Pre-contract cost management: a study on risk management and its effect towards costs

Abstract

Budget preparation of a project during pre-contract stage is very crucial because it is the stage where the client need to substantiate whether their objective is within their financial capability. In case that it is beyond their budget, then there are methods to adjust in accord. This is a concern for a project owner if the risks are not being identified and that will bring to a significant cost overrun. Other than time and quality, if the client is not financially strong, the risk impact could even stall the project. A total of 150 participants from cost and project management consultant firms within the area of Selangor and Kuala Lumpur have responded to the questionnaires given and structured interview sessions have also been conducted with four (4) subject matter experts. This paper has identified the project risks and determined its impact on construction project. Then, research found that all project risks that has been categorised into Technical Risk, Environmental Risk, Logistical Risk, Management Risk, Financial Risk, Socio-Political Risk and Legal Risk influence to the project cost. The data generated through Relative Importance Index (RII) has also identified the risk that has the most significant impact and occurrence towards cost. Furthermore, this research has investigated response strategies of the risks which mainly consist of Avoid, Transfer, Mitigate and Accept. Furthermore, this paper also developed strategies in mitigating the project risk that involved on cost such as through the record and control of risk register, establishment of risk management plan, and value engineering. Apart from that, the common risks that involving cost and the overview of risk management in Malaysia are also discussed in this paper. The establishment of risk management plan in organisation, risk evaluation during pre-contract, and extensive involvement of project management bodies are all part of the recommendations of this research.