. Vertical construction is also largely dominated by private investment and is strongly affected by commercial clients’ procurement methods. The current trend of ‘lowest price bid’ favoured by most clients in the vertical sector has aggravated the level of competition in the market, pushing the margin to a low point. This, combined with ‘fixed price’ contracts offered by some contractors to win projects, can have significant financial consequences for those whose balance sheet is not strong enough to absorb risks. As a result, staff turnover is higher in the vertical sector, further exacerbating skills shortage and capability problems.
The factors that influence how risks can be managed are multi-faceted and systemic. Structural issues in the construction sector, such as fragmentation of sub-sectors, trades, and contracts, and a lack of labour availability and capability, constrain the sector somewhat from effectively managing some risks and improving productivity and performance. Some contractual risk allocation practices are reflective of market behaviours of many commercial clients as well as norms of risk transfer within construction sector supply chains. There are also a number of factors that construction businesses have certain control, either on their own or collaboratively, and provide opportunities for better risk management. Attention should be given to better performance measures for incentivising professionalism and work ethics, better understanding of risk profile (including pricing risks and understanding contractual risks), risk culture and capability, and more prudent decision-making.
Procurement is a primary lever for influencing risk levels and practices within the sector. It affects the behaviour/conduct and competitiveness of construction businesses operating in the sector. Interviewees from the horizontal sector highlighted the benefits of using early contractor involvement (ECI), integrative design and build (DB) delivery approaches, target value design processes, and public target on Public Private Partnership (PPP) projects for better risk sharing and allocation among project stakeholders.
For long-term improvement of productivity in the vertical sector, better understanding of the implications of risk allocation and procurement practices for both clients and construction sector organisations is needed. Greater collaborations and partnerships (e.g. forming alliances or joint ventures) among construction businesses are also needed, especially for the small-scale players to build up their capability and skill base in addressing the risks and productivity losses caused by fragmentation in trades and contracts. In addressing the risk factors identified in this research, use of technology, better staff key performance indicators (KPIs), certainty of construction pipelines, and better alignment of training and demand were also suggested, which would have implications for productivity performance of individual companies and the sector as a whole.