Preliminary Study of Risk Factors in Marine Construction Projects

Introduction

Background of the Study

The Saudi Arabian marine construction industry is growing rapidly as the country tries to diversify sources of revenue. The government has been working closely with the private players to ensure that the overreliance on the oil and gas sector of the economy is reduced. Although the country remains one of the top producers of oil and gas in the global market, efforts have been put in place to develop the fishing, construction, finance, tourism, and many other services and industrial sectors of the economy. The Saudi Arabian marine construction industry has been relying on the oil and gas companies as its main customers over the past several decades. However, the diversification of the economy has seen new clients emerge on top of the existing mega clients in the petroleum industry. The demand for the services that the companies offer has been on the rise, and many of the marine construction firms are under pressure to ensure that they meet the ever-dynamic customer needs. Competition from foreign companies, especially due to the emergence of firms from Europe, North America, India, China, and Japan, has also made these companies reevaluate their operations to enhance their efficiency and productiveness. According to Morotea and Vila, one of the major concerns that this industry faces is risk management (22).

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Most projects in this industry are often subjected to numerous risks that may have financial, health, and many other consequences if not managed properly. Some of these projects, especially those in the energy sector, are prone to numerous threats. Cases such as fire outbreaks, explosions, leakages, accidents that may lead to human injury and many other risks are common when undertaking such mega projects. Table 1 below shows regionally recorded accidents in various industries. Different industries have varying levels of risks. The table below shows workplace fatalities that occurred in 2010 and 2011 by industry.

Workplace fatalities by industry
Table 1. Workplace fatalities by industry

Source (Tam and Yen 407)

As shown in the data above, the construction and marine industries are the leading industries when it comes to workplace fatalities. Then there is the risk of delays, which may result in significant financial consequences. It is not easy to predict some of these risks and it is impossible to avoid them completely. As such, many firms often consider coming up with mitigation plans. These plans involve identification, classification, and proper management of these risks in a way that would ensure that the consequences are as less severe as possible. In this paper, the researcher focuses on a preliminary study of risk factors in marine construction projects. The study will look at how these risks can be identified and properly classified, and how they can be assessed to ensure that the affected firm’s operations are not significantly disrupted in case of risk occurrence.

Significance of the Study

According to Tam and Yen, both onshore and offshore oil exploration and production in Saudi Arabia are very important, as the country remains dominant in the oil and gas market (406). Saudi Aramco, for instance, has initiated various projects targeting both onshore and offshore oil exploration and extraction, besides their offshore projects. The fishing industry in the country is also growing rapidly. These developments mean that the marine construction industry is set to grow rapidly in the near future. The current customers are becoming more demanding, and new ones are coming up with new requirements. Despite the growing opportunity in the marine construction industry, competition is also growing, which in turn, affects the market. New international firms have noticed that the market has a huge potential and they are finding their way into the local market. Marine construction projects have increased in volume significantly over the past two decades, and the current trends show that they will increase further. However, new risks are also emerging that may affect the operations of entities locally within the country. The research focuses on classifying, identifying, and assessing risks related to marine construction projects. The research also looks at the risk probability and consequences or their impacts on the project’s objectives such as time, cost, quality, and scope.

According to Gudmestad, the failure of a firm to mitigate risks in any industry may lead to serious losses that may force it out of operations in the market (156). This study is important because it seeks to identify, classify and assess the risks with marine construction projects. Westney says that one can only manage risks effectively if there is a proper understanding of them (4). This study defines what risk is to enhance clarity. It then identifies risk factors that are unique to marine construction projects. The study then classifies these risks to help the affected firms know of the best approach they can take when dealing with them. After the classification, proper guidance is provided to help in understanding the approach that should be taken to manage risks in each category. The methodological approach of managing risks that will be proposed in this paper will act as a blueprint that companies can use to manage various risks in marine construction projects as they emerge. Companies involved with marine construction projects will benefit from this study because it will provide them with skills and knowledge on how to deal with various risks that they face. The policymakers may also find this document important in informing their decisions when trying to regulate the industry. Scholars interested in conducting further studies in this field will also benefit from this study significantly.

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Overview of Marine Industry

The marine industry is very broad and may not thoroughly be discussed in its entirety in a single research project. According to El-Karim et al., ship construction, sea transport, fishery, marine insurance, aquaculture, offshore and offshore drilling, marine energy, construction and management of ports, harbors, and jetties all fall under the marine industry (204). This study narrows down to a specific target in the maritime industry, which is the onshore construction sector. It means that the study will focus on the construction projects such as ports, harbors, and jetties construction within the kingdom of Saudi Arabia. These projects are very important for the development of the maritime industry. All the players in this industry rely on ports, harbors, and jetties to ensure that their products are moved from one location to the other. However, the construction projects in this sector are often faced with risks, some of which are often very destructive. The study will look at how these risks can be classified and effectively.

Main Characteristic of Marine Construction Projects

According to Hashemi et al., when analyzing risks within an industry, it is important to start by defining and explaining the main characteristics of the projects under focus (18). Understanding these characteristics makes it easy to explain the nature of the risks and their impact on the affected firms. One of the main characteristics of marine construction projects is that they are very costly projects. Undertaking marine construction projects requires a significant amount of money and only large companies and government entities can afford to sponsor them. Putting up, repairing, or upgrading a port, a harbor or jetties requires huge sums of money that small and medium-sized enterprises cannot afford. It means that the owners of most of these projects are always government departments or leading corporations in the country such as Saudi Aramco Company. Another major characteristic is that the current marine construction projects require a high level of technology and expertise. Some of these projects involve putting up a very delicate structure under or on the water surface with a high level of precision. When undertaking such projects, a team of experts is needed to help at various stages and to ensure that, the desired outcome is achieved in the project.

According to Wassenaer, when discussing characteristics of construction projects, one factor that should never be left out is that some of them are very dangerous (41). During the construction process, employees are frequently exposed to numerous risks, especially at the deep harbors or in the high seas. Once the construction is completed, operating these projects may also be risky. Many lives have been lost because of the accidents arising from these projects while others have sustained accidents, which completely changed their lifestyle. These projects are prone to natural disasters (Ellis and Sherman 21). In many cases, it is almost impossible to avoid the consequences of natural disasters when undertaking these projects. Cases of fire outbreaks, major earthquakes, cyclones, or major rainfall that was not expected can lead to a number of risks. It may result in the destruction of the structures being constructed, resulting in a delay as the project is put on hold for some time, and lead to a financial loss. Because of the nature of most of these projects, they are often subjected to stiff regulatory policies by the government and other relevant authorities. Other than conducting an environmental impact assessment (EIA) to ensure that the project is not a threat to nature and people, numerous other steps must always be followed when undertaking marine projects.

Defining and Explaining Marine Construction Projects

Offshore, onshore, and inshore projects all form part of the rapidly growing marine construction industry. Offshore marine construction, which is increasingly becoming more common, involves projects undertaken in the deep seas, further from the shore. The inshore marine projects are those taken in the seas, but close to the shores such as the construction of the jetties and harbors. Inshore projects are those taken on land, such as the construction of onshore oil rigs. In the Kingdom of Saudi Arabia, a number of marine construction projects have been undertaken, while others are still underway as the industry continues to grow.

One of the examples of such projects is the upgrading of Jeddah main berth 1 and the upgrade of Jeddah berth 2 that is sponsored by Saudi Aramco. The contractor for that project was Archirodon while the engineer was taken from Saudi Aramco. It was started in March 2003 and completed in June 2004. The development of East-West RoRo jetties was another major project that was undertaken by Petro Rabigh. The contract was awarded to Huta Marine and was started in January 2006 until October 2008. Aramco-NGL terminal was another major project that was undertaken by Archirodon as the contracting company. It was started in January 2012 and completed in April 2015. Other notable projects include KAUST harbor works, Obhur Creek development, Durrat Al Arous-Dhahban in Jeddah, and the construction of Berth 54 at King Fahd Industrial Port.

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Pitfalls in Maritime Industry

It is important to appreciate that a number of pitfalls exist that firms in the maritime industry always face in their normal operations. One of the main pitfalls is the possibility that natural disasters may occur. Major rainfall, cyclones, heavy rains, and flood are pitfalls that may have devastating implications in the industry. They often happen without any warning and sometimes with devastating impacts. Delays are also common pitfalls. In many cases, delays are caused by underestimation after assessment of the work at hand. Delay in the delivery of funds, industrial action by the employees, or natural causes may also cause delays. Delivery of poor quality services and cases of negligence are also major pitfalls common in the maritime industry. Such pitfalls may cause major accidents that can cause loss of lives and massive destruction of property.

Literature Review

According to Mannan and Lees, meaningful research should focus on adding new knowledge to the existing pieces of information (41). It is not advisable to duplicate already existing information. That is why this section is dedicated to reviewing the literature on risk and risk management as discussed by various scholars.

Risk

Hulett defines project risk as the potential threat or problem concerning the completion of a specific task whose occurrence may affect the set project goals (38). The scholar explains that these risks are inherent in all projects, and as such, they can never be eliminated fully, although can be efficiently managed to alleviate the impacts on the attainment of the project’s goals. According to Ellis and Sherman, “risk refers to the exposure to economic or financial loss, physical damage, injury, or possible delay, because of the uncertainty associated with pursuing a particular course of action,” (2). Marine construction projects are often prone to various risks with varying devastating impacts. Some of these risks are caused by natural forces such as flooding, cyclones, earthquakes, and massive amounts of rainfall among other forces, which are directly out of human control. The risk may also be associated with human errors.

Gross negligence and violation of the set safety rules and procedures may result in a major accident in marine construction projects. Defects in the equipment or failure f the equipment to function as required may also cause accidents when undertaking such projects. Bai says that a project may also be hit by market forces, such as a sudden increase in the international prices of various materials used in the construction (49). In such cases, it will force the owner of the project to inject more resources into the project to meet the increased costs of operations. Some risks may be within the direct control of a firm, while others may not be within their control. Wassenaer advises that it is the responsibility of a firm to understand these risks, monitor their patterns, and come up with the most appropriate ways of managing them to minimize or eliminate their impact on a firm (61).

Risk Management

According to Palmer and Croasdale, risk management refers to a synchronized set of activities, which seek to help a firm to overcome consequences in case of occurrence of a given calamity (70). It is a systematic approach to managing forces, which may be of negative impact to a firm in cases of their occurrence. Effective risk management in an organization is one of the vital management tasks that can help in achieving success in major construction projects (Ellis and Sherman 32). Risk Management has become a critical aspect of administrative activities in the construction industry. As mentioned above, construction firms always know about the existence of these risks. They know that sometimes the natural calamities may strike with devastating impacts. They also know that operational or administrative negligence may lead to major accidents that can have a catastrophic impact on a firm. However, it is always impossible to determine with precision when a specific risk may occur. It is also not easy to determine the magnitude of the impact of such occurrences. Verzuh says that many marine construction companies have put in place risk management mechanisms to deal with such problems in case they occur (46). Risk management starts with the acknowledgment that some undesirable events may happen unannounced, and when they do, it becomes necessary to find ways of dealing with them.

According to Harris et al., the local marine construction industry has adopted certain measures to manage various risks (34). Such measures include changes of contractual arrangement, the concept of risk-sharing with contractors and the implementation of a risk management system when undertaking mega projects. These measures are put in place to ensure that a firm can still survive even when it is negatively affected by these major risks. According to Song and Panayides, an efficient risk management system should bring various major advantages for organizations (34). One of the major benefits is that it should facilitate systematic and objective decision-making within an organization when the risk occurs. It should make it possible to compare the robustness of various projects with specific uncertainties (Verzuh 44). It should also enable the project managers to rank the relative importance of various immediate risks. It should offer an improved understanding of specific projects by identifying risks before they can have a devastating impact on an organization. It should also be capable of demonstrating a company’s responsibilities to customers. Finally, it should enhance the corporate experience and effective communication. Firms have different strategies that they use to manage varying cases of undesirable eventualities. One of the oldest and still very popular risk management mechanisms is buying insurance cover. In this case, a firm appreciates that accidents do occur, but it is impossible to know when and how it will happen. Instead of worrying about the impact of such an eventuality, a firm would transfer the risk to an insurance company for a fee. Events such as flooding, fire outbreak, cyclones, and general accidents are always ensured when undertaking marine construction projects.

Companies are also coming up with internal solutions to the risks that may occur when undertaking such projects. Negligence is often blamed for the occurrence of accidents in some of these projects. Insurance companies may fail to compensate a firm if it is determined that the accident was caused by negligence on the side of the insured party. To avoid such double tragedies, companies have come up with ways of training their workforce to ensure that they are equipped with the necessary skills that can enable them to overcome these risks. Internal systems and structures must also be put in place to ensure that lives and property can be protected in case of risk occurrence. Even in cases where a firm is fully insured against a given risk, no amount of money can compensate the life of an employee. As such, it is always important to have systems that can ensure that they are protected at all times. Emerging technologies have made it possible to identify some risks before they can affect a given firm. For instance, it is now possible to determine when a cyclone may strike a given region. Successful companies often make urgent measures to secure their premises and evacuate all employees in time to eliminate loss of life and destruction of property. Bai says that risk management requires that a firm should be proactive in its management processes (56).

Risk Identification

One of the initial steps in the risk management process is risk identification. One must start by identifying the risk to be able to manage them properly. Bai says that one of the most important risks that often occur in the design and construction industry is an underestimation of the time and cost of the project (38). The major forces, which are responsible for the risks are employer delays, limited or unclear information or instructions from the employer, difficulty in effectively following the given instructions, new administrative or operational developments, unexpected conflict of interest, and variation to the original project. The risk management team should identify specific risks that may possibly affect the operations of a firm. Wassenaer advises that in the process of identifying the risks, stress should be placed on the impact and probability of occurrence (47). Risks, which are likely to occur frequently, and those whose occurrence may have a significant impact on a project, should be prioritized when planning management mechanisms. On the other hand, risks that are unlikely to occur and whose impact may have an inconsequential impact should be given less priority. That approach makes it necessary to come up with an effective risk classification mechanism, as discussed below.

Risk Classification

Classification of risks is an important stage in the risk management process. According to Ellis and Sherman, we have six major categories into which various risks can be grouped (45). The first group falls under the acts of God or natural calamities. The second group includes physical accidents. The third group includes financial and economic risks. The next category includes political and environmental risks. The design risk is another critical stage. Finally, there is the group of construction-related risks. The classification helps in knowing the best approach to take when handling risks from each of the categories.

Marine Risk Factors

It is important to appreciate that marine risk factors vary from the risks faced in other industries. The industry is unique in various ways, and so are the risks, which have the potential of affecting projects being undertaken. Verzuh says that marine construction projects are subject to economic, social, political, and technical risks, which may have major impacts on their profit in major ways (56). According to the study, one of the highest risk factors is a delay that may result in an increase in the overall cost of the project. Inflation is another high-risk factor in major projects, especially when the materials needed have to be imported. The likelihood and occurrence of each of these risks and the associated impact vary, but it is always important to find a way of managing them in an appropriate manner.

Research Tasks

In this research project, the tasks in this research project include risk classification, risk identification, and statistical methods, which will be presented in the paper. Section four of the research project focuses on the research results. It is important to collect data that will help in informing the conclusion and recommendations that will be made at the end of this research project. Data used in this study were collected from two sources. The first source of data was obtained from books, journal articles, and reliable online sources. They formed the basis of the review of the literature. The second source of data was from primary respondents sampled to be part of this study. After identifying the participants, they were interviewed to extract the needed information from them. The questionnaire focused on gathering information based on the following sections.

Risk Identification

The first section focused on risk identification. The researcher wanted to know, from the respondents, how risks are always identified in their respective organizations. The ability of a firm to manage risks effectively largely depends on its ability to identify them as soon as possible before it may have serious implications on the firm. It helps in eliminating unnecessary financial loss. That was the first focus of the questionnaire.

Risk Classification

Classification of risks is an important stage in the risk management process. According to Ellis and Sherman, we have six major categories in which various risks can be grouped (45). The first group falls under acts of God or natural calamities. The second group includes physical accidents. The third group includes financial and economic risks. The next category includes political and environmental risks. Then we have the design risks. Finally, there is the group of construction-related risks. The classification helps in knowing the best approach to take when handling risks from each of the categories.

Risk Identification

The next step in this project is to identify various risks involved in marine construction projects using survey questionnaires. It was considered necessary to conduct primary research in the form of a survey to help come up with an appropriate way of classifying the risks common to this industry. The questionnaire used in this study was developed to help in getting opinions from industry experts who are actively engaged in managing different marine construction or related projects. The researcher structured the questionnaire in such a manner as to determine the risks, which occurred frequently, and the actual impact of the risks identified. The primary data that was collected from the survey questionnaire helped in understanding how the practitioners in this industry perceive risk factors. That is why the study targeted experts currently working in Saudi Arabian marine industry. The respondents were requested to rate the risks on a scale of 0-9. The form of classification made it possible to conduct statistical analysis, where 0 represented risks with an insignificant impact while 9 represented risks with a major impact on a project. From the survey, 75 risks were identified as shown in table 2 below.

Table 2. Classification of Major Risk Categories

Risk category Risk code Risk Factor Meaning of the risk
Contractor
Associated risks
R1 Delay in mobilization Delay in mobilizing the workforce, material and equipment to begin the work, delays the start date of the project, which finally delays the end date and other related activities get affected. This imposes a major risk to the project.
R2 Abnormal Increase in material prices compared to the original bid amount Contractors’ bid amounts usually have a certain allowance for a price increase of material. The project budget is based on this amount. When the market prices increase beyond this amount, it becomes a risk.
R3 Improper construction methods/quality control Lack of formalized operating system for construction quality in executing the work is also a risk factor. This increases the chance of redoing already executed work, which further delays projects.
R4 Frequent change of subcontractors/vendors Disputes between contractors and their vendors could result in changes in the agency. This is a risk because time is lost between the existing vendor quitting the job and a new vendor starting his
R5 Poor site management and supervision by the contractor Contractor not fully equipped with the site management system
R6 Safety accidents at work site Occurrence of accidents because of poor safety procedures
R7 Failure to disclose changes and resulting in extra work Risk due to chances of delay because of change in nature of work. And the further risk of increase in project cost due to failure of reporting the changes at the time it occurs
R8 Bankruptcy Chances of contractor’s risk of facing a financial crisis during the course of the project
Owner Associated
Risks
R9 Inadequate/unclear definition of project scope Major changes being made in the functional use of the structure may alter the complete plans and project purpose which could risk the project not being completed on time and as planned
R10 Delay in handing over the site to the contractor Risk of delay in getting the site cleared of encroachments
R11 Failure to disclose site conditions and circumstances which the contractor may encounter Risk of encountering obstruction due to site conditions, which were not taken into consideration before the bidding phase.
R12 Failure to make timely payments to the contractor Unable to attract/retain better talents because of poor practices like untimely payments and not offering incentives for early completion of activities
R13 Change orders or variations (additions, deletions and modifications) Owner making changes in original plan during construction
R14 Holding key decisions in abeyance Conflict among owners representatives; Delay in the project due to
Owner’s inefficiency in making timely decisions
R15 Owner’s improper intervention during construction Delay of construction activities due to owner consuming the float time by intervening were not necessary
R16 Bankruptcy Chances of facing financial crisis leading to project termination

Source (Nguyen, Bhagavatulya, and Jacobs 7)

Research Results

Data collected from these respondents were analyzed both quantitatively and qualitatively to arrive at the given conclusion. Qualitative analysis helps in explaining how and why a given approach was used in managing a specific risk. On the other hand, quantitative analysis helps in explaining the magnitude of various risks to a firm, especially if not managed in the right manner. It is from the analysis that conclusion and recommendations were made.

Works Cited

Bai, Yong. Subsea Pipeline Integrity and Risk Management. Gulf Professional Publishing, 2014.

El-Karim, Mohamed, et al. “Identification and Assessment of Risk Factors Affecting Construction Projects.” HBRC Journal, vol. 13, no. 2, 2017, pp. 202-206.

Ellis, Jean, and Douglas Sherman. Coastal and Marine Hazards, Risks, and Disasters. Wiley & Sons Publishers, 2014.

Nguyen, Hung, Gayathric Bhagavatulya, and Francois Jacobs. “Risk Assessment: A Case Study for Transportation Projects in India.” International Journal of Application or Innovation in Engineering & Management (IJAIEM), vol. 3, no. 9, pp. 1-12.

Gudmestad, Tobias. “Risk Assessment Tools for Use during Fabrication of Offshore Structures and in Marine Operations Projects.” Journal of Offshore Mechanics and Arctic Engineering, vol. 124, no. 3, 2002, pp. 153-161.

Harris, Frank, et al. Modern Construction Management. Wiley-Blackwell, 2013.

Hashemi, Hassan, et al. “Compromise Ranking Approach with Bootstrap Confidence Intervals for Risk Assessment in Port Management Projects.” Journal of Management in Engineering, vol. 29, no. 4, 2013, pp. 12-35.

Hulett, David. Integrated Cost-Schedule Risk Analysis. McMillan Publishers, 2012.

Mannan, Sam, and Frank Lees. Lee’s Loss Prevention in the Process Industries: Hazard Identification, Assessment, and Control. Butterworth-Heinemann, 2012.

Morotea, Nieto, and Ruz Vila. “A Fuzzy Approach to Construction Project Risk Assessment.” International Journal of Project Management, vol. 29, no. 1, 2011, pp. 220–231.

Palmer, Andrew, and Ken Croasdale. Arctic Offshore Engineering. Hackensack, 2013.

Song, Dong-Wook, and Photis Panayides. Maritime Logistics: Contemporary Issues. Emerald, 2012.

Tam, Vivian, and Shen Yen. “Risk Management for Contractors in Marine Projects.” An International Journal, vol. 4, no. 1, 2012, pp. 403-409.

Verzuh, Eric. The Fast Forward Mba in Project Management. 5th ed., Wiley, 2015.

Wassenaer, Arent. A Practical Guide to Successful Construction Projects. Routledge, 2017.

Westney, Richard. “Managing the Cost & Schedule Risk of Offshore Development Projects.” Offshore Technology Conference, vol. 12, no. 9, 2001, pp. 1-7.

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