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THE IMPACT OF INSURANCE POLICIES TO BUILDING PROJECT CONTRACTS

CHAPTER ONE

INTRODUCTION

1.1 Background of Study

A clear understanding of risk management process and practice within the construction industry is an important model for exploring the application and barriers of risk management in Nigeria. It will also help in identifying the ever present risk factors and their probability of occurrence in Nigerian projects. This chapter summarizes the whole work carried out for this study. Risk concept varies based on people’s understanding, experience and attitude (Belel and Mahmood, 2012). Many people recognize events in a dissimilar way due to different attitude, emotions, judgments and beliefs. This means that the definition of risk will differ to different people. Risk in its simplest form means uncertainty with recognized probability distribution (Barkley, 2004). According to Holmes (2002), risk is not the actual being of a problem rather it is a possibility that a certain problem may arise in the future. Baloi and Price (2003) define risk as the likelihood of an unfavorable incident occurring to a project. It is widely accepted across the construction management society that a project risk is any event or series of events, whether motivated internally or externally, that when occurred will negatively affect the project objectives of functionality, performance, time and cost(Devripasadh, 2007). Risk within the construction industry is understood to be a mixture of activities that can affect the project goals. Risks are major component of the overall cost of projects and their distribution has significant effect on project financial plan.

Project management is the scientific application of skills, tools and technique to fulfill project activities in order to meet the expectation and requirement of clients or stakeholders (Deviprasadh, 2007). A project is always trying to bring in some type of modifications or changes, a new invention, work or structure. This change involves uncertainty, which cause projects to have a possibility of being blown off by a possible future event. Risks and uncertainties are present in all activities of a construction project (Odeyinka, 2000). It is very important to know the distinction between risk and uncertainty (Carpenter and Frederickson, 2001). According to Hillson (2004) risk is measurable uncertainty while uncertainty is immeasurable risk.

Risk management is a comprehensive and systematic way of identifying, analyzing and responding to risks to achieve the project objectives (Banaitiene and Banaitis, 2012). It is also defined as a planned form of identifying and evaluating risk and selecting, establishing and applying options for the handling of the risk (Kremljak, 2004). It is the recognition, prioritization and appraisal of risk followed by an organized resource application economically to reduce, monitor and manage the possibility of unfortunate events or to maximize production or outcome (Ehsan et al. 2010). The basic function of insurance is risk transference; risk is transferred from one party (the insured) to another party (the insurer). The transfer of risk by no means eliminates the possibility of misfortune, but the insurer provides financial security and tranquillity for the insured when the insured risk occurs. In return, an insured pays a premium in a very small amount when compared with the potential losses that may be suffered (Morton, 1999).

1.2 Statement of Problem

Development of infrastructure is one of the key drivers in business over the globe; it increases the GDP of a nation (Awodele et al. 2009). This encourage countries to prioritize infrastructural development and make provisions in their budgets for financing its infrastructure. This leads to new challenges considering the risks involved in the design and production. Construction projects due to its nature allows a lot of possibilities for many environmental, socio-political and other problems during pre-contract, contract and post-contract stage leading to completion time problem, cost overruns or exceeding budget in projects and poor quality finish (Akintoye and Macloed, 1997). In order to avoid or reduce the losses, management of the risk involved in the construction project is required. Nevertheless, saying Nigerian construction industry is poor, is an understatement as the industry is characterized by frequent setbacks or interruptions, cost overruns and abandonment of projects (Awodele et al., 2009). These are caused by different kind of risks involved in construction projects. Risk factors are believed to be familiar to Nigerian construction professionals, yet the probability of occurrence and its impact at precontract and post-contract stage is yet to be investigated. However, there are few researches conducted on risk management within the construction industry in Nigeria. In Nigeria, the construction industry mainly depends on government’s budget and the industry is performing very poor due to avoidable risk. The need for understanding how to manage project risks becomes a very important issue.

1.3 Research Objectives

The research broadly sought to assess the extent to which SMEs adopt insurance as a risk management tool and the benefits there in. Specifically, the research intended to achieve the following objectives to:

1.  Identify the various construction risk faced by construction industry

2. Examine the response of construction industry towards the use of Contractors All Risk policy (CAR)

3. Assess the benefits Construction industry derive from using insurance as a risk management tool;

4. Identify any problems Construction industry encounter in using insurance

5. Find out solutions to the challenges that construction industry encounter in using insurance.

Research Questions

1. What are the various construction risk faced by construction industry?

2.What is the response of construction industry towards the use of Contractors All Risk policy (CAR)?

3. What are the benefits Construction industry derive from using insurance as a risk management tool?

4. What are problems Construction industry encounter in using insurance?

5. What are solutions to the challenges that construction industry encounter in using insurance?

1.5 Significance of Study

The study would help identify the reasons for the level of patronage of insurance as a risk transfer mechanism and create a changed behaviour of the owners of Construction industry in Nigeria. The research would benefit, risk managers, construction project consultants and building planners by identifying areas that they might need to consider when preparing disaster recovery plans, particularly for construction project. Findings that emerged from the study would serve as a spring board to generate interest for further research into the other aspects of insurance challenges. The research work would also be of enormous assistance to various levels of educational institutions in the country, especially the universities as reference material for further studies and research work on insurance as a risk management strategy. The study would further contribute to the existing literature on mitigating and providing confidence to contractors in their planning decisions.

1.6 Scope of Study

The study was aim at evaluating the impact of insurance to building project in Nigeria with particular to five construction firms in Anambra state. The study recognize some contraction insurance policy in Nigeria.