Risk Management in

Construction
Lec 1

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 Course Objectives

• To increase the awareness of students on the vital role

of systematic tackling of risks in construction projects
and introduce a risk management framework
• To introduce qualitative and quantitative risk analysis
tools/methods (soft systems methodology, Monte Carlo
Simulation, multi-attribute decision making tools,
sensitivity testing, etc.)
• To discuss various case studies taken from construction
industry to demonstrate the application of risk
management principles/techniques in practice
 Course Outcomes
Upon successful completion of this course, students
should be able:
• To assess, control, and transfer risk related to the
lifecycle of the project.
• To use mathematical models based on probabilistic
and statistical methods, simulation in risk
identification, analysis and mitigation of project
risks.
• To understand the risk management practices
currently applied in the construction industry.
 Reference Material

• Loosemore, M. Raftery, J. Reilly, C. Higgon, D.

(2006). Risk Management in Projects. 2nd Edition.
Taylor & Francis, NY.
• Practical Project Risk Management: The ATOM
Methodology by David Hillson, Peter Simon
• The Failure of Risk Management: Why It's Broken
and How to Fix it by Douglas W. Hubbard
• Project Management Body of Knowledge by PMI –
Chapter on Risk Management
• Practice Standard for Project Risk Management by
PMI
The Challenge of Managing Risk
 The Challenge of Managing Risk

• Life is risky; it is precisely the

element of risk that makes life
interesting.
• Unmanaged risk is dangerous; it can
lead to unforeseen outcomes.
• Risk management is essential,
whether in business, projects, or
everyday life.
 Risk – The Definition Debate

‘Risk’ has been well-understood, is there a need of debate

here?
• In recent years, risk practitioners and professionals have
been engaged in an active and controversial debate
regarding the precise scope of the word ‘risk’.
• ‘Risk’ arises from ‘uncertainty’; it is about the impact
uncertain events and circumstances could have on
realization of goals and objectives.
• A risk is any uncertainty that, if it occurs, would have an
effect on achievement of one or more objectives.
 Risk – The Definition Debate

• The traditional view about risk deals with negativity; often

synonymous to harmful, adverse, hazardous and
unwelcome.
• But some uncertainties may be ‘desirable’; their
uncertainty part is similar to those of ‘undesirable’ ones,
their potential effect, if they were to occur, would be
beneficial, positive, and welcome.
 What is Risk?

• “Risk is an uncertain potential condition or event

that, if it occurs and is not mitigated, may have
negative impact on the project objectives.”

• “A measure of the inability to achieve project

objectives with defined cost and schedule
constraints.”

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 What is Risk?

• A probability that something will go wrong

• An uncertain event or condition that, if it occurs,

has a positive or negative effect on a project
objective

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 Features of Risk

• Probability: an event is risky only

if there is certainty of its future
occurrence.

• Negativity: the risky event leads

to damage.
 Risk – Descriptive Evolution

• The occurrence of a negative event or

the non-occurrence of a positive event.

• Narrow concept of risk

Likelihood of suffering detriment

• Broad concept of risk

Negative risk (threat): Likelihood of
suffering detriment
Positive risk (opportunity): likelihood of
gaining an advantage
 Risk – The Definition Debate

• One group insists on the traditional approach; reserving

the word risk for bad things and opportunity for good
things.
• A second group believes treating both opportunities and
threats together is advantageous; broadening the
definition of risk and scope of risk management.
• A third group is unconcerned about definitions, preferring
to focus on the job. Emphasis is on dealing with
uncertainty without worrying about labels.
 What are Project Risks?

• Project Risks are adverse factors that have the

potential to influence:
– Process
– Technology (hardware and software)
– Organization
– Deliverables
– Schedule
– Costs or
– Business units
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 Levels of Risks
There are arguably four levels of risk:
• Strategic----risks involved in ensuring business
survival and long-term security or stability of the
organization
• Program----risks involved in managing
interdependencies between individual projects
and the wider business environment.
• Projects----risks involved in making progress
against project plans
• Operational----risks involved in technical
problems, supplier management and so on
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 Types of Risks
• Different organizations will face different types of
risk.
• Some types of risk are:
– Strategic / Commercial Risks
– Economic / Financial / Market Risks
– Legal and Regulatory Risks
– Organizational Management / People Issues
– Political / Societal Factors
– Environment Factors
– Technical / Operational / Infrastructure Risks
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 Why Manage Risks?
• All projects are subject to risks.
• A project which finds itself in a state of perpetual
crisis, is failing to manage risks properly.
• Failure to manage risks is usually characterized by
the inability to decide:
– what to do;
– when to do it;
– whether enough has been done.

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 Risk Management
• Systematic process of identifying, analyzing, and
responding to project risks… (PMBOK)

• Practices and procedures that enable managers

to identify, assess, categorize, monitor, control,
and mitigate risk before or while it is transitioning
to a problem.

• Risk Management is a methodology that helps

managers make best use of their available
resources
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 Risk Management
• Plan made for purpose of control, distinguishing between
different categories of change to fully instigate the
monitoring and formal aspects of the project

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 Who Uses Risk Management?
• Risk Management • Finance and
practices are widely Investment
used in public and • Insurance
private sectors, • Health Care
covering a wide range
of activities or • Public Institutions
operations. These • Governments
include:

Risk Management is an integral part of business

planning.
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Who is involved in Risk Management?

• Business managers, process owners, strategic

planners, project and procurement teams and
key suppliers are all involved in risk
management.

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 Why Risk Management is Important?

• Effective risk management helps us to improve

performance by contributing to:
– Better service delivery
– More effective management of change
– More efficient use of resources
– Better project management
– Minimizing waste, fraud and poor value of money
– Supporting innovation

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Risk, Cause and Effect

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Risk Management Process

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Risk Management Layout

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Risk & Project Life cycle

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 How is Risk Management Used?

• The Risk Management process steps are a

generic guide for any organization, regardless
of the type of business, activity or function.

• There are certain steps in the Risk

Management process

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 Steps involved in Risk Management
• Risk Management Planning
– deciding how to approach and plan risk management
activities
• Risk identification (Qualitative & Quantitative)
– Identify project, product and business risks;
• Qualitative risk analysis
– Performing a qualitative analysis of risks and
conditions to prioritize their effects on project
objectives;
• Quantitative risk analysis
– Measuring the probability and consequences of risks
and estimating their implications for project objectives
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Steps involved in Risk Management
• Risk Planning
– Draw up plans to avoid or minimize the effects
of the risk;
• Risk Monitoring & Control
– Monitor the risks throughout the project;

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Risk Management

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Risk Assessment

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 Risk Assessment
Risk Assessment is the first of two stages in
Project Risk Management and includes three
main steps as follows:
• Identify
– Review all the project plans and identify areas
of uncertainty
• Analyze
– Define how the identified areas of uncertainty
could affect the performance and success of
the project in terms of scope, quality, duration
and cost.
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 Risk Assessment
• Prioritize: Prioritize the risks in terms of those
risks that
1) must be eliminated (resolved) completely due
to their extreme Impact to the project;
2) are important enough to demand regular
monitoring and reviewing;
3) are deemed to have a minor impact and will
not require detailed monitoring; and
4) should not be totally ignored but demand less
attention.

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 What are Project Impacts
• All steps of the Risk Assessment are to be addressed in
terms of the impact to the project's scope, quality, time
and budget.
SCOPE
• Project Scope can be defined as the identified tasks and
activities that need to be performed in order to deliver
the required features and functions of a product. This
refers to anything that will result in the project scope
being altered. Such as:
– change in business requirements;
– increased/reduced functionality; and

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 What are Project Impacts
QUALITY

• Quality can be defined as the defined or accepted

standard of performance or deliverable that satisfy the
expectations. This refers to anything that will result in a
project deliverable not conforming to the expected
quality, standard or performance. Lesser quality may
impact Time and Budget as the deliverable may have to
be re-done or extra time (and money) may have to be
spent to bring the deliverable upto the acceptable quality
level.
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 What are Project Impacts
QUALITY
• Depending on the type of deliverable and contract,
reduced quality may in fact reduce the cost of the
project, if the reduced quality is accepted. This may be
caused by:
– the level of quality not being clearly defined at the
start;
– standards not being in place or clearly identified; or
– the performance of the deliverable( e.g.: system
response time) is not identified at the start.

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 What are Project Impacts

TIME

• Time can be defined as either the elapsed period of the

project or the amount of effort budgeted or assigned to
each project task and activity. This refers to anything that
will result in a project activity or deliverable being
completed later than planned or requiring more effort.

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 What are Project Impacts

TIME

• There is usually a direct relationship between time and

budget risks. This may be caused by:

– staff not being available for their assigned scheduled

tasks;

– task estimates not accurate or taking longer; or

– changes in scope.

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 What are Project Impacts
BUDGET
• Budget can be defined as the agreed or contracted
amount of the project. This refers to anything that will
result in the project costing more than was budgeted.
This may be caused by:
– direct cost or cost to purchase (eg: hardware or
software) being greater than budgeted;
– scheduled tasks taking longer than originally
estimated (this will not be an issue with fixed price
contracts); or
– changes in scope.

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 Decision making in Risk
Management
• Risk management is a particular form of decision making
within project management
• It is about understanding your project and making a better
decision with regard to the management of your project,
tomorrow (this could mean to abandon the project)
• In essence, decisions are made against a predetermined set
of objectives, rules and/or priorities based upon knowledge,
data and information relevant to the issue although too often
this is not the case.
• Frequently decisions are ill-founded, not based on a logical
assessment of project-specific criteria and lead to difficulties
later.
• It is not always possible to have conditions of total certainty;
indeed in risk management it is most likely that a
considerable amount of uncertainty about the construction
project exists at this stage.
 Decision making in Risk
Management
• Risks fall into three categories; namely known risks,
known unknowns and unknown unknowns.
– Known risks include minor variations in productivity and
swings in material costs. These occur frequently and are
an inevitable feature of all construction projects.
– Known unknowns are the risk events whose occurrence
is predictable or foreseeable. Either their probability of
occurrence or their likely effect is known.
– Unknown unknowns are those events whose probabilities
of occurrence and effect are not foreseeable by even the
most experienced staff. These are usually considered as
force-majeure.
 Decision making in Risk
Management
Probability of occurrence of risk

I Low High
m
p
Low Trivial Expected
a
c
High Hazard Risk
t Management

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 Decision making in Risk
Management
• Events with a low impact are not serious and can
be divided into the elements of trivial and expected.
• For the high impact and low probability, these
events are a hazard which could arise but are too
remote to be considered. In project management
however, high impact risks should not be ignored
even if their probability is low. Fallback and
response plans should be put in place even if the
financial impact is too large to be covered by
contingencies.
• The use of risk management is to identify, assess
and manage those events with both a high input
and a high probability of occurrence.
Benefits of Effective Risk Management
• Risk management is the single most influential
factor in project success.
• Where risk management is well implemented,
more projects meet their objectives.
• Where risk management is poor, projects fail
more often.
 END
Effort Never Dies

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