In building design and development, risk analysis is defined as the systematic methodology and procedure by which events capable of affecting the end product are identified, measured, displayed, controlled, and monitored. Risk management is useful in planning and mitigating risks to determine the cost, schedule, safety, and operation of a project. A good procedure measures the teams confidence level on a continuous basis making room for corrections, financial contingency, and a timed float to reduce any losses incurred and keep the project on track. Any threat contains two aspects namely the likelihood of an event occurring and the impact upon occurrence.
The dangers can be classified according to their center of focus and action, meaning the area that receives the most impact. Therefore, they can be categorized as project, business, environmental, and external risks. Project dangers are those that affect the outcome delivery of a development plan. Business risks refer to threats affecting the operational outcome upon the provision of the project. Environmental ones are the hazards related to the projects surroundings that have the possibility of affecting the developments objectives. External ones are the dangers found beyond the directly close surroundings but still have potential in influencing planned projects. Force majeure encounters are also classified under the outside change hazards. These are unforeseen or unpredictable events that are beyond the control of parties involved in a contract.
A stable risk management strategy is one that aims to recognize potential hazards, assess the damage probability and weigh any other possible impact. The plan should also distinguish and outline the alternative courses that can be taken to prevent the risks from occurring, or whether it reduces the impact and how to accept and deal with the consequences. Other than these factors mentioned, risk management aims at monitoring actions taken to maximize on cost effectiveness and successful objectives delivery and providing a reaction based on experiential learning meant to improve management of future projects.
An organization should be able to anticipate and sway events before their occurrence. They do this by using a proactive approach. It should also be able to provide sufficient facts about predicted events and avoid hidden assumptions or false definitions of hazards. Any organization is required to provide an improved contingency plan for the risks, verified records of planning and control, and to make the management process explicit and transparent. The business managers should provide assistance in the project objectives delivery by focusing on the triple standard time, quality, and cost thresholds. They should also work with project managers to inform, improve the decision making process, recognize the order of risk avoidance, reduction, control, and acceptance. Finally, they should give room for the development of picture planning in the event of identifying a risk with a high impact level.
Risk Management in Real Estate Development
Building developments consist of retails, offices, residential houses, industrial plants, and mixed-use establishments. Hazards and dangers in the building development process can be grouped as land value risks, land exploitation, planning permit, construction, revenue, duration, partner, legal, and political risks.
There are common strategies that work across all groups in the mitigation of risks. The first strategy is to conduct research which is vital in assessing all possible outcomes. Major research areas include allocation, stakeholder demands, a yield development prediction, and occupants, consumers, and partners requirements. The second strategy known as phasing involves subdividing the project objectives into smaller steps and reviewing the risks associated with each round. Thirdly, any person investing in the building industry should seek legal counsel when drawing up contracts. These agreements are potential areas for costly errors. Therefore, involving lawyers to write contracts carefully reduces the risk of mistakes. Most people are encouraged to use controlled pricing strategies when getting into construction agreements.
Another common approach used in risk mitigation in the building process is conducting of cost calculations. A comprehensive building development assessment comprises of assumptions that are realized as the project progresses through various stages. However, engineers and project managers should be careful about making wrong assumptions as they need through calculations to contain the possible risks. Cost calculations are made during design development as it advances towards absolute specifications. Other factors to consider in cost calculations include inflation, changes in prices, and market trends.
The industry requirement for building developments is conducting a pre-lease or pre-sale. The pre-selling or pre-leasing aspect is meant to test the end-users market before committing entirely to the intended project. It offers a demonstration of the market enthusiasm for the project or product, and majorly reduces the number of risks involved because conducting a pre-lease or sale cash in on the part of the expected revenue.
Another approach to risk mitigation is by timing the payments. Investors in real estate are advised to pay as late as they can in the case of costs. They are also encouraged to receive payments at the earliest possible opportunity in the case of receiving revenues. This strategy comes close to the advantage of low-interest costs and provides investors with full control in the event of arising disputes relating to issues like contracts. Moreover, it is preferable to maintain the expenditure level in the development state to the extent of having a possible indecisive dilemma at the start of the construction stage.
The research conducted in the building development process seeks to meet various goals. The primary one is the ability to understand risk management before embarking on building projects. Other goals include:
a) To educate new investors in the building industry on risk management.
b) To highlight the theoretical aspect of dealing with risks.
c) To equip investors, project managers, and engineers with the necessary knowledge and strategies for handling risks.
Purpose of Study
Many people are lured into the real estate market without understanding what is required of them. The building and development market is a highly lucrative one, but also a risky industry if clients and stakeholders do not have full knowledge of what is expected of them or their projects. Several new entrants into the market have incurred massive losses due to lack of conducting research, blindly signing contracts, ignoring possible occurrences, or the inability to plan effectively while considering all possible outcomes.
Others have had issues with authorities and had their buildings demolished because they did not conduct ample research before the process. The majority of individuals also get conned by professional project managers or people in the industry because of lack of basic knowledge about risk management. This qualifies the need to conduct research to reduce the scenarios mentioned above, and make the industry a safe one to invest in and expect good returns. It also promotes good practice in the market, and sets a trend for service delivery improvement, and the successful accomplishment of project objectives.
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