What's Hot

Nassim Nicholas Taleb's blog, an inspiring read | Incerto

Thursday, July 26, 2012

ISO 31000 for Property Development

It states in the ISO 31000 standards guide, that organisations of all types and sizes face internal and external factors as well as influences that make it uncertain whether and when they will achieve their objectives.

If we were to look at property development or the construction industry for example, we know that these types of issues are also likely to be evident. So, would ISO 31000 be of benefit to the construction sector?

In this short journal post, we share a presentation that reviews some of the problems of risk management in property development, how risk management currently functions in this industry sector and why it would be advantageous to adopt ISO 31000 in property development.

Property Development Issues
To say that the construction industry doesn't generally take risk management seriously, is an incorrect statement.  Property development, especially commercial ventures are governed by many standards, practices and regulations across the globe. These standards seemed to have increased awareness for managers in respects to the diversity and causality of construction-site related accidents.

Have the number of accidents decreased on construction sites over the years as an outcome of risk management?

That is a very difficult question to answer because much of the statistical data I have on construction related accidents has the projections moving lower but as an analyst, this figure needs to be compared with the growth of the sector as a whole. However, the effectiveness of safety standards is not the debate for today.

Away from safety standards, I believe that project finance, construction and property development, often under perform with risk management as a whole because of a lack of coherent, transparent and formalized risk management processes.

To understand whether this statement is true or not, we need to take a look at how risk management is governed in a typical property development company and whether ISO 31000 could assist.

Perhaps the first place to look for risk management practices in project finance, would be right at the very beginning of the project and that normally occurs in the feasibility study.

The feasibility study and due diligence aspects of a pre-venture program is supposed to drive out the risks for the project but from what I have been witnessing, feasibility study outcomes seem to be more focused on attempting to formulate a management decision. This decision to accept or decline a project doesn't normally transgress to risk mitigation strategies. Additionally, when the project is launched, some managers have this false belief that risk is already accounted for on their project because the feasibility study investigated it.

Choosing to accept or reject a project based on statistical confidence levels from a feasibility study, often detach that confidence assessment from the project's risk. Later on when hazards actualize, management are often not properly prepared for them.

The project finance and deal structuring work that seems to follow on from the feasibility case study are designed to price risk and the industry at large seems to focus heavily on this aspect of valuation. All that aside, deal structuring may use leverage and high debt to equity ratios seem exacerbate impacts from hazards on a project when cash flows are volatile.

The presentation shown below describes the best practice activities for risk management in property development and in an exemplified manner. 

Prezi on Risk Management hurdles in property development | Martin Davies

It is our belief that ISO 31000 would improve the overall risk management aspects of project finance, construction and property development because ISO 31000 is front to back and a straight forward method for embedding risk management practices in a firm.

Intuitively, risks and hazards identified from feasibility research studies would be classified under ISO 31000 and potentially treated. Common practices at present have a tendency to work by pricing risk in as part of the project valuation but often fail to treat such exposures. This motivation to ignore certain risks is also more profound when there are gaps in laws around operating practices.

In our opinion, the encouragement to measure risk by using recommendations from standards such as ISO 31010, would also move property development to a higher level of risk control. The main reason for this is that project risk reserving practices are improved when statistically coherent measures of risk are used rather than finger in the air estimates of downside.

In future articles on this website, we intend to investigate and publish best practices around risk measurement in the construction sector directly.

1 comment:

  1. Nice and very informative post. Thanks for sharing such a useful and very important facts of property development.
    Brian Linnekens