RISK

MANAGEMENT
IN 2013
CONSTRUCTION
REPORT

AAKANKSHA JAIN (029)

RIDHI SARAN (055)

NIMISHA KK (068)

PRASEEDA M (077)
DEFINITION: A project risk can be defined as “an uncertain event or condition that, if it occurs, has a positive
or negative effect on at least one project objective”.

What happens if risk is ignored?

• Construction project delays

• Increased costs or spending

• Loss or reduction in profits

• Unsatisfactory project results or total failure

• Damage to the brand/reputation

• Disposal of business or insolvency

CAUSE:-

• A risk may have one or more causes and if it occurs, it may have one or more impacts.
• A cause may be a requirement, assumption, constraint or condition that creates the possibility of
negative or positive outcomes.
E.g. – Causes could be requirement of environmental permit to do work or having limited personnel.
Risk event would be delay in issuance of permit.

SIGNIFICANT RISKS INVOLVED IN CONSTRUCTION PROJECTS:

• Shortage of Materials.

• Shortage of Skilled Labors.

• Unforeseen engineering, environmental and geological problems.

• Work stoppages (strikes, harthal, etc.)

• Weather interferences (Rain, Storm, Flood, etc.)

• Unanticipated Cost Increase.

• Unavailability of construction equipments.

• Unforeseen problems or difficulties in obtaining any of the Requisite Documents (license, permits,
authorizations) from regulatory authorities.

• Lack of Safety Measures.

• Design variations (after commencement of project).

• Unsuitable construction program planning (inaccurate/incomplete cost estimates, inadequate program

scheduling, etc).
 • Occurrence of Disputes.

• Quality expectations.

• Lack of co-ordination among the project participants.

Objectives of project risk management are to increase the probability and impact of positive events and
decrease the probability and impact of negative events in the project.

Project risks include:

Quality and safety

Cost management

Time management (programme/schedule)

Scope and change management

Procurement and contracts

People management

Information management

External influences

Benefits of risk management include:

project issues are clarified, understood and considered from the start;

decisions are supported by thorough analysis;

the definition and structure of the project are continually monitored;

clearer understanding of specific risks associated with a project;

Build-up of historical data to assist future risk management procedures.

RISK MANAGEMENT PROCESS:

• Risk identification
• Qualitative risk analysis
• Quantitative risk analysis
• Risk response planning
• Risk monitoring and control
• Risk management planning

Key steps for a typical risk management process are:

1. Risk identification
 2. Risk assessment (qualitative and quantitative analysis)

3. Risk response planning (strategies)

4. Risk monitoring and control

• Risk identification is the first and perhaps the most important step in the risk management process, as it
attempts to identify the source and type of risks.
• Risk identification develops the basis for the next steps: analysis and control of risk management.
• Correct risk identification ensures risk management effectiveness.

1. RISK IDENTIFICATION
• Determining risk
• Indentifying their characteristics.

Risk factors on construction projects can be split into 2 major groups:

1. Internal risks – which fall within the control of clients, consultants and contractors.

2. External risks – which include risk elements that are not in control of key stakeholders.

INTERNAL RISKS:

• Construction risks

• Design risks

• Project management risks

EXTERNAL RISKS:

• Natural forces

• Inflation and interest rate

• Fiscal policy

• Political controls
Risk Register - OUTPUT
Risk register- The primary outputs from risk identification are initial entries into risk register.

Typically a risk register contains:

A description of the risk.
The impact should this event actually occur.
The probability of its occurrence.
Risk Score (the multiplication of Probability and Impact).
A summary of the planned response should the event occur.
A summary of the mitigation (the actions taken in advance to reduce the probability and/or impact of the
event).

2. RISK ASSESMENT

1. QUALITATIVE RISK ANALYSIS

This consists of using the probability and impact matrix tool (PIM) to prioritize and rank the risks
contained in the risk register. By doing this, we are able to focus our management time and effort on the
most important risk areas.

OUTPUT – RISK REGISTER UPDATES

Risk register is updated from with information from qualitative analysis such as relative ranking or priority
list of project risks, causes of risks or areas of project requiring special attention, list of risks requiring
additional analysis and response, list of risks requiring response in near term, etc. For relative ranking of
project risks, probability and impact matrix can be used to classify risks according to their individual
significance. For this, risk can be divided in various categories as shown below:
Figure 1 RISK CATEGORIES Figure 2 RISK MATRIX

Once the risks and probabilities are determined, the risk score can be calculated. The risk matrix shows the
combination of impact and probability that in turn yield a risk priority which helps in prioritizing the risks for
further action.

Risks with high impact and high probability majorly responsible for poor quality of work, delays and
associative losses and thus require aggressive risk management.

2. QUANTITATIVE RISK ANALYSIS

• It is performed on risks that have been prioritized by the Qualitative Risk Analysis as potentially and
substantially impacting the project’s competing demands.
• This is quantifying the ranked risks often done in terms of time or cost.
There are several tools that help in this. One is by using decision trees to arrive at a monetary amount for
each risk (the extra cost incurred or time delay if the risk happened).
 EXAMPLE OF A MODELLING TECHNIQUE

EMV (Expected Monetary Value) analysis is a statistical concept that calculates the average outcome
when the future includes scenarios that may or may not happen(i.e. analysis under uncertainty). It is
calculated by multiplying the value of each possible outcome by its probability of occurrence and adding
the products together. A common use of this type of analysis is in Decision tree analysis.

Figure 3 DESIGN TREE DIAGRAM

3. RISK RESPONSE PLANNING (STRATEGIES)

There are four strategies of risk analysis in construction management which are as follows:-

RISK AVOIDANCE

• It is an obvious first stop.

• The sources of risks are identified and analyzed and methods are formulated to avoid or reduce some of
the risks, making only minor changes to the project.
• In extreme cases, projects are abandoned due to the inability to avoid or reduce the risks incurred.

RISK TRANSFER

Risk transfer means the shift of risk responsibility to another party either by insurance or by contract.

Three methods are used to transfer risk in construction projects:-

• through insurance to insurance companies;

 • through subcontracting to subcontractor;

• Through modifying the contract terms and conditions to client or other parties.

The power to initiate the transfer rests with the CLIENT.

Following factors are considered before any risk is transferred:-

• Consideration should be given as to whether or not the party to whom the risk is transferred would be
able to manage the risk and whether they be able to accept it if realized.

• Whether or not the risk premium that would have to be paid for the transfer of risk is greater than the cot
of consequences should the risk be realized.

The decision to transfer the risk to another party is implemented through an insurance policy or conditions of
the contract and the power to initiate the transfer rests with the CLIENT.

RISK MITIGATION

• Risk mitigation is defined as taking steps to reduce adverse effects.

• The timing of an action taken to mitigate the effects of a risk may dictate the action that is chosen.

RISK ACCEPTANCE

• In accepting risk, management acknowledges that it is impossible to completely eliminate risk, and at
the same time asserts that it has made the best use of existing resources to address its most critical risks.

• The party that is holding the risk might be the only one that can manage or accept the consequences, if
the risk is realized.

• The risks retained can be controllable or uncontrollable.

• Residual risks is the term coined for some risks which is left with the client normally.

4. RISK MONITORING AND CONTROL

Risk monitoring and control is required in order to:

• Ensure the execution of the risk plans and evaluate their effectiveness in reducing risk.

• Keep track of the identified risks, including the watch list.

• Monitor trigger conditions for future possible risks.

• Monitor residual risks and identify new risks arising during project execution.

• Update the organizational process assets.

INPUTS TO RISK MONITORING AND CONTROL

RISK REGISTER

Contains outputs of the other processes: identified risks & owners, risk responses, triggers and warning signs.

APPROVED CHANGE REQUESTS

Approved changes include modifications such as to scope, schedule, method of work, or contract terms. This
may often require new risk analysis to consider impact on existing plan and identifying new risks and
corresponding responses.

WORK PERFORMANCE INFORMATION

Project status and performance reports are necessary for risk monitoring and control of risks.

TOOLS AND TECHNIQUES FOR RISK MONITORING AND CONTROL

1. RISK REASSESSMENT

• Project risk reviews at all team meetings.

• Major reviews at major milestones

• Risk ratings and prioritization may change during the life of the project. Changes may require additional
qualitative or quantitative risk analysis.

2. RISK AUDITS

Examine and document the effectiveness of the risk response planning in controlling risk.

3. VARIANCE AND TREND ANALYSIS

Used for monitoring overall project cost & Schedule performance against a baseline plan. Significant deviations
indicate that updated risk identification and analysis should be performed.

4. RESERVE ANALYSIS

Reserve analysis compares available reserves(as the risk affects the schedules or cost) with amount of risk
remaining at the time and determines whether reserves are sufficient or not.
5. STATUS MEETINGS

Risk management can be addressed regularly by including the subject in project meetings.

OUTPUTS FROM RISK MONITORING AND CONTROL

1. RISK REGISTER UPDATES

Risk register is updated to include:

• Outcome of risk reassessments, risk audits and periodic risk reviews. These may include updates to
probability, impact, priority, response plans, ownership, etc.

• Actual outcome of risks, and of risk responses that becomes part of the project file to be utilized on
future projects.

2. CORRECTIVE ACTION.

• Corrective action consists of performing the contingency plan or workaround (previously unplanned
responses to emerging risks). Workarounds must be properly documented and incorporated into the
project plan and risk response plan.

3. RECOMMENDED PREVENTIVE ACTIONS

• Used to direct project towards compliance with the project management plan.

4. PROJECT CHANGE REQUESTS

• Implementing contingency plans or workarounds frequently results in a requirement to change the

project plan to respond to risks. The result is issuance of a change request that is managed by overall
change control.

5. ORGANIZATIONAL PROCESS ASSETS UPDATES

• Information gained through the risk management processes are collected and kept for use by future
projects: Templates for risk management plan, probability-impact matrix, risk register, lessons learned,
updated RBS.

6. PROJECT MANAGEMENT PLAN UPDATES

• Updates to the project management plan as a result of approval of requested changes.