Risks and uncertainties are major contributors to organizational expenses. To address this issue, several cost management practices have been developed. The following paper discusses the roles of cost engineers and accountants in risk management and identifies the impact of risk and uncertainty on cost management practices.
Accounting is an important aspect of the organization’s performance. As a result, cost engineers and accountants play one of the major parts of the risk management process. Traditionally, the accountant’s area of responsibilities includes working with financial statements and participating in strategic decisions regarding finances. Nevertheless, it is equally important to acknowledge the presence of uncertainties that may influence their decisions. These uncertainties may pose a threat to an organization’s performance and profitability, in which case they are considered threats, or contain a potential for improvement, in which case they are viewed as positive risks (Chen et al. 2014). Therefore, it would be reasonable to state that risk management is one of the inherent components of accountants’ activities.
One of the most apparent examples of accountants’ involvement in a company’s risk management practices is the development and management of an internal control program. The planning and design phases of the program in question rely heavily on the understanding of financial aspects of the organization’s performance. In addition, the final version of such a program requires a substantial understanding of accounting principles, which necessitates close cooperation between accounting managers and staff accountants within the organization. Finally, to determine the program’s effectiveness, relevant metrics need to be developed and implemented. Accountants typically possess the knowledge necessary for performing the evaluation and are familiar with methods and tools used in the process. Simply put, accountants are involved in all key stages of risk management and are essential to the process.
Finally, accountants can help in risk management by organizing and running educational and training events for company staff. These events can familiarize employees with basic principles of risk management and risk management standards relevant to the practice. Personnel training can increase the decision-making capacity of workers and, as a result, have a positive indirect effect on the overall effectiveness of risk management efforts.
Uncertainty is an unavoidable part of management. The degree of uncertainty is directly related to the complexity of an organization’s structure and the scope of its operations. Several practices have been developed to respond to the challenges created by uncertainty. One example is an estimation of the financial aspects of a process. In its basic form, estimation involves quantifying the costs of the project by calculating the costs of its components. Understandably, such an approach does not address unforeseen events and unplanned deviations from the project’s roadmap. To counter this shortcoming, a comprehensive estimation should include available historical experience as well as data from similar cases. In this way, the most likely risks can be identified, and relevant methods for mitigating them can be developed (Wachinger et al. 2013). Finally, measurable milestones need to be included in the estimation documentation to allow for consistent monitoring and adjustment of strategy if necessary.
Another area of cost management impacted by uncertainty is budgeting. Unlike estimation, budgeting covers specific areas of incurred costs, usually set at specific dates to comply with conditions created by stakeholders. As a result, it is easier to encounter inconsistencies due to unforeseen events and risks. In this case, uncertainty is not reserved exclusively for negative events. Some of the corporate mechanisms, such as progressive taxation schedules, can introduce expenses in response to improved performance and profitability of the company, further decreasing the value of the initial budgeting.
To respond to these challenges, cost engineers utilize contingency budgets. A contingency budget includes resources allocated for expenses resulting from risks. The budget is expected to cover the risks identified at the planning stage and acknowledges both their cost and likelihood to determine the necessary amount. The construction industry is one of the most prominent examples of relying on contingency budgeting, both due to high cost and resource volumes and in response to the magnitude of some of the risks in the field (De Marco, Rafele & Thaheem 2015). Researchers identify three main categories of contingency budgeting, namely the deterministic, probabilistic, and mathematical approach (Bakhshi & Touran 2014). Each of the approaches offers a range of benefits and challenges that make them suitable for certain types of construction projects. Thus, accounting managers need to ensure the compliance of the selected budgeting methods with the project’s specificities to maximize their relevance.
Finally, cost control is a major component of managerial practices used for risk management purposes. Regardless of the occurrence of unforeseen situations, changes in cash flow are possible that may impact the project on a strategic scale. Using an example of the construction industry, it is possible to encounter a scenario where changing budgeting schedules would create an advantage in terms of compliance with the established deadline. In this situation, it would be necessary to adjust cash flow to avoid risks of non-compliance with the project’s roadmap.
As can be seen, both identified risks and the existence of uncertainties affect cost management in organizations. In most cases, it is possible to minimize expenses associated with these risks through appropriate cost management practices. Thus, cost engineers and accountants need to demonstrate a sufficient understanding of these methods.
Reference List
Bakhshi, P & Touran, A 2014, ‘An overview of budget contingency calculation methods in construction industry’, Procedia Engineering, vol. 85, pp. 52-60.
Chen, RLY, Cohn, A, Fan, N & Pinar, A 2014, ‘Contingency-risk informed power system design’, IEEE Transactions on Power Systems, vol. 29, no. 5, pp. 2087-2096.
De Marco, A, Rafele, C & Thaheem, MJ 2015, ‘Dynamic management of risk contingency in complex design-build projects’, Journal of Construction Engineering and Management, vol. 142, no. 2, pp. 1-34.
Wachinger, G, Renn, O, Begg, C & Kuhlicke, C 2013, ‘The risk perception paradox—implications for governance and communication of natural hazards’, Risk Analysis, vol. 33, no. 6, pp. 1049-1065.