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Good risk management requires a high level of collaboration and communication with all parties involved. Keeping everyone on the same page and working together will allow everyone to identify and manage risks before it becomes a problem. Risks can lead to great rewards when effectively managed.
This may mean turning down a project or negotiating the contract to remove the risks. There’s no shame in walking away from a project if the risks outweigh the potential rewards.
The company might not be the right fit to manage a particular risk. Work with the other stakeholders to determine who on the project team is best suited to assume each risk.
Discuss with the client what risks they will assume and which ones we will be responsible for managing. Work together to determine which risks are covered under the current policies along
with other options for protecting the company against risks.
Eliminating, reducing and accepting risks takes careful planning. By breaking down each risk into actionable items. Don’t overcommit your resources to handling multiple risks. We may need to bring in additional resources, such as hiring more workers or renting additional equipment, to manage all risks effectively.
Agreeing to accept a risk is a decision that shouldn’t be taken lightly. It might be fine to accept a few low probabilities, low impact risks. Agreeing to accept a high probability, high impact risk without any type of management or mitigation could be detrimental to the project and your bottom line.
Short project duration because early tendering is allowed. Detailed designs or drawings may not be required for tendering which is also what Mr Lim wants; project to be done within 15 months.
But Re-measurement requires the work need to be start right before the design is even completed which may be a problem for Mr Lim as he is very particular about the design quality and would want to finalize his work to satisfaction before construction work commence. Therefore, re measurement might not be suitable for Mr Lim’s project. Furthermore, re-measurement process is tedious as it requires a lot of time and resources as everything is done on site. Site measuring is challenging and need to be done very timely.
Less financial risk of under-estimate during tender as everything is calculated according to amount of work done by the contractor.
But low certainty in price because there are uncertainties of the work scope to be done. Because of the amount cannot be announced this also crates uncertainty for BOTH client and the contractor. Advantages in quality Mr Lim don’t need to worry about the design as projects under cost reimbursement all have good design standards and it is flexible in design change.
It is tedious as all quantities are measured on site. A lot of paperwork and documents need to be prepared.
Very high financial risk but can be shared between Mr Lim and his contractor Costs that the contractor wanted to reimburse must be set out extremely clearly and available for Mr Lim to keep track of the prices. Mr Lim may also monitor the construction activities closely and check the market prices to verify the costs to make sure they are legitimate and not excessive this may be suitable to his project as he wants to work out the most ideal financial scheme for his cash flow planning in order to build the house.
It is not economical for Mr Lim as the contractor will not control his budget because he will claim everything from the client as Mr Lim doesn’t want any unnecessary claims from the contractors. Cost-reimbursement has low certainty in cost which is definitely not suitable for Mr Lim’s project because Mr Lim wants to know the exact cost of his project to build his dream house.
Tendering and construction process can start early. It saves time for Mr Lim as the project can commence even when the design is not completed.
Mr Lim wants to finalize his work to satisfaction before even commence construction work.
Mr Lim doesn’t need to worry about the design as projects under cost reimbursement all have good design standards and it is flexible in design change.
Tedious cost verification as a lot of paperwork and documents need to be done and well prepared for the payment purposes.
Best procurement strategy- Traditional Lump Sum Traditional lump sum is the most widely accepted contract between the clients and the contractors because of its general predictability, easy to manage and assured maximum price arrangements. The contract is often based on firm bills of quantities and drawings.Furthermore, it is also the most recognized contract on simple and small projects. It is appropriate where the project is already well defined, and less variation. Therefore, the owner must have very detailed and complete drawings and specifications, and paper work and documents at the time of the bid to allow the bidders to properly estimate the cost of labour and materials. Why do we think traditional lump sum is suitable to be used for Mr Peter Lim’s project?
High certainty of final price For traditional lump sum client will have high certainty for final price. According to the information provided above, high certainty of price before commencement of work is crucial to Mr Lim, as it enables him to work out the most ideal financial scheme for his cash flow planning in order for him to get the best value for money for his dream home. Lump sum contract has high certainty in final price because all the tender prices are based on the bill of quantities and the schedule of rates making it easy to analyse and select the best value of money which wanted by Mr Lim to build his dream home. Because of high certainty in price, Mr Lim has lower financial risk compare to his contractors who bears more financial risk as they may face problems like under-estimate the price
Higher design quality and functional standards Traditional lump sum contract is a sequential process. All the design should be completed before the tender is called. Therefore, long project duration is because of the sequential process with so much time in the consultants’ hands they have the confidence and responsibilities to ensure the design quality and making sure it completed or with minimal changes before the commence of construction works. Client controls over the design process via its appointed consultants. Apart from that, the Contractor does not have input in any design or planning.
For Mr Lim, he is very particular with design and would like to finalize to his satisfaction before construction works commence. For traditional lump sum, Mr Lim can directly control the design team and be involved in the process to design his dream house with the professionals. Mr Lim and his team can have easy access variations based on the agreed schedule of rates.
Scope of work is clearly defined under traditional lump sum. The contractors can accurately price the risk they are being asked to accept and they also bear in more financial risks such as under-estimate and cost escalation than the client. Therefore, Mr Lim do not need to worry about any unnecessary abortive works and variation claims from contractors as there is certain degree of limitation over owner’s exposure as well as accountability at the time construction since the contractor has already agreed upon a fixed rate. Since the contractor has accepted a fixed price for the construction, the owner is not liable for any over expenditure. This is the most important benefit. Even if there are changes or variations in price it should only be minor compared to the original lump sum contract price. Because of client having lower risk compare to the financial risks that the contractors bear, Mr Lim may worry about contractor’s claim culture because of contractor’s under-pricing but he doesn’t need to worry about that because traditional lump sum contract fixes the price to be paid for undertaking out the work, before the start of the contract.
As we mentioned about traditional lump sum contract has a sequential process which follows the project delivery of ‘design-bid-build’ and all designs should be completed before tendering. Therefore, it has very long project duration.
Demolishing and building a new 3 storey detached house must be finished within 15 months. Mr Lim also wanted the design process to be completed before construction works commence Therefore, lump sum is the best strategy for him as Mr Lim is particular about the design of his house and he also wants to integrate a garden into his design which requires a lot of time and careful planning and drawings to be completed before tender is called. Therefore, he has plenty of time for him and his team of consultants to design an impressive house. With such plenty time in hands the professionals can produce a complete, buildable and final design before the construction works commence.
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