IMPACT OF PROJECT RISK ON CONTRACT SUM AND DURATION

The Case Study of THE CHEVRON NEW MESS HALL PROJECT, Escravos

OBIORAH EMMANUEL OZO

[QTS/2005/047]

DECEMBER 2010
IMPACT OF PROJECT RISK ON CONTRACT SUM AND DURATION
The Case Study of THE CHEVRON NEW MESS HALL PROJECT, Escravos

BY

OBIORAH EMMANUEL OZO

[QTS/2005/047]

A DISSERTATION SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE

AWARD OF DEGREE OF BACHELOR OF SCIENCE
(B.SC) HONOURS IN QUANTITY SURVEYING OBAFEMI AWOLOWO UNIVERSITY ILE-IFE,
NIGERIA

DECEMBER 2010

2
 CERTIFICATION
This is to certify that this work was carried out by Obiorah Emmanuel Ozo and supervised by Mr. G.O.
Jagboro

___________________________________ __________________________
Supervisor’s name & signature Date

_______________________ _________________
Head of Department’s Name & Signature Date

3
 DEDICATION

To my late mother…

Mrs Bridget OBIORAH (Ezinne)

Dilibe 1 of UNUBI

For her determination to get me educated

4
 ACKNOWLEDGEMENT

This research would have remained a mere dream without the grace of God Almighty. Therefore, I wish

to thank the King of kings for His abundant grace and unending love for me.

This very special honour goes to my mentor and supervisor Prof. G.O. JAGBORO. The professor of

professors, the most outstanding personality I have ever encountered in my entire life and a great father.

I love you with all my heart. Thank you for your guidance throughout my stay on campus and

particularly during my project work.

My acknowledgement also goes to the Head of Department, Dr. (Mrs) M.O. BABALOLA and the

wonderful lecturers in the department who together, form an impressive and awesome team. I must at

this point single out Mr. J.O. DADA and thank him most sincerely for assisting me with most of the

resource materials I needed during my literature review.

I must quickly acknowledge the powerful support of my late mother Mrs Bridget Obiorah nee Dilibe 1

of Unubi (Ezinne) who stood by me at all times with love and care in all my endeavours.

To my brothers, VINCENT, MARTINS and MICHEAL who continued to support me morally and

financially, I wish to say a very big thank you for the love and care.

My special thanks also go to my darling sisters, BIBBIAN, GERALDINE and AGNES. Thank you so

much for complimenting with your prayers and constant financial assistance.

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To my brothers and sisters-in-Law, Patrick, Ambrose, Alison and Nkiru, I am grateful in no small

measure to your kind gestures and words of encouragement. Chief and Mrs Bob Okoye, thank you for

all your encouragement and advice in times I needed them most.

To my fathers in the construction industry, Mr. Dan EKOKO, Mr. Roland EYETU, Mr. Segun

ADEBANJO and Idowu O.S., I can’t thank you all well enough for your immense contribution towards

the success of this research. Without your kindness, this research would have been worthless or at best,

shallow.

My very special gratitude also goes to Arc. C.O. OSASONA, Professor S.O. Fadare and the entire

DESSINATEURS OAU family for their passion and love for charity and the uplifting of human

dignity.

To the entire ROTARACT CLUB OF ILE-IFE (District 9125) and the LEGACY Group, especially

Mr. John Yule, Uncle JG and Mr. Desmond Majekodunmi, thank you for being there for me always.

My friends, too numerous to list, friends in Lagos, Anambra, Osun, Warri, Escravos and the QS class

’10,

I love you all.

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 TABLE OF CONTENTS

Title Page i

Certification iii

Dedication iv

Acknowledgement v

Table of content vii

List of tables xi

List of figures xii

Abstract xiii

CHAPTER ONE: INTRODUCTION

1.1 Background of study 1

1.2 Statement of the problem 3

1.3 Aim and Objectives 4

1.4 Research hypothesis 4

1.5 Significance of Study 5

1.6 Scope of the Study 5

CHAPTER TWO: LITERATURE REVIEW

2.1 Risk 7

2.2 Risk Management System 8

2.2.1 Risk Identification 9

2.2.1.1 Construction Site Accident 9

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2.2.1.2 Weather 10

2.2.1.3 Communal crisis and Agitation 11

2.2.1.4 Environmental risk 11

2.2.1.5 Financial risk 11

2.2.1.6 Project Management risk 12

2.2.1.7 Change in Scope 12

2.2.2 Risk Classification 13

2.2.3 Risk Analysis 14

2.2.3.1 Quantitative Risk Analysis 16

2.2.3.2 Qualitative Risk Analysis 17

2.2.4 Risk Response Planning 18

2.2.4.1 Risk Avoidance 19

2.2.4.2 Risk Transfer 19

2.2.4.3 Risk Mitigation 20

2.2.4.4 Risk Exploit 21

2.2.4.5 Risk Sharing 22

2.2.4.6 Risk Enhancement 22

2.2.5 Risk Attitude 22

2.3 Risk Management Planning 23

2.4 The Case Study 24

2.4.1 Chevron in Nigeria 24

2.4.2 The Escravos Operations 25

2.4.3 The New Mess Hall Project 26

CHAPTER THREE: RESEARCH METHODOLOGY

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3.1 Introduction 28

3.2 Research design 28

3.3 Data collection 29

3.3.1 Primary data collection 29

3.3.2 Secondary data collection 30

3.3.3 Data requirement 30

3.4 Sampling technique 31

3.4.1 Sample size 31

3.5 Data analysis and technique 31

CHAPTER FOUR: DATA ANALYSIS AND RESULTS

4.1 Introduction 33

4.2 The Data 33

4.3 Basic Information of Respondents 34

4.4 Basic Information of The New Mess Hall Project-Escravos 34

4.5 Identifying The Various Risks Associated With Construction Projects 34

4.6 Assessing The Impact of The Identified Risks on Contract Sum and Duration 37

4.6.1 Qualitative Assessment of The Risks 40

4.7 Identifying and Assessing The Different Risk Management System 41

4.7.1 Project Execution Plan 41

4.7.2 Safety Plan 41

4.7.3 QA/QC Plan 42

4.7.4 Recovery Plan 42

4.7.5 Community Plan 42

4.7.6 Risk Management and Project Rate 43

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CHAPTER FIVE: CONCLUSION AND RECOMMENDATION

5.1 Introduction 46

5.2 Conclusion 46

5.1.1 Identifying various risks associated with construction projects 46

5.1.2 Identifying and assessing the different risk management system 46

5.1.3 Assessing the impact of the identified risks on contract sum and duration 47

5.3 Recommendation 47

References 49

Appendix 52

LIST OF TABLES

Table 2.1: Probability and Impact matrix 17

Table 4.1: Basic information of respondents 34

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Table 4.2: Basic information of the New Mess Hall Project- Escravos 34

Table 4.3: Respondents’ perception on why project risk occur 35

Table 4.4: Relationship between project risk and contract sum 36

Table 4.5: Relationship between project risk and complexity of project 37

Table 4.6: Impact of risks on the contract sum and duration of the NMH Project 38

Table 4.7: Probability and Impact matrix of risks encountered in the NMH Project 40

Table 4.8: Comparative rates of a typical onshore project to the NMH Project 44

LIST OF FIGURES

Figure 1.1: Three Project Constraints 1

Figure 2.1: Risk Management Framework 8

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Figure 2.2: Risk Analysis 16

Figure 2.3: Transfer of Project Risk 20

Figure 2.4: Planning for Risk Management 23

Figure 4.1: Direct Proportionality between project risks and contract sum/project complexity 37

Figure 4.2: Impact of risk on contract sum and duration for the NMH project as perceived by

the project team and sponsor 39

Figure 4.3: A mean perception of Main and Sub-contractors as against the client perception 39

ABSTRACT

Risk in construction projects cannot be wished away. It is an unforeseen occurrence that characterizes

every project. The effects of risk in construction projects is manifested in project delay, cost overrun,

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changes in scope to manage the risk, as well as other possible factors analysed in this research. It is very

difficult to find a project in which the initial contract sum is not exceeded at the completion stage;

hence, this study sought to find the root causes of risks in construction projects, their level of impact on

contract sum and project duration as well as the various risk management systems using the Chevron

New Mess Hall project-Escravos as a case study.

The research identified seven major risks associated with construction with particular reference to the

Chevron New Mess Hall project, Escravos. They include social risk, changes in scope, Health Safety

and Environment risk, financial risk, contractual risk, project management and transportation risks. The

risks are also categorised and the various methods for risk analysis were extracted from literature.

Prominent among them include the quantitative and qualitative analysis.

The research was carried out through the use of primary and secondary data. The primary data was

gotten through an interview conducted with a client representative, the main contractor and a sub-

contractor. The secondary data was gotten from relevant archival materials. Respondents were asked to

rate each of the identified risks in terms of the perceived impact on contract sum and duration using a

scale of 0-10 and the results clearly show that some risks were more on the part of client e.g. financial

risk, while some were more on the part of the contractors e.g. HSE, contractual risk, and changes in

scope.

The data was analysed and the convergence/divergence of opinion of the major actors/respondents was

compared. In most cases, the main and sub-contractors opinion converge and they jointly differ in

opinion with that of the client. This is very understandable since they have similar role as project

executors, their interests also should naturally be similar. Also, the rating of impact of risks as

perceived by the respondents was tested on a probability and impact matrix and the results revealed that

certain risks like social, HSE and risk arising from changes in scope were quite high in the project of

the case study while others were on a moderate scale.

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In conclusion, based on the findings, certain recommendations were made and it is hoped that such

recommendations will be useful in future to both the client (CNL) and contracting firms that operate or

wish to operate in offshore locations of the Niger-delta region.

CHAPTER ONE

INTRODUCTION

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1.1 BACKGROUND OF STUDY

According to The Project Management Body of Knowledge, PMBOK® 4th Edition, a project is a

temporary endeavour undertaken to create a unique product or service. –By the term,

‘TEMPORARY’, it means that the endeavour has a duration of operation. It must commence at some

point and terminate or close at another point in time.

Thomsett (1990) reveals that projects are distinguished from routines by the way in which they must

operate under the three constraints of result, budget, and time, as illustrated in Figure 1.1

RESULT

BUDGET TIME

FIG. 1.1 – Three Project Constraints

Source – Thomsett (1990)

A risk on the other hand is defined as an uncertain event or condition that possesses the potential to

have a positive or negative effect on the project’s success. Perry and Hayes (1985) define risk as an

exposure to economic loss or gain arising from involvement in the construction process. There are

various categories of project risks ranging from Internal or Organisational risk, External, Technical

and unforeseeable risks. Some external risks may result from force majeure (superior power or force

that is impossible to resist). All these shall be analysed in subsequent chapters. Risk is also defined as

a condition in which there is a possibility of an adverse deviation from a desired outcome that is

accepted or hope for (Vaughan and Vaughan, 1996).

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 Risks can only be managed or avoided but cannot be eliminated from surfacing in a project. According

to Hertz and Thomas (1984) cited in Flanagan and Norman (1993) - ‘To try to eliminate risk in

business enterprise is futile; risk is inherent in the commitment of present resources to future

expectations. Indeed, economic progress can be defined as the ability to take greater risk’.

Contract Sum is an agreed lump sum to be paid for the whole of the Services, usually in instalments

according to a Payment Schedule [http://www.constructingexcellence.org.uk]. The contract sum is

usually payable by monthly instalments. Under traditional contracting the quantity surveyor produces

a (usually monthly) “valuation” of the work properly executed to date. By “valuing” the work the

quantity surveyor is calculating the proportion of the contract sum which is attributed to the work

done. The contract administrator then issues a (monthly) interim certificate stating the appropriate

payment to the contractor, which is the quantity surveyor’s valuation less:

(a) Sums previously certified and

(b) Retention [http://www.longworthconsulting.co.uk/construction_contracts/contract_sum]

According to Nkado (1994), construction time can be regarded as the elapsed period from the

commencement of site works to the completion and handover of a building to the client. The

construction time of a building is usually specified prior to the commencement of construction. There

are no ‘hard-and-fast’ rules for predicting construction durations of projects. Construction time is

usually deduced from the client’s brief or derived by the construction planner from available project

information such as design drawings, bill of quantities, method statements, specifications, bar chart

programs, etc.

The completion periods are often calculated on the basis of the planner’s own previous experience on

similar projects. Quite often there is a difference between contract cost and actual construction cost at

the completion of a project.

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 Factors that influence such cost overrun could range from simple errors in original quantity takeoff to

changes in quantities of items of work or inclusion of new items of work. Whatever the reasons, it

entails an increase in size of a project in terms of volume that may trigger an increase in construction

time (Ifte, 2009).

1.2 STATEMENT OF THE PROBLEM

Many time and cost overrun are attributable to either unforeseen events or foreseen events for which

uncertainty was not appropriately accommodated (Perry and Hayes, 1985).

Jagboro and Ojo (2003) point out that it is very difficult to find a project in which the initial contract

sum is not exceeded at the completion and therefore, serious action must be taken by building project

estimators to ensure strict budget compliance, in order to control the amount of capital invested.

Contractors have failed to give adequate attention to this problem or better still, carry out an in-depth

study on how to convert risk into an advantage.

This research seeks to identify various types of risks and how they affect contract sum of a building

construction work.

1.3 AIM AND OBJECTIVES

The aim of the study is to evaluate the impact of different types of project risks on the contract sum and

duration of building construction projects using the Chevron New mess hall, Escravos Warri, as a case

study.

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The objectives are to:

I. Identify various risks associated with construction projects

II. Identify and assess the different risk management system

III. Assess the impact of the identified risks on contract sum and duration

1.4 RESEARCH HYPOTHESIS

This project tries to understand the extent by which various risks affect the contract sum of building

projects. To achieve this end, the following research questions must be answered to give a better

understanding to the work:

• Why does project risk occur?

• Is there any relationship between project risk and contract sum?

• Is there any relationship between the complexity of a project and the inherent risk?

• Does the project location have any role to play in influencing the rate of exposure to risk

encountered and to what magnitude?

1.5 SIGNIFICANCE OF THE STUDY

It is the wish of the employer and the project team to ensure that a particular project is delivered on

time, on budget and on scope. It is equally desirable when project risks are identified and analysed

efficiently to transform them into opportunities. Most project managers understand that a huge amount

of money can be realised if uncertain project events are handled in a proactive manner. The result will

be that you minimise the impact of project threats and seize the opportunities that occur.

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This allows you to deliver your project on time, on budget and with the quality results your project

sponsor demands. Also your team members will be much happier if they do not enter a "fire fighting"

mode needed to repair the failures that could have been prevented (Bart Jutte-

http://www.projectsmart.co.uk).

While this research seeks to give a clearer picture of the cost effects of various project risks, it will also

be an instrument to explore the cost saving tendencies of an effective project risk management plans.

This study shall be a viable instrument in the hands of practising professionals in the building

construction industry because it shall open up new boundaries and give clearer analysis on how

individual risk types can be converted to opportunities.

1.6 SCOPE OF THE STUDY

This research is restricted to the works carried out in the Chevron New Mess Hall Project, Escravos

Warri. The data collected are centred on the project. They include basic historic information about

Chevron Nigeria Limited, the company’s exploration in the Nigeria/Mid-Africa Strategic Business Unit

(NMA/SBU), Minutes of all the site progress meetings and other data needed to achieve the set

objectives.

This is because the Escravos Construction Group and most of the other contractors in the region operate

in a world class construction system and with an efficient project risk scheme. The choice of scope is

also due to the peculiarity of certain types of risks in the Niger-Delta region.

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 CHAPTER TWO

LITERATURE REVIEW

2.1 RISK

Risk! Construction projects have abundance of it, contractors cope with it and owners pay for it.

The construction industry is subject to more risks than many other industries. The process of taking

a project from initial investment appraisal to completion and into use is complex, generally bespoke

and entails time consuming design and production process (Flanagan and Norman, 1993).

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Complexities of the project, location, type of contract, familiarity with the work, breakdown in

communication are some of the significant contributors to risk in construction projects. Evidence

from projects world-wide show that these risks are not being adequately dealt with (Thompson and

Perry, 1992)

Risk in project, if they come in fruition, can mean total project failure, increased costs, extended

project duration amongst other things. Risk often has negative connotation but the acceptance of the

risk can also offer a reward. For project managers, risk can mean failure, but the reward can mean a

time or cost savings, as well as other benefits (Rita, 2005).

Flanagan and Norman (1993) reveal that pundits have argued that there are four ways to tackle risk

in the construction industry:

• ‘The umbrella approach’ where you must allow for every possible eventuality by adding a

large risk premium to the price;

• ‘The ostrich approach’ where you bury your head in the sand and assume everything will

be alright, that somehow you will muddle through;

• ‘The intuitive approach’ that says don’t trust all the fancy analysis, trust your intuition and

gut feel;

• ‘The brute force approach’ that focuses on the uncontrollable risk and says we can force

things to be controlled, which of course they cannot.

2.2 RISK MANAGEMENT SYSTEM

Risk management aims to ensure that all that can be done will be done to ensure the project

objectives are achieved. The main purpose of a risk management system is to assist business

to take the right risks. It is the Process for identifying, analyzing, and responding to project

risk. It includes maximizing the probability and the results of positive events

(opportunities) and minimizing the probability and consequences of adverse events (risks).
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 Flanagan and Norman (1993) explain the process of Risk management by breaking them

down into the following risk management system as shown in Fig. 2.1.

RISK IDENTIFICATION

RISK CLASSIFICATION

RISK ANALYSIS RISK ATTITUDE

RISK RESPONSE

Fig 2.1: Risk Management Framework

Source: Flanagan and Norman (1993)

2.2.1 RISK IDENTIFICATION

This process involves identifying the source and type of risks. Any risks missed here may be harder

to deal with in the project. This effort should involve all stakeholders and might even involve

literature review, research and talking to non-stakeholders. Sometimes the core team will begin the

process and then the other members will become involved, making risk identification an iterative

process (Rita, 2005).

Rudd (2005), defines risk identification as the way the project team determine the risks that affect

the project so that analysis and risk response can be performed. Risk Identification is an iterative

process and continues throughout the life of the project.

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Once a risk is identified and defined, it ceases to be a risk, it becomes a management problem.

Inevitably, bad definition of a risk will breed further risk. Risk identification process also

acknowledges the source, event and effect of these risks. Risk sources may include the following

examples, inflation rising above the allowance in the estimate, unforeseen adverse ground

condition, insolvency of the main contractor, exceptionally inclement weather etc.

Some common effects are: failure to keep within the cost estimate, failure to meet required

completion date and quality, injury to a worker due to an inadequate system of working, among

others (Flanagan and Norman, 1993). Below are types of risks that affect contract sum and duration

in the construction industry.

2.2.1.1 CONSTRUCTION SITE ACCIDENT

Construction is a relatively hazardous undertaking. There are significantly more injuries and lost

workdays due to injuries or illnesses in construction than in virtually any other industry. These work

related injuries and illnesses are exceedingly costly. (Project Management for Construction: Quality

Control and Safety during Construction).

Flanagan and Norman (1993) refer to this type of risk as pure risk. Rita (2005) reveals that such

pure risks are insurable and that they can only result to loss when they occur. Pure risks include the

risk of fire, theft and personal injury. Accidents have very strong impact on the construction work

and the final result will be evident in the cost of the project.

Ogunmoroti (2001) explains that losses due to injuries and accidents may assume large proportions

unless controlled by a progressive safety programme directed by a competent safety engineer or an

aggressive safety committee. Well organized safety programme can improve morale and eliminate

losses.
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The Escravos Construction Group organises daily Tool Box Talk, Job Safety Analysis (JSA)

review. There is also a monthly Safety meeting and safety drill for the entire project management

team.

2.2.1.2 WEATHER

Inclement weather is also another type of risk that affects construction projects. The contractor

usually does not contemplate the extent of impact of weather during tender stage. Poor weather

condition usually leads to loss of man-hour, material wastage, delay and cost over-run. Extreme

weather conditions may lead to great catastrophe. Certain risks are due to the act of God. Nobody

can come in the way of such occurrences. They are usually referred to as ‘Force Majeure’ that is-

force of a superior power, impossible to resist. Earth quakes, Land slides, volcanic eruptions,

hurricanes and tsunamis all fall under this category.

2.2.1.3 COMMUNAL CRISIS AND AGITATION

This is a common type of risk especially in the restive Niger-Delta regions. Communal crisis and

militant agitation is commonplace. This area is continuously subject to threat occasioned by a

precarious security situation and the associated risk levels are continuously evolving. It is therefore

necessary that this risk be constantly monitored such that the exposure is controlled and always

maintained at an acceptable level (Inyang and Oyinlola, 2006).

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This type of risk is usually categorized under social risk and it results in tension as well as the

destruction of properties, financial loss, injury and sometimes death. During the period of tension,

most socio-economic activities are suspended including construction works. This ultimately results

in delay and subsequent impact on contract sum.

2.2.1.4 ENVIRONMENTAL RISK

The environment also contributes to the risk experienced in construction. Sometimes, it is as a result

of the act of God while some other times, it is purely due to human activities. Human beings use the

environment in an extremely exploitative manner. Such recklessness eventually distorts the eco-

system and in turn, endangers life and property. Perry and Hayes (1985) classified the following

under environmental risk: Waste treatment, Ecological damage, Public enquiry and pollution.

2.2.1.5 FINANCIAL RISK

Financial risks according to Flanagan and Norman (1993) falls under speculative or business risk.

They are risks that may give rise to opportunities or treats. Examples of financial risks include;

availability of fund, adequacy of insurance, adequate provision of cash flow, losses due to

contractor’s default, suppliers’ exchange rate, fluctuation, inflation and taxation (Perry and Hayes,

1985).

Robert (2007) explains that estimating risk falls under financial risk and can have an impact on

construction. When this happens the project can either try to secure additional funding or change the

design in the field to reduce the budgets yet to be expended.

2.2.1.6 PROJECT MANAGEMENT RISK

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According to the PMBOK® Guide, project management risk deals with faults in the management of

the project. They include unsuccessful allocation of time, resources and scheduling; unacceptable

work results (low-quality work); and lousy project management as a whole.

2.2.1.7 CHANGES IN SCOPE

A permanent or temporary change can inadvertently introduce new hazards or compromise

safeguards built into the original design of a facility. To ensure that any hazards potentially

associated with such a change are identified and controlled, a Management of Change (MOC) plan

must be prepared and approved before a facility change is made (Safe Practices Manual, 2005).

Robert (2007) explains how change in scope may be used to mitigate or reduce the impact of risk.

Field conditions such as rock excavation, poor soils, or inclement weather may expend the entire

estimate risk buffer (construction contingency) early in the project. Subsequently, there may not be

sufficient buffer in the later stages to lessen or mitigate the impact of additional field conditions.

When this happens the project can either try to secure additional funding or change the design in the

field to reduce the budgets yet to be expended.

2.2.2 RISK CLASSIFICATION

Perry and Hayes (1984) attribute variation in construction costs to some risk elements inherent in

construction such as, physical risks, environmental risks, logistic risks, financial risks, legal risks

and construction risks among others.

A more recent study by Goran and Simo (2009) list the following as the most frequent risks on the

construction project- land and property, design, politics and technique/ technology, infrastructure,

business and commerce, pre-construction, site establishment, procurement and construction.

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Rita (2005) reveals that there are four broad categories of risk. They include:

• External risk- Regulatory, Environmental, Government, Market shifts

• Internal risk- Time, Cost, Scope changes, Inexperience, Poor planning, People, Staffing,

Materials, Equipment.

• Technical risk- Changes in technology

• Unforeseeable risk- Force majeure

Flanagan and Norman (1993) further explain the concept of risk classification by grouping it into

three categories namely; risk consequence, risk types and impact of risk.

Risk consequence examines:

1. The frequency of risk occurrence

2. Severity/ Impact

3. Predictability

Types of risks include the pure/specific risk and the speculative or market risk. Pure risks have no

potential gain. Such risks will typically arise from the possibility of accident and injuries or

technical failure. On the other hand, speculative risks have the possibility of loss or gain which

might be financial, technical, or physical. Speculative risks are sometimes called business risks.

Finally, the classification explores the impact of risk to the company, the environment, the

market/industry and the project/individual.

This classification is an expanded view compared to the general classification by Rita (2005).

2.2.3 RISK ANALYSIS

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Risk analysis is perhaps an indispensable part of the entire risk management system.

Raftery (1994) as cited in Ogunmoroti (2001) defines risk analysis as an integral part of risk

management that attempts to capture all feasible options and to analyse the various outcomes of any

decision and give an insight to what happens if the project does not proceed according to plan.

According to Flanagan and Norman (1993), no matter how good the analytical techniques, it is up to

the professional to interpret the results. There are six steps in risk analysis:

STEP 1 All the various options to be considered

STEP 2 Consider the risk attitude of the decision-maker

STEP 3 Consider what risks have been identified, which is controllable, and likely impact

STEP 4 Measurement, both quantitative and qualitative

STEP 5 Interpretation of the results of the analysis and development of a strategy to deal with

the risk.

STEP 6 Decide what risk to retain and what risk to allocate to other parties.

From the estimating stage, we can easily tell when project cost estimates are likely to be overrun.

“Murphy's Law” is not a sufficient explanation of these overruns. Simply adding up single-point

cost estimates of project elements will never produce the most likely cost of the project. Although

this traditional method is intuitively appealing, it is invariably wrong. (Hulett, 2005)

There are two important advantages of carrying out risk analysis.

• A risk analysis improves the accuracy of project costs by exploring the uncertainties that are in

all estimates. It is the best way to determine a contingency that will protect the project cost from

a pre-selected degree of overrun risk.

• A risk analysis can identify the main cost risk elements in complex projects to facilitate risk

management. In such cost elements that contribute the most, there is the need for contingency

28
 and they may require the best managers, the most management attention and perhaps a change

in plan to contain costs (http://www.projectrisk.com).

Goran C. and Simo S. (2009) opine that there are four objectives of doing risk analysis:

• To set the project’s funding requirement during Budget or Authorization for Expenditure

• To assess the highest risk items at different project stages so that mitigation can be planned

• To return any excess contingency fund during project execution, so that the fund can be used

more profitably in other areas

• To set Stretch Target as a challenge to the Project Team

Fig 2.2: Risk Analysis

Source: FLANAGAN AND NORMAN (1993)

From the figure above, it is clear that risk analysis may be quantitative or qualitative.

2.2.3.1 QUANTITATIVE RISK ANALYSIS

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Quantitative risk analysis according to the PMBOK® Guide is a numerical assessment of the

probability and impact of the identified risks. It also creates an overall risk score for the project.

Quantitative Risk Analysis applies interviewing and statistical techniques to evaluate the effect of

risk events on the project objectives. It helps the project manager to determine appropriate amounts

of management reserve or contingency to be used in the project cost and schedule objectives.

Quantitative Risk Analysis uses numerical data and statistical techniques; hence it has more

credibility than the Qualitative Risk Analysis, which is primarily based on expert judgment. The

sensible risk response decision(s) and contingency reserve amounts will be based on the information

from the Quantitative Risk Analysis (Rudd, 2005).

2.2.3.2 QUALITATIVE RISK ANALYSIS

Qualitative risk analysis on the other hand is a process of prioritizing risks for subsequent further

analysis or action by assessing and combining their probability of occurrence and impact. The

following steps are adopted for such analysis:

• Estimate the probability that each identified risk event will or will not occur

• Determine the impact of the risk event (the amount at stake or what can be lost)

• Rank the risks based on the probability/impact

• Identify the risks that will be managed (mitigated)

An evaluation of each risk’s importance and priority for attention is typically conducted using a

probability and impact matrix. An example is shown in Table 2.1 below

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 Table 2.1- Probability and Impact Matrix

Severity of a Risk Event (Risk Score) = Risk Probability x Impact of a Risk Event

According to Rudd (2005), there generally is not enough time or money to address every risk event

that may be identified, so the project team should expend its effort on the most important risk

events, that is, the ones that have the greatest return impact on the project. This return can be in the

form of negative impacts that are prevented or minimized, or positive impacts where the probability

is increased. Qualitative Risk Analysis allows the team to prioritize the identified risks.

2.2.4 RISK RESPONSE PLANNING

Rita (2005) simplifies the concept of risk response planning with the question; ‘What are we going

to do about each top risk?’ Risk response planning involves finding ways to make the threat smaller

or eliminate it entirely, as well as finding ways to make positive risks more likely or greater in

IMPACT
LOW MODERATE HIGH
HIGH Moderate High Unacceptable
PROBABILITY MODERATE Low High High

LOW Low Moderate Moderate

impact. It includes doing one or all of the following for each top risk:

• Do something to eliminate the threat before they happen

• Decrease the probability and/or impact of threats or increase the probability and/or impact of

opportunities

For the remaining (residual) risks:

• Do something if the risk happens: Contingency plans

• Do something if contingency plans are not effective: Fallback plans

The PMBOK® Guide classifies risk response plan into two broad categories:

31
 Strategies for Negative Risks or Threats

• Risk Avoidance

• Risk Transfer

• Mitigation

Strategies for Positive Risks or Opportunities

Exploit

Share

Enhance

2.2.4.1 RISK AVOIDANCE

Rita (2005) suggests that the project management team must try to avoid the risk by planning a

different technique to remove the risk from the project. Avoidance also tries to eliminate the threat

by eliminating the cause (e.g. Remove the work package or person).

Flanagan and Norman (1993) explain that risk avoidance is synonymous with the refusal to accept

risk. According to them, the refusal to contract is a simple example of risk avoidance.

2.2.4.2 RISK TRANSFER

This is concerned with the deflection of the risk in the bid to make another party responsible for the

risk through purchasing of insurance, performance bonds, warranties, guarantees or outsourcing the

work. For instance, the response to certain risks such as fire, property or personal injury etc is to

purchase insurance.

Insurance exchanges an unknown risk for a known risk. For example, in the event of fire, the risk is

unknown depending on the extent of the fire, but when insurance is purchased, the cost risk of fire

32
becomes known, as it is the cost of the insurance. Purchasing insurance does not eliminate all risk.

For example, there can still be scheduled delays on the project caused by the fire (Rita, 2005).

Figure 2.3 gives an insight on how risk is transferred among various parties in the construction

industry.

CLIENT

CONTRACTOR
DESIGNER

CONTRACTOR

INSURER

Figure 2.3 Transfer of project risk

Source: Kwakye (1999) cited in Farinloye, Salako & Mafimidiwo (2009)

2.2.4.3 RISK MITIGATION

Rita (2005) explains risk mitigation as the reduction of the probability or the impact of a threat,

thereby making it a smaller risk and removing it from the list of top risks on the project. In the

33
mitigation process, any reduction will make a difference, but the option with the most reduction is

often the option selected.

The PMBOK® Guide describes mitigation as a corrective action that reduces the expected monetary

value of a risk event by reducing the probability of its occurrence and/or consequences to an

acceptable threshold. This simply means that in mitigation, some fund will be saved in the process

and this is a positive mark for the project success.

Flanagan and Norman (1993) classify risk reduction into four basic categories.

• Education and training to alert the staff to potential risks

• Physical protection to reduce the likelihood of loss

• Systems are needed to ensure consistency and make people ask the ‘what if’ questions

• Physical protection to protect people and property

The Escravos Construction Group clearly puts all four considerations into proper practice. By

education and training, the group enforces a compulsory Operational Excellence (O.E) Training as

well as a monthly safety meeting for all members of the project management team.

In the case of physical protection to reduce the likelihood of loss, installations such as the water

sprinkler systems, smoke and heat detector etc are properly installed in buildings to alert relevant

safety and rescue agencies.

The ‘what if’ questions are asked in the daily Job Safety Analysis review. This exercise ensures that

the right questions are asked and suitable solutions proffered.

Finally, the Personal Protective Equipment (PPE) is made available to ensure physical protection of

every site personnel and property.

Robert (2007) affirms that risk mitigation at the early stage may be achieved by a change in design.

Such changes to the design to reduce cost are classified under aesthetic, functional, or

34
 programmatic. Although the aesthetic changes to the design are the most visible, they often have the

lowest impact on the overall cost of a project. The functional changes to the design (VAV vs. CV

HVAC system) have a moderate impact to the project costs but may also change how the project is

operated when complete. The programmatic changes to the design have the largest impact on the

costs, but also have the largest impacts to the end-users (i.e. less square foot per person, no

cafeteria, etc.).

2.2.4.4 RISK EXPLOIT

Risk exploit is one of the three strategies for positive risk otherwise known as opportunities. This

strategy seeks to eliminate the uncertainty associated with a particular upside risk by making the

opportunity definitely happen.

2.2.4.5 RISK SHARING

Sharing a positive risk involves allocating ownership to a third party who is best able to capture the

opportunity for the benefit of the project.

2.2.4.6 RISK ENHANCEMENT

This response plan seeks to modify the size of an opportunity by increasing probability and/or

positive impacts and by identifying and maximizing key drivers of these positive impact risks.

2.2.5 RISK ATTITUDE

In most project management terms the most serious effects of risk can be summarised as:

• Failure to keep within the cost estimate,

• Failure to achieve the required completion date

35
 • Failure to achieve the required quality and operational requirements

The success of a project management exercise depends very much on the efficient and effective

management of the risks involved (Ren, 1994).

Risk attitude is equally important because any decision about risk will be affected by the attitude

of the person or organisation making the decision. Flanagan and Norman (1993) group such

persons or organisations into three types:

• Risk loving

• Risk averse

• Risk neutral

Risk lovers do not hesitate to venture into any endeavour but they are harder to find. Most

decisions are now made on the basis of detailed analysis. The basic rationale of risk aversion is

that it is more unpleasant to lose a given sum than pleasant to gain the same amount; for a loss

may cause a reduction in the standard of living to which one has become accustomed. In an

extreme case, a risky venture may be shunned because it puts basic necessities at risk. Finally, a

risk neutral person is one who treats risk and reward on an equal basis. Flanagan and Norman

(1993)

2.3 RISK MANAGEMENT PLANNING

Risk management planning is about making decisions. The project manager, the project team, and

other key stakeholders are involved to determine the risk management processes. The risk

management process is in relation to the scope of the project, the priority of the project within the

performing organization, and the impact of the project deliverables. In other words, a simple,

low-impact project won’t have the same level of risk planning as a high-priority, complex project

(Project Management Body of Knowledge, 4th Edition). Figure 2.4 shows the relationship.

36
 Project priority

Risk planning

Fig. 2.4 - Planning for Risk Management

PMBOK® Guide, 4th Edition.

According to Rudd (2005), risk management planning is the process of developing an approach

and executing risk management activities for a project. It should be completed early in the project

planning phase.

2.4 THE CASE STUDY

The case study seeks to identify the risks encountered in the New Mess Hall Project, Escravos

and how much impact they had on the contract sum and duration. To achieve this goal, there is a

need to embark on an in-depth research on the company.

Such research explores chevron operations in Nigeria, data about the project and other relevant

archival information. An interview was also conducted to compliment the information received

about the New Mess Hall Project (Appendix A).

2.4.1 CHEVRON IN NIGERIA

Chevron has been active in Nigeria since 1913, when legacy company Texaco products were first

brought to the market. As Texaco Overseas (Nigeria) Petroleum Co. (TOPCON) and later

37
Chevron Nigeria Ltd. (CNL), the company discovered Nigeria's first offshore oil fields in 1963-

the Koluama and Okan fields.

In 1997 CNL started the Escravos Gas Project (EGP), the nation's first major project to gather

and process natural gas. Continuing the search for offshore oil, CNL discovered the Agbami field

in 1999 and uncovered potential recoverable resources of 900 million barrels of oil equivalent,

Nigeria's largest ever deepwater discovery.

Today Chevron has the largest acreage position in deepwater offshore Nigeria and owns and

operates more than 300 Texaco-branded service stations, blending and manufacturing facilities

and marketing activities. Chevron's Nigeria operations are based in Lagos, Warri, Escravos and

Port Harcourt.

CNL is expanding rapidly and investing significant capital to drive long-term production growth

in Deepwater and Gas, as well as other base businesses. At the same time, Chevron is committed

to actively promoting a safe and healthy environment (http://www.chevron.com).

2.4.2 THE ESCRAVOS OPERATIONS

Escravos is derived from the Spanish word ‘esclavo’ (Encarta 2009). Chevron operates mostly in

the on-shore and near off-shore areas in the Niger Delta region of Nigeria. The Escravos site is

located about 100km southeast of Lagos. Escravos crude oil is produced in Nigeria. It is loaded

from the Chevron-operated Escravos Terminal, which can accommodate Very Large Crude

Carrier (VLCC) loading. The typical cargo size is 950 thousand barrels but alternate cargo sizes

can be arranged with advance planning. Typically, cargoes are sold with pricing based off Brent

(Dated) quotes. The production rate of the contributing fields is approximately 400 thousand

barrels per day. Chevron has a 40% interest in the concession.

38
Concessions covering approximately 2.2 million acres (8,900 sq km) are operated under a joint

venture with Nigeria National Petroleum Corporation where NNPC currently holds 60 percent of

the joint ventures and 40 percent owned by Chevron Nigeria Limited. One of the largest joint-

venture gas projects is the Escravos Gas Plant (EGP). In 2005, the joint ventures commenced a

massive project called the Escravos Gas-To-Liquid Project (EGTL) with a production capacity of

34,000bpd (Barrels per day) of fuel using flared gas (http://www.234next.com).

Escravos is an island and so, human resources, materials and plants are conveyed through air and

water. Typical of any remote facility, basic emergency and daily needs are put in place to ensure

the effective production and storage of hydrocarbons which is the primary operation in the area.

Such facilities include health care services, emergency rescue facility, accommodation and food.

The meals in the island are prepared and served three times daily in the Mess Halls.

2.4.3 THE NEW MESS HALL PROJECT

The New Mess Hall is an astonishing 3072 square meter project that is conveniently symmetrical

in design. The building is located in Tank-farm; Escravos-a stone throw from the administration

block. It is broadly divided into two functional segments namely- the kitchen area and the dinning

area, both separated by a narrow serving area line. The dinning area of the mess hall was

designed to accommodate over five hundred persons at every point in time.

The client is Chevron Nigeria Limited (CNL) while the main contractor is a Lagos-based

construction company- Aritse Ventures Limited (AVL). There are many sub-contractors that

played different roles in the project and some include: Alumaco, GMP, Crittal Hope, Fenlab,

Orittech, Foursquare, Adeoye Bakare Partners, Mellavin, Tolaco etc.

39
The contract used for the execution of the mess hall project was a Lump Sum-Schedule of Rates

type of contract. The estimated total cost of the project is 3.6 million US Dollars. This amount

excludes costs of transportation of workmen to site, transportation of materials, feeding, time

writing, accommodation, health care and administrative costs. All these are regarded as indirect

costs to the project and are bourn by the client.

Hence there is a direct cost which is the actual cost of material procurement and execution

including contractor’s profit and overhead, costs arising from fluctuations and variations etc and

there is the indirect cost which has been described above. For the indirect cost, a charge code is

assigned to a particular unit e.g. Construction Unit, and every flight booking meant to bring

anybody into the terminal with respect to the project is charged to that code. Same thing applies

to feeding, accommodation and other indirect costs mentioned earlier.

The various units that relate to construction in the terminal include the Escravos Construction

Group (ECG), Facility Management (FM) and the In-house Construction unit. These units have a

well structured organ and modus operandi. Each group is headed by a superintendent. The ECG

has very well skilled construction engineers, material coordinators, safety officers, mechanical,

electrical and civil engineers etc.

From the inception of the project, quality was never sacrificed for mediocrity and every member

of the project team was determined to protect this standard. The control mechanism on quality

adopted for the project may best be described as ‘Total Quality Control’- a system that allows for

a zero tolerance of defective works.

Daily site activities include the early tool-box talk and review of the job safety analysis (JSA)

which is also known as risk assessment, actual construction work, daily progress tracking of

works executed and a realistic future look-ahead.

40
 While quality work is expected at all times, all tasks are equally executed in a safe environment.

The client opines through her tenets of operation that all works should be carried out safely or

not at all, there is always another time to do it safe.

For this reason of safety consciousness, the daily construction risks associated with every task is

first analysed by the entire crew before site work commences and a monthly safety meeting is

usually convened to address pressing safety issues alongside the compulsory safety drills.

CHAPTER THREE

RESEARCH METHODOLOGY

3.1 INTRODUCTION

This chapter deals with the methods and procedures adopted by the researcher in gathering and

analysing data for the study. The methodology of research is centred on three major issues, namely:

literature search, primary data collection (field work), secondary data collection (archival materials)

and the analysis of collected data.

2 RESEARCH DESIGN

Research design refers to the structuring of investigation aimed at identifying the variables. In

this particular scenario, the research design is thus expressed:

Contract sum and duration = f (Project risks)

41
 The research seeks to establish the relationship between ‘Project Risks’ (Independent variable)

and ‘Contract Sun and Duration’ (Dependent variable) that exists in all projects with particular

reference on the New Mess Hall Project, Escravos.

This is summarized below:

Y = f(x) ………………. Eq. (i)

Where y = Contract Sum and Duration

x = Project risks

3.3 DATA COLLECTION

3.3.1 PRIMARY DATA COLLECTION

Data for research survey can be collected through interviews and the administration of

questionnaires. However, for case studies, the interview system is more relevant.

According to Michener and Delamater (1994), one advantage of using an interview is that the

interviewer can adjust the questioning to the respondent. That is, he or she can look for verbal

and/or non-verbal signs that the respondent does not understand a question and repeat or clarify as

needed.

There are three methods of conducting interviews:

• Scripted

• Semi- scripted

• Ad-lib (http://www.tpub.com)

While the scripted method requires that all the questions and answers are prepared in advance and

that the interviewee(s) simply read(s) the prepared text; in semi-scripted, there is a greater flexibility
42
 such that the interview questions come from both the prepared text and issues arising from the

dialogue.

Finally, the ad-lib method is used in an unplanned scenario and does not require any prepared text.

The interviewer is expected to improvise and ask questions without prior preparations.

Michener and Delamater (1994) reveal that there are two main types of interview namely: Face-to-

face interview and telephone interview, although the Computer Assisted Telephone Interviewing

(CATI) is now widely used.

For the purpose of this research, the type and method of interview to be adopted shall be a face-to-

face semi-scripted interview with key persons representing the Management of Chevron who

participated in the New Mess Hall project as well as the contractors. To ensure that each respondent

in this study receive the same questions; an interview schedule will be compiled and used for the

survey. This will help in collecting more accurate information due to the visual feedback that can be

assessed from such type of interview.

The PMBOK® Guide affirms that Interviewing subject-matter experts and project stakeholders is

an excellent approach to identifying risks on the current project based on the interviewees’

experience. The interviewee, through questions and discussion, shares his insight on what risk he

perceives within the project. The goal of the process is to learn from the expert what risks may be

hidden within the project, what risks this person has encountered on similar work, and what insight

the person has into the project work.

3.3.2 SECONDARY DATA COLLECTION

Secondary data collection can be collected using desk study approach either in statistical or

descriptive format. However, the two categories of data approach were used, since both primary and
43
 secondary data are required for this research work. Data for the study were generated through

interviews as primary data and from archival materials as secondary data.

.3 DATA REQUIREMENT

This study was carried out using the expertise of the construction professionals to collate

information required through the use of interview and archival sources in examining the impact of

project risk on contract sum and duration, the focus being the chevron new mess hall project,

Escravos.

They answer the following questions:

I. General information about chevron, the company’s antecedence and modus operandi

II. What peculiar risk factors are associated with the location of the case study

III. The level of impact such identified risks had on the project’s contract sum and duration

IV. The solutions proffered by the company to prevent the reoccurrence of the situation

4 SAMPLING TECHNIQUE

There are two types of sampling techniques available for research work, namely; random sampling

and selected sampling. Random sampling is a technique in which every object has a known and

equal chance of being selected for inclusion in the sample. In selected sampling on the other hand,

only specific samples relevant to the investigation are identified and used for the research work.

.1 SAMPLE SIZE

The interview was conducted and questions that are relevant to this research were asked.

Participants include a client representative as well as the project managers of the contractor and sub-

contractor firms. This is because they occupy the top echelon of management and can provide
44
 accurate and vital information needed to establish the level of impact the project risks had on

contract sum and duration.

5 DATA ANALYSIS AND TECHNIQUES

Data generated from the research work were processed by cross-comparing the responses given by

the client, main contractor and a sub-contractor to isolate any commonalities or convergence of

opinion and/or divergence. The convergence simply reinforces the opinion of all three parties while

a divergent view necessitates enquires as to the reason(s) for the contrast with respect to literature.

Respondents were asked to rank the impact of identified risks on the contract sum and duration of

the project on a scale of 0 – 10 and the ranking was also extracted and tabulated to represent the

way all three parties view the risks faced on the project in terms of their level of prominence. This

made it possible to establish which risk factors are to be given more attention for future projects in

the Escravos terminal.

45
 CHAPTER FOUR

DATA ANALYSIS AND RESULTS

4.1 INTRODUCTION

This chapter illustrates the analysis of the data collected, which is the analysis of the interview

schedule responses collected from the client, main contractor and sub-contractor representatives who

took part in the chevron new mess hall project, Escravos. The questions asked during the interview

were aimed at identifying the predominant risks in the project, their impact on the contract sum and

duration, and to identify and assess the various risk management systems employed.

4.2 THE DATA

Three oral interviews were conducted and the participants gave responses to the various questions

that were carefully designed to achieve the objectives of this research. The professionals include two

engineers and one quantity surveyor each representing the client, the main contractor and the sub-
46
 contractor. Additional information was also gathered from the archives of each representative to

reinforce the information gotten from the respondents.

The data collected shows the academic qualification of respondents, their line of profession the

contractual role of their company and their years of experience in the construction industry.

4.3 BASIC INFORMATION OF RESPONDENTS

Table 4.1 shows the basic information of the respondents.

CONTRATUAL ROLE PROFESSION OF ACADEMIC YEARS OF

IN THE PROJECT RESPONDENT QUALIFICATION EXPERIENCE

CLIENT Engineer B. Sc 18 years
MAIN CONTRACTOR Quantity Surveyor HND 27 years
SUB CONTRACTOR Engineer B. Sc 15 years

4.4 BASIC INFORMATION OF THE NEW MESS HALL PROJECT-ESCRAVOS

Table 4.2 shows the basic information of the New Mess Hall Project, Escravos.

Client Chevron Nigeria Limited

Location
Project Size
Estimated Total Cost
Total Contract Sum
Agreed Contract Duration
Actual Project Duration
Project Functionality
Tank farm, Escravos, Delta State [About 100km southeast of Lagos]
3072 Square metres
USD 3.6 million [Direct cost only]
USD 5.2 million [Direct cost only]
24 months
46 months
World-Class Messing Facility for offshore personnel

4.5 IDENTIFYING THE VARIOUS RISKS ASSOCIATED WITH CONSTRUCTION

PROJECTS

This section deals with the analysis of the perception of respondents in identifying the various risks

associated with construction projects with respect the New Mess Hall project which is the case

47
 study of this research. Each respondent stated the risks perceived to have been encountered during

the cause of the project; they equally gave reasons why risks occur in construction projects their

relationship with variables like contract sum, project complexity and location. The excerpts are

represented below:

1. Why does project risk occur?

CLIENT: Every project comes with its own risks. The risk varies depending on the project,

location of the project and the execution team

MAIN CONTRACTOR: Project risk occurs first as a result of inadequate planning. That is one

of the major reasons why project risks occur then of course some occur naturally.

SUB-CONTRACTOR: There cannot be a single reason why Project risk occurs. However,

when the wrong sets of people are put up to a task, or when the right people are executing a job in

the wrong manner, the project is prone to risk. Some other factors include the environment both

natural and socio-political. In fact, there are a whole lot of reasons.

Table 4.3 clearly extracts the respondents’ perception on why project risks occur. All three

interviewees agree that project risks occur as a result of different reasons.

REASONS WHY PROJECT RISK OCCUR

CLIENT’S VIEW • Location

• Project Execution Team

• Project Type
MAIN CONTRACTOR’S VIEW • Inadequate Planning

• Force Majeure
SUB CONTRACTOR’S VIEW • Ineffective selection of contractors

• Poor project execution scheme

• Environmental Factors

• Socio-political climate

Table 4.3: Respondents’ Perception on why project risk occur

48
2. How can you relate project risk and contract sum?

CLIENT: The project risk and contract sum are somehow directly proportional but this

statement does not apply to all project.

MAIN CONTRACTOR: The higher the risk, the higher the contract sums. That means they are

directly related.

SUB-CONTRACTOR: Contract sum of a project is bound to rise when the project is exposed to

much risk.

Table 4.4 Explain the interviewees’ reactions to the relationship between project risk and contract

sum with particular emphasis on the new mess hall project.

VARIATION

(PROJECT RISK AND CONTRACT SUM)

CLIENT’S VIEW • Project Risk is directly proportional to contract sum
MAIN CONTRACTOR’S VIEW • Project Risk is directly proportional to contract sum
SUB CONTRACTOR’S VIEW • Project Risk is directly proportional to contract sum

The response shows that there is a 100% agreement/convergence of opinion among all three parties

involved that project risk varies directly to contract sum.

3. How can you relate the complexity of a project and the inherent risk?

CLIENT: They are directly proportional?

49
MAIN CONTRACTOR: The more complex the project is; the riskier the project. However that

is all things being equal. There are some less complex projects that have high risks, depending on

location factor, for instance, you are doing a small project in the moon. Now the risk of going to the

moon to just go and build a toilet could be very high.

SUB-CONTRACTOR: If a project is complex, chances are that more advanced technology

will be employed. Complex projects raise the bar of risks likely to be encountered.

Table 4.5 Show the interviewees’ response to the relationship between project risk and complexity

of a project.

VARIATION

(PROJECT RISK AND PROJECT COMPLEXITY)

CLIENT’S VIEW • Project Risk is directly proportional to project complexity
MAIN CONTRACTOR’S VIEW • Project Risk is directly proportional to project complexity
SUB CONTRACTOR’S VIEW • Project Risk is directly proportional to project complexity

The The response shows that there is a 100% agreement/convergence of opinion among all three

parties involved that project risk varies directly to project complexity.

PROJECT RISK

CONTRACT SUM/COMPLEXITY
FIG 4.1-Direct proportionality
between project risks and contract sum/project complexity

50
4.6 ASSESSING THE IMPACT OF THE IDENTIFIED RISKS ON CONTRACT SUM

AND DURATION

The respondents were asked to identify peculiar risks and their impact on the contract sum and

duration of the New Mess Hall project and the rating revealed a number of submissions.

Table 4.6 shows this rating that was carried out based on a scale of 0-10.

Table 4.6: Impact of risks on the contract sum and duration of the NMH Project

IMPACT RATING BY RESPONDENTS

IDENTIFIED RISKS CLIENT MAIN
RATING CONTRACTOR
RATING
SOCIAL RISK 5 5
FINANCIAL RISK 7 2
CHANGES IN SCOPE 2 6
TRANSPORTATION RISK 3 4
HEALTH SAFETY AND 3 7
ENVIRONMENT RISK (HSE)
CONTRACTUAL RISK 3 7
PROJECT MANAGEMENT RISK 3 5
SUB- MEAN RATING OF
CONTRACTOR MAIN AND SUB-
RATING CONTRACTOR
7 6
3 2.5
8 7
3 3.5
9 8
9 8
3 4

From Table 4.6, it is noticed that both the client and the mean rating of the main and sub-contractor

revealed some convergence of opinion at some point and divergence at another. For instance,

financial risk was rated high by the client but the main and sub-contractor rated it low. This shows

that the client bore this risk to shield the contractors and protect the project from failure.

On the other hand, the contractor rated contractual risk, HSE and risks arising from changes in

scope to be very high as against the client’s perception as being low. This is because, from the

nature of the project, these risks have been transferred to the contractors who are meant to deal with

them in the course of project execution.

This relationship may also be represented with a multiple Bar Chart in Fig 4.2.

51
 Social Risk
Fin Risk
Changes in Scope
Client
Transp. Risk
Main contractor
HSE Risk
Sub-contractor
Contractual Risk
Project Mgt Risk

0 1 2 3 4 5 6 7 8 9 10

FIG 4.2 - Impact of Risk on Contract Sum and Duration

for the NMH Project as perceived by the project team and sponsor

In a bid to further highlight the convergent or divergent nature of the perception of respondents, the

mean response of the project executioners was derived.

Since they share some similarities in their contractual role; it is believed that they may share some

similarities of opinion with regards to matters concerning project risks. Figure 4.3 represents this

premise.

Social Risk

Fin Risk
Changes in Scope
Client
Transp. Risk
Main & Sub Contractor
HSE Risk
Contractual Risk

Project Mgt Risk

0 1 2 3 4 5 6 7 8 9 10

FIG 4.3 – A mean perception of Main and Sub-Contractors as against the client perception

52
 4.6.1 QUALITATIVE ASSESSMENT OF THE RISKS

Qualitative risk analysis is a process of prioritizing risks for subsequent further analysis or action by

assessing and combining their probability of occurrence and impact. Table 4.7 shows the

Probability and Impact Matrix of the risks encountered in the project as perceived by the

respondents.

Table 4.7: Probability and Impact Matrix of risks encountered in the NMH Project

IMPACT

LOW MODERATE HIGH

Moderate High Unacceptabl

HIGH e
CONTRACTUAL CHANGES IN SCOPE
PROBABILITY

Low High High

MODERATE SOCIAL RISK HSE

Low Moderate Moderate

PROJECT MGT RISK FINANCIAL RISK

TRANSPORT RISK

LOW

The probability and Impact matrix has been used to assess the impact of the risks identified from

literature and from the interview series. From table 4.7 above, it shows that the risks that had the

highest impact are Health Safety and Environment risk, Social risk and risks arising from changes in

scope.

53
 The risks that had moderate impact include Project Management risk, Contractual risk, Financial

risk and Transportation risk. The assessment also shows that none of the risks was low and none

was unacceptably high.

4.7 IDENTIFYING AND ASSESSING THE DIFFERENT RISK MANAGEMENT

SYSTEM

Apart from the various risk management systems identified from literature, this research also

identified some risk management systems used in the industry especially those plans used in the

execution of the New Mess Hall project. They include:

PROJECT EXECUTION PLAN

The project execution plan is drawn up and it shows all the strategies that the contractor company

wish to adopt to achieve a hitch-free project execution. This involves a concise program of work,

procurement and material movement plans, detailed daily activity plan and three-weeks look ahead.

All these plans are aimed at moderating cash flow, minimising cost overrun and managing project

delay.

SAFETY PLAN

This involves a daily Job Safety Analysis (JSA) also known as Risk Assessment. In this exercise,

the likely risks involved in the daily tasks to be executed on site are looked for and steps aimed at

mitigating such risks are analysed.

54
 The Job Safety Analysis is carried out before work can commence on any construction site in the

Escravos Terminal and all workmen that have any business on that site must be in attendance for the

exercise. The JSA goes in hand with the daily tool box talk.

QA/QC PLAN

A quality assurance/quality control plan is put in place to ensure that quality is not compromised

during the construction work. Chevron insists on total quality control and all contractors must yield

to this because poor workmanship could have devastating effects on the project life. All materials to

be installed as well as tools for the tasks are made to undergo series of tests.

RECOVERY PLAN

If a project is perceived to being delayed or has actually becomes delayed, chevron will request that

the contractor recovers his plan to ensure the situation is managed effectively. A recovery plan is a

detailed and realistic strategy that clearly shows how the contractor plans to make necessary

adjustments to get back on course.

This may warrant that he brings in more men, materials and plant to double his productivity on site.

The recovery plan helps recover time lost.

COMMUNITY PLAN

The community plan is a peculiar risk management plan in the Niger-delta. This is because of the

volatile nature of that region characterised by the incessant communal agitations by the locals. This

plan takes into consideration the yearnings of the community, their requests and how to manage

such requests without causing any form of unrest.

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It is also important to ensure that while attending to such requests and agitations, the essentials of

the project execution process is not distorted. Some of the numerous agitations include a constant

upward review of the wages for community workers, bonuses and allowance.

4.7.6 RISK MANAGEMENT AND PROJECT RATE

The Contract Sum is an agreed lump sum to be paid for the whole of the Services, usually in

instalments according to a Payment Schedule [http://www.constructingexcellence.org.uk]. A

contract sum is derived from a build-up of the bill of quantities which shows the breakdown of costs

of all the elements that make up the entire project.

This bill of quantities otherwise called the BoQ clearly itemize the description of each work item,

the quantity, standard unit of measurement, the rate and finally the amount, all on separate columns.

The rate of an item is simply the cost per unit of the item, hence the total amount for any item

largely depends on the rate and the quantity required. The analyses further takes a look at how the

rates of risk seeking projects like the New Mess Hall could be used as a viable tool in risk

management process.

Here, a comparative rate for a project executed onshore with less exposure to risk is placed side by

side with some of the rates of similar items for the NMH project. Both projects were executed

within the same time frame and so, they operated with the same market philosophy. It must be

clearly stated that although risk considerations may have formed a large part of the reasons for this

deviation in rates, it is definitely not the only reason.

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 Table 4.8: Comparative rates of a typical onshore project to the NMH project in 2009

RATES FOR A TYPICAL ONSHORE RATES FOR THE NEW MESS HALL DEVIATION

PROJECT PROJECT
DESCRIPTION RATE (N) DESCRIPTION RATE (N)
EARTHWORK SUPPORT 216.00 EARTHWORK SUPPORT 1,563.90 1,347.90
Maximum depth not Maximum depth not exceeding
exceeding 1.00m; distance 1.00m; distance between
between opposing faces not opposing faces not exceeding
exceeding 2.00m 2.00m
Reinforcement bars; 124,000.00 Reinforcement, high tensile 166,166.00 42,166.00
B.S.4449, hot rolled bars; Straight and bent
deformed high yield steel; 10mm diameter in all classes of
Straight and bent concrete
10mm diameter in all
classes of concrete

Vibrated reinforced in - 25,220.00 Reinforced concrete; vibrated; 30,700.80 5,480.80

situ concrete ( 1:1:2- mix-1:1:2-, 19mm aggregate;
19mm aggregate) 409m3 poured against faces of
Total volume filled into formwork
formwork and well
packed around E10:5. Slabs
reinforcement
(Reinforcement and
formwork both measured Thickness not exceeding
separately ) in:
150mm; reinforced (200mm
Oversite concrete slab thick)
150mm thick

Level and compact 50.00 D20: 13.2.3.0 44.20 -5.80

Bottom of excavation to Compacting; bottom of

receive concrete. excavations

The rate for Earthwork support in the NHM Project is very high because of the loose nature of the ground.

This will adequately cover for all uncertainties that may result from such ground conditions.

The study however revealed that some of the rates compared remained relatively the same. It is therefore

safe to assume that such items have been considered as having low risks and so, there was no need to place

extra amount on the rates of such items to cater for risks.

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On the other hand, some items booked for in the New Mess Hall project are peculiar to projects in

that region. These items include provision for Health Safety and Environment (HSE) – billed as an

item (USD 10,776.92), Community Provisions (USD 36,769.23). This is aimed at taking care of the

risks that may arise from such avenue and it also justifies HSE risk and Social risk being high from

the project probability and impact matrix in table 4.7 above.

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 CHAPTER FIVE

CONCLUSION AND RECOMMENDATION

5.1 INTRODUCTION

This chapter makes recommendations based on the findings and the analysis of both the primary

and secondary data. The recommendations are also in form of the lessons learnt from the execution

of the project from the perception of the client, the main contractor and the sub-contractor. At the

end of the recommendations, a conclusion is made.

5.2 CONCLUSION

The set objectives for the research have been achieved and the following conclusions are made on

the basis of the findings.

5.2.1 Identifying various risks associated with construction projects

The literature review identified seven project risks and the respondents confirmed these risks to be

associated in varying dimensions with the case study.

The risks include Social risks e.g. militancy and industrial labour actions, Financial risks, Risks

arising from changes in scope, transportation risks, Health Safety and Environmental risk,

Contractual risks and Project Management risks.

5.2.2 Identifying and assessing the different risk management system

Various risk management systems were also gotten from literature and they include, Risk

identification risk classification, risk analysis, risk attitude, and risk response. The client and

contracting organisations identified with these risk management systems and explained that the

management system has been useful in the areas of risk mitigation.

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The client organisation, identify, classify and analyse the risks through frequent review of the Job

Safety Analysis, monthly safety meetings and drills, daily management meetings involving all

supervisors and construction engineers. They respond to the risks in various ways depending on the

alternative considered suitable. In most cases, the client shields the contractors by bearing certain

risks.

5.2.3 Assessing the impact of the identified risks on contract sum and duration

Different risks have different impact on contract sum and duration. This research was able to

identify the risk factors with the highest impact and those with moderate and low impact. It revealed

that while social risk, changes in scope and HSE risk pose high impact on the contract sum and

project duration, financial, transportation, contractual and project management risks have moderate

impact. None of the risks identified by literature had low impact on the NMH project.

I hereby submit that these risks with high impact should be the primary focus each time a project is

to be executed in the Escravos terminal.

5.3 RECOMMENDATION

The research has been able to identify the various risks associated with construction projects with

particular reference to the New Mess Hall project, Escravos and their varying level of impact on the

contract sum and project duration.

The findings will be relevant to contractors who wish to tender for construction projects in the

terminal as well as the client for clear understanding of the various risk management approaches the

contractors wish to adopt. The approaches may be beneficial to the client in some cases and non-

beneficial in some other cases.

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The contractor needs to adequately study the risks through previously executed projects in the

region to ensure that he gives the client both value for money as well as make adequate profit which

is very important to keep the contractor’s firm operational.

Contractors handling projects in Escravos need to pay more attention to risks such as HSE risk,

Social risk, and risks arising from changes in scope. These risks are of high impact and probability

of occurrence.

The client should also take time to review carefully the rates of construction works quoted in the

Bill of Quantities and the contractor’s work estimate CWE so as to ascertain the level of risk

inherent in an item and compare such risk with the rate of the item.

It is also important to note that a good and detailed plan will always mitigate against some of these

risks. Such planning must also be extended to timely delivery of materials, equipment and personnel

to site. Team work between the client and contractor is equally necessary for a successful project.

In addition, the capability of the contractor with respect to the size of project is vital to a successful

project. Another very critical aspect is the cash flow. Contractors must also try to understand the

client’s taste, the nature of the job, the contractual obligations of all parties involved and the weight

of the risks involved in the project. Contracting firms must weigh all these factors and compare

them with the company’s capability to deliver such project before embarking on it.

REFERENCES

61
Bart Jutte, 10 Golden Rules of Project Risk Management (Source- PROJECTSMART.co.uk, source

date-29th May, 2010)

Carter McNamara (2009) MBA, PhD, - Basics of developing case studies, provided by Authenticity

consultant, LLC

Flanagan, R and Norman, G (1993) -Risk Management and Construction, a publication of

Blackwell science. Printed and bounded in Great Britain by Bookcraft (Bath) Ltd, Somerset

Farinloye O.O., Salako O.A & Mafimidiwo B.A (2009) - Construction professional’s perception of

risk impact on cost of building projects in Nigeria construction industry

Goran C. and Simo S. (2009) - Risk Assessment in Construction Industry

Hulett D.T (2005) – Project cost risk summary, Hulett & Associates- Project Management

Consultants.

Ifte, C. (2009) - Correlates of time overrun in industrial construction project in India, adopted at the

RICS COBRA Research Conference, University of Cape Town, held on the 10-11th

September 2009.

Inyang, E and Oyinlola, S (2006) – Security Matrix in the Niger-Delta Operations

Jagboro, G. O. and Ojo, G. K. (2003) - ‘A Study of Relationship between Contract Period and

Tender Sum of Building Projects in South Western Nigeria’, The Hong Kong Institute of

Surveyor Journals, 14(1), pp. 49-53.

Michener, H.A. and Delamater, J.D. (1994) – Social Psychology (3rd Edition), published by

Harcourt Brace College, Orlando, Florida

Microsoft Encarta Premium TM (2009) – English: Spanish translation

Nkado, R.N. (1994). Construction time influencing factors: the contractor’s perspective.

62
 Construction Management and Economics,

Ogunmoroti A. (2001) – The study of risk management in the Nigerian construction industry.

Project dissertation

Perry, J.G. and Hayes, R.W. (1985):- Risk and its Management in construction Project, The

institution of Civil Engineers proceedings. Part 1, Vol. 78. London.

PMBOK® Guide - Project Management Body of Knowledge (4TH Edition)

Project Management for Construction: Quality Control and Safety during Construction.

Ren, H. (1994) – Risk management: risk lifecycle and risk relationships on construction projects.

International Journal of Project Management

Rita Mulcahy (2005) – Project Management Professional exam prep (5th Edition), RMC

publications, Inc

Robert, N.K (2007) - Risk in Construction Estimating

Rudd, M. (2005) – Passing the PMP® Exam: How to Take it and Pass it. Publisher: Prentice Hall

PTR, published July 29, 2005

SPM (2005)-Safe Practices Manual, Chevron Nigeria/Mid-Africa Strategic Business Unit-

NMA/SBU, a publication of BRES information design and consulting team, Houston

Thompson, P.A. and Perry, J.G. (1992)- Engineering Construction Risk, a guide to project risk

analysis and risk management, SERC Project Report, Thomas Telford Ltd, London.

Thomsett, M.C. (1990) - The Little Black Book of Project Management, AMACOM Books

Vaughan, E.J. and Vaughan, T.M, (1996) –Fundamentals of Risk and Insurance (seventh edition)

published by John Wiley & Sons, Inc.

Websites consulted

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http://www.allAfrica.com - Accessed- December 1st 2010

http://www.234next.com. TIMBUKTU Media – Accessed- August 23rd 2010

http://www.chevron.com – Accessed- August 23rd 2010

http://www.constructingexcellence.org.uk- Accessed- May 30th 2010

http://www.longworthconsulting.co.uk/construction_contracts/contract_sum. Accessed- May

30th 2010

http://www.projectrisk.com. Accessed- May 30th 2010

http://www.tpub.com- Page title: Interview methods. Accessed July 23rd 2010

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 APPENDIX:

IMPACT OF PROJECT RISK ON CONTRACT SUM AND DURATION

The Case Study of THE CHEVRON NEW MESS HALL PROJECT, Escravos

INTERVIEW QUESTIONS

Department of Quantity Surveying,

Obafemi Awolowo University, Ile-Ife

Osun State, Nigeria.

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Dear respondent,

REQUEST TO GRANT AN INTERVIEW

I am currently working on a B.Sc Dissertation captioned IMPACT OF PROJECT RISK ON

CONTRACT SUM AND DURATION – A Case Study of the Chevron New Mess Hall Project,

Escravos. I hereby solicit your permission to grant me an interview session.

Sincerely oblige me the necessary information needed with utmost clarity and sincerity. I assure you

that the information provided will be treated with utmost confidence and used only for the purpose

of this research work.

Thank you for your cooperation

Yours faithfully

OBIORAH EMMANUEL OZO

INTERVIEW SCHEDULE

INTRODUCTION

66
This interview seeks to assess the impact of project risk on contract sum- a case study of the

Chevron New Mess Hall Project, Escravos. The interview questions have been carefully stream-

lined to achieve the set objectives of this research. Some questions are optional but relevant to this

research work.

RESTATEMENT OF THE OBJECTIVES

The objectives set-up to guide the study and also to help in data collection is re-stated as follows:

I. To identify various risks associated with construction projects

II. To identify and assess the different risk management system

III. To assess the impact of the identified risks on contract sum and duration

PART I

1. Good day Sir/Ma, what is the name of your company?

2. What is your line profession?

3. What is your academic qualification? ( e.g. PhD, M.Sc, B.Sc, HND, OND)

4. How many years have you been with your company?

5. How many years of experience do you have in construction?

6. What role did your company play in the execution of the New Mess Hall Project?

7. What can you say about the New Mess Hall Project?

PART II

8. Why does project risk occur?

9. How can you relate project risk and contract sum?

10. How can you relate the complexity of a project and the inherent risk?

11. Does the project location have any role to play in influencing the rate of exposure to risk

encountered and to what magnitude?

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 PART III

12. What was the Estimated Total Cost (ETC) of the New Mess Hall project prior to the

commencement of work on site?

13. What is the Total Contract Sum (TCS) after the project had attained practical completion?

14. What was the agreed contract duration?

15. What was the actual duration of the project?

16. Can you give reasons for this deviation?

17. Does your company have any statistical tool used in assessing the impact of risks on contract

sum and duration so as to be sure of the extent of delay and cost overrun was largely due risk

factors?

18. What project risks are peculiar to the construction works in the Escravos Terminal?

19. On a Scale of 0 – 10, (with 0 being the least and 10 being severe), how would you rate the

impact of these risks on the Estimated Total Cost (ETC) and the project duration:

• Social risks e.g. Militancy and Industrial Labour actions

• Financial risks e.g. availability of fund, adequacy of insurance, adequate provision of

cash flow, losses due to contractor’s default, suppliers’ exchange rate, fluctuation,

inflation and taxation

• Risks arising from Changes in Scope e.g. design and specification change or

adjustments.

• Transportation risks e.g. movement of human resource, materials and plants into the

island through aircrafts and barges.

• Health Safety and Environment (HSE) risks

• Contractual risks

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 • Project Management risks e.g. unsuccessful allocation of time, resources and

scheduling; unacceptable work results (low-quality work); and lousy project

management as a whole.

20. Can you explain what efforts your company made and the steps taken to mitigate these risks?

21. Were there any risks that resulted to opportunities during the entire project duration?

22. In summary, what were the lessons learnt?

23. Will you say the project was a risk seeking, risk neutral or risk-averse one?

24. Which of the risk management systems does your company adopt?

25. How effective has it been over the last decade?

26. What International or local standard does your company adopt in its risk management planning?

69