War Plans for Combating Construction Industry Risk
Risk appetite of construction industry has been deemed at a higher level than most of the other industries, due to the complexities arising from project technicalities, and management structuring on a cost effective manner. Due to the euphoria existing at the initial time period from the award of the project, the necessary due diligence on risk management strategies from the very onset of a project is overseen. Focus gets driven to the Project execution process, rather than the project administrative oversight covering deeper and broader perspective.
Construction is getting hit due to various factors like fraud and lack of controls leading to cost escalations, revenue losses, over utilization of resources, wastages, lower productivity, penalties due to extension of time, etc. However, lack of capability for establishing appropriate risk management strategies, building the necessary infrastructure for the same, and lack of management responsiveness to the risk escalations have drawn the industry into deeper turmoil even with the higher risk appetite prevalent in the industry.
Research on Frauds in Construction
In a recent report from a research published by the Association of Certified Frauds Examiners, USA, the impact of frauds in various industries were studied. Construction Industry stood on a critical level as susceptible to various fraud schemes at considerable median value loss from frauds. (Please refer to the Report to the Nations, 2018 Version from ACFE-Download is available on www.acfe.com). This report reveals that construction industry stands susceptible to almost all fraud schemes and holds the fifth largest value in fraud loss terms globally. A specific section in also available for the Middle East territory in this report (Government Version).
Strategy for Risk Containment
Synergic strategies for prevention, detection, and correction of expenditure overload, revenue loss, Low productivity and fraudulent practices needs to be implanted into the core structure of the organization. The following structured methodology may be considered for meeting the required norms for establishing the same:
a. Development of a risk register – Risk Audit Scope
b. Establishing a strong Risk Consulting Team – Outsourced teams with Construction background and Technical audit presence could be used to establish a roadmap towards developing an internal team – Risk Audit Scope
c. Establish a strong Pre-Audit process to review all procurement and payment practices prior to commitment – Top Management Activity
d. Ensure that a Zero Tolerance policy is adopted to set the norm for fraud prevention – Top Management Activity
e. Lay down a good ERP duly integrated to Estimation Planning, Material Resource Planning, Accounting and Reporting and Human Resources. Further, the report formats for delivery of information to the relevant operational divisions should also be ensured in the system – Top Management Activity
f. Develop a Hotline for whistle blowers to open communications – This could be connected to the Loss Prevention or Internal Audit Head – Top Management Activity
Specialized Construction Audit
Specialization required for Construction Industry Risk Audit requires a detailed understanding of various aspects of Construction activities. These include Technical considerations, Procurement, Cost containment, Optimal Resource allocation disrupts, Fraud hotline Management process, Process control review, Accounting and Reporting Support Capabilities, and Gaps in IT support systems.
Vital Role for Risk Consultants
Risk Consultants play a vital role in establishing the infrastructure for the Construction Industry. They have made remarkable achievements in cost cutting, detection of revenue identification failures, fraud detection, prevention, and providing for corrective measures in such areas. The approach required to meet with the infrastructural applications has been duly explored by a few of them to provide value added services to the organizations in this industry. The prudent use of such Risk consultants could go a long way in supporting the organizations war to combat the risk prevalent in this industry.