Risk Management in Real Estate Construction

Harish MV, Regional Director  Property & Asset Management, Jones Lang LaSalle India

There are several uncertainties in a project's external environment (e.g. social, economic, legal and statutory, natural environment) and internal environment (design, construction, procurement, contractual, health and safety) which may adversely affect not only project cost and schedule but also construction quality, safety and sustainability.

Risk management is a process of proactive identification of such uncertainties and taking measures so that the adverse effect of such uncertainties are minimized and the project cost, timelines, quality and safety largely remain unaffected. Project management is a sense is risk management.

Importance of Risk Management in Real Estate

• Real estate projects face a lot of uncertainty from external factors (Statutory approvals, Economic factors which affect cost of project and market demand for the project, Social and Environmental factors etc.) If these uncertainties are not proactively managed, they can adversely affect project cost and schedule thereby
• Improved risk management ensures that the adverse effect of uncertainties on the project cost on project schedule is minimized and the net present value of the project is largely unaffected. This helps in preserving the profitability of the project.
• Proactive risk management builds confidence among project stakeholders and customers that the project will be most likely be completed within budget and on time. This means that professionally managed projects can be sold at a premium to the market rates for similar projects where risk management is not practiced.
• The process of risk identification also helps in identifying opportunities to reduce cost and project duration. This improves the net present value of the project and thus improved the project profitability.

Insurance as a Risk Management Tool

Projects cannot be insured against time delays caused due to uncertainties. Legal risks arising out of inadequate statutory approvals cannot be avoided with the help of insurance. However insurance can take care of cost increase due to uncertainties in most of the cases. Also the risks in design and construction can be insures through Professional indemnity to Client.

The process for managing Project Risks can broadly be formulated as:

Design Risks and Contractual Risks

Design risks are risks that may originate on the project because of:

• Improper requirement assessment
• Inadequate or wrong formulation of design basis which may lead to superfluous or inadequate design thus impact project costs or functionality of the built space.
• Improper Design coordination which may lead to rework which adversely impact project cost, quality and schedule.
• Faulty or improper design documents which may impact quality of construction.

Contractual risks arise if:

• These is a mismatch between the ability of contractor and the scope of works that he/she has been awarded
• Contract clauses have not been framed properly because of which it becomes difficult to control contractor in case of defaults.
• Contract does not conform to the law of the land.
• Contract creates unnecessary liabilities for the client stakeholder

Mandatory Laws 

Certain mandatory laws exist that reduce the health and safety risks e.g. workmen compensation act and factories act etc. Other that these, it is mandatory to follow various building codes and standards like National Building Code, Indian Standards etc. which aim at reducing the design risks.