ENHANCING PROFITABILITY AND COMPETITIVENESS IN THE CONSTRUCTION INDUSTRY USING RISK MANAGEMENT PROCESSES

Abstract

Construction industries are prone to competitiveness and loss of profits. This is due to multiplicity of groups of companies handling projects nowadays. Empirical evidence from previous studies shows that lack of risk management processes affects profit output. Identification of risk management processes and critical risk factors is important to minimising the likelihood of non-profits occurring in the industries. Thus this study is aimed at investigating risk management processes, identifying critical risk factors and validating the identified risk factors as they affects profitability and competitiveness in the construction industry in Nigeria. Responses from 68 respondents were analysed using statistical method. Thirty significant risk management processes were validated. A likert scale of 1 – 5 was used for qualitative analysis of survey data. Based on the survey analysis, quality of the project was identified as the most significant critical risk factor with a mean and SD value of 4.19 (0.76), followed by time allocated to project 4.18 (0.73), cost of project 4.18 (0.81), interest rate 3.99(0.82) and environment of the project 3.90 (0.85). Furthermore it was found that most construction firms, up to 93%, do not use risk management tools at the optimum value of hundred percent. Taken together these findings support strong recommendations on the need for effective risk management processes in the Nigeria construction industry. Implementation of these recommendations will minimize the likelihood of non-profits in the industry.

CHAPTER ONE INTRODUCTION

1.1        Background of the Study

In the construction industry, risk is inevitable, yet profitability should be the ultimate aim. For profitability  to  take  place,  there  must  be  competitiveness.  The  construction  industry  is  an important sector in the economy of Nigeria and for the industry to thrive, there is need to introduce risk management processes. If risk is managed properly and also accounted properly, the industry will be able to have more profit. At the long run or at the end of the project, if a construction industry is able to make profit, it gives the company better edge over other construction companies  in terms of competitiveness. The construction industry in Nigeria is growing in complexity and also growing to be competitive at different levels (Agwu, 2012). Due to its complex risk, profitability and competitiveness are unavoidable. (Budde, 2014) opined that the construction industry is full of risks, from personal safety risks on construction sites, to financial risks and risks of business failure. According to Junying et al. (2005), risks cannot be eliminated, but by applying the risk management processes, practitioners are able to improve in profitability. Added to that, Agwu (2012), observed risk management must not be approached in construction as just another step in avoiding unwanted costs but as a tool for maximizing competitiveness and profitability. Risk management processes dynamically minimizes risk levels by identifying and ranking potential risk events, developing a response plan, and monitoring actively during project execution (PMI, 2013).  Construction projects have several phases, and every phase, has its own unique challenges and specific risks. For example, while the risk of nonpayment is fairly universal in construction, the way that risk is shifted between parties and the tug-of-war to accomplish that financial risk-shifting provides interesting insights into the actual apportionment of risk in the construction industry. Budde (2014) still stated that the construction industry is such a credit-heavy industry, and the payment scheme on construction projects is intimately tied into this credit-base. One of the relationships between profitability and competitiveness, is that if for instance a contractor is given a project and he is able to carry it out within stipulated time, and without an extra cost, which is profitability, you will find out that this contractor will be beating other contractors in terms of competitiveness. This is because other

clients will always seek out for the contractor, who carried out his project within stipulated time and without extra cost.

1.2       Statement of the Problem

There is a high rate of reluctance in the construction sector as regards to competitiveness and profitability of the construction industry. The industry has a poor reputation for coping with risk, with many projects failing to meet the cost targets and deadlines (Thompson and Perry 1992). There is a saying, that management determines profitability while leadership determines the productivity. Competitiveness leads to innovation, which further leads to profitability. In a bid to operate on having profits, risk will emerge. In the industry, management of risk as pertaining to competitiveness and profitability cannot be over-emphasized, hence, this research.

1.3       Objectives of the Study

When a construction company is not profiting, it means it‘s in the danger of failing. The absence or the very low quality of risk management in the construction industry, is a source of concern to Engineering in Nigeria. The main aim of this research is to investigate the extent to which Risk Management processes is used in construction industry to enhance competitiveness and profitability and the extent to which it agrees with the Risk Management requirements on construction industries, and the specific objects are:

(i)  To investigate risk management processes in Nigeria construction industry as it affects profitability of organizations.

(ii) To identify the critical risk factors that affects profitability of organizations in Nigeria. (iii)To validate the identified factors that militate against profitability in construction industry

in Nigeria.

(iv)To identify risk management tools for analyzing and managing risks as it impacts on profitability and competitiveness.

1.4      Scope of the Study

This research is on the nature of an existing risk management in the construction Industries in Nigeria. This research basically concentrated on the construction companies (firms) of at least 30 people. It is basically focused on the building sector of the construction industry located within the country Nigeria (using four geopolitical zones as case study). The following cities; Abuja,

Lagos, Port Harcourt and Enugu are used as the representative of the political zones. The research is based on the opinion of construction practitioners like the constructing firm, the consulting firm, public firms and academic institution that has works department and Engineering faculties.

1.5     Justification of the Study

Risk management processes are not new in Nigeria, yet most construction companies, will not want to see it as a helping tool in the construction industry. Even at that, most of the parties involved are actually practicing it to a little extent but not to the maximum as it ought to be. This research will, therefore, be of great advantage to:

a) Management personnel in the construction industry by suggesting both proactive measurements that will stop those things that triggers risk, and reactive measures that will help in profitability and competitiveness.

b)  The parties involved, such as the clients, consultants, contractors, civil society, workers and even the Government to be conscious of how to have effective risk management processes

1.6        Limitations of the Study

The   respondents   are   reluctant   about   supplying   the   information   needed   to   the questionnaire, few respondents were able to return theirs, while some respondents couldn‘t supply the information needed, and thereby they couldn‘t return their questionnaire. Secondly is the lack of statistical data on profitability and competitiveness in the construction industry.

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