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RISK MANAGEMENTVinod Nakra, MRICSProfessor Emeritus, RICS School of Built Environment

A Construction Project is a complex undertaking of changing requirements, multiple parties, unforeseen developments, changing circumstances and misunderstandings (Anonymous)

MBA 3RD SEMESTER JUL TO NOV 2015RISK MANAGEMENT IN CONSTRUCTION

RISK MANAGEMENT & CONSTRUCTION PROJECTS?

NO CONSTRUCTION PROJECT IS RISK FREE. RISK CAN BE MANAGED, MINIMIZED,SHARED, TRANSFERRED OR ACCEPTED. IT CAN NOT BE IGNORED (LATHAM 1994)

COURSE OBJECTIVESTO DISSEMINATE THE KNOWLEDGE AND PRACTICE OF RISK MANAGEMENT IN CONSTRUCTION PROJECTS THAT SHALL INCLUDE:

RISK MANAGEMENT PLANNING

IDENTIFICATION OF RISKS

QUALITATIVE AND QUANTITATIVE ANALYSIS OF RISKS

RISK MITIGATION AND RISK CONTROL.

TO DISCUSS TOOLS AND TECHNIQUES FOR CONSTRUCTION RISK MANAGEMENT.

STUDENT LEARNING OBJECTIVES

COMPREHEND THE IMPORTANCE OF RISK MITIGATION AND MANAGEMENT TOOLS AND TECHNIQUES TO:-

DEMONSTRATE SUFFICIENT UNDERSTANDING AND KNOWLEDGE OF RISKS AND THEIR NATURE, ESPECIALLY CONNECTED WITH CONSTRUCTION PROJECT MANAGEMENT.

APPLY THE KNOWLEDGE TO CONDUCT RISK ASSESSMENTSBASED ON APPROPRIATE FACTORS.

UNDERSTAND APPLICATION OF VARIOUS TECHNIQUES USED TO MEASURE AND QUANTIFY RISK FOR RISK MITIGATION AND RISK RESPONSE.

OVERVIEW OF CONSTRUCTION PROJECT RISK MANAGEMENT

WHY?

THOSE WHO CANNOT REMEMBER THE PAST ARE CONDEMNED TO REPEAT IT

----GEORGE SANTAYANA

DEFINITION: WHAT IS A RISK?1. AN UNCERTAINTY INHERENT IN PLANS AND THE POSSIBILITY OF SOMETHING HAPPENING(CONTINGENCY), THAT CAN AFFECT THEPROSPECT OF BUSINESS OR PROJECT GOALS.(BS 6079-3:2000)

WHY DO PROJECTS FAIL?

2. COMBINATION OF THE PROBABILITYOR FREQUENCY OF OCCURRENCE OF A DEFINED THREAT OR OPPORTUNITY AND THE MAGNITUDE OF THE CONSEQUENCES OF THE OCCURRENCE.[BRITISH STANDARD ON PROJECT MANAGEMENT]

3. AN UNCERTAIN EVENT OR CONDITION THAT, IF IT OCCURS, HAS A POSITIVE OR A NEGATIVE EFFECT ON A PROJECTS OBJECTIVES [ PMB OK Guide 3rd Ed. 2004]

IN SHORT-RISK IS?

THE THREAT OR POSSIBILITY THAT AN UNCERTAIN ACTION OR EVENT WILL ADVERSELY OR BENEFICIALLY AFFECT AN ORGANISATIONS ABILITY TO ACHIEVE ITS OBJECTIVES

KEY WORDS:POSSIBILITY, UNCERTAINTY, ADVERSELY, BENEFICIALLY, OBJECTIVES

RISK IS SIMPLE. IT IS ANYTHING THAT REQUIRES YOU TO MAKE CHOICES ABOUT FAILURE---CHARLES BOSLER- PMI Risk Management Specific Interest Group

RISK MANAGEMENT

A SYSTEMATIC WAY OF LOOKING AT AREAS OF RISK AND CONSCIOUSLY DETERMINING HOW EACH SHOULD BE TREATED.

WHAT IS RISK MANAGEMENT(IN AS UN ACC0M)

RISK MANAGEMENT IS A SYSTEMATIC APPROACH TO SETTING THE BEST COURSE OF ACTION UNDER UNCERTAINTY BY IDENTIFYING, ASSESSING, UNDERSTANDING, ACTING ON AND COMMUNICATING RISK ISSUES------ HeinzPeter Berg (RISK MANAGEMENT: PROCEDURES, METHODS AND EXPERIENCES, Jun 2010)

RISK MANAGEMENT IS ..

SYSTEMATIC APPROACH UNDER UNCERTAINTY

BEST COURSE OF ACTION

IDENTIFYING-SOURCES?

ASSESSING-LIKELIHOOD/IMPACT?

UNDERSTANDING-EFFECT ON PROJ OBJECTIVES

COMMUNICATING RISK ISSUES

ACTING

A MANAGEMENT TOOL-AIMS AT

IT IS A MANAGEMENT TOOL THAT AIMS AT:

IDENTIFYING SOURCES OF RISK & UNCERTAINTY

ASSESSING THEIR LIKELIHOOD/PROBABILITY

DETERMINING THEIR IMPACT, AND

DEVELOPING APPROPRIATE MANAGEMENT RESPONSES (UHER, 2003).

WHAT DOES CONSTRUCTION ACTIVITY INVOLVE?AVASCIRA

UNLIKE OTHER INDUSTRIES- CONSTRUCTION INDUSTRY INVOLVES:

ASSEMBLING MATERIALS AND COMPONENTS DESIGNED AND PRODUCED BY MULTITUDE OF SUPPLIERS:

VARIETY. DISCIPLINES AND TECHNOLOGY.

ACTIVITIES. PLANNING, REGULATION, DESIGN, MANUFACTURE, CONSTRUCTION, MAINTENANCE AND DECOMMISSIONING OF STRUCTURES.

SCALE, COMPLEXITY AND INTRICACY. VARIES ENORMOUSLY-SMALL BUILDERS TO INTERNATIONAL COMPANIES.

RANGE-SHORT TERM SIMPLE JOBS TO LONG TERM COMPLEX, HIGH COST AND AT TIMES HIGH RISK PROJECTS/MULTIPLE PROJECTS

CONSTRUCTION INDUSTRY-VALUE CHAIN

MEANS OF PRODUCTION OF SERVICES-FACTORY, OFFICE

STRENGTHENING/DEVELOPING INFRASTRUCTURE OF ECONOMY-RAILWAY, ROADS, PORTS, AIRPORTS, IRRIGATION, POWER

SOCIAL INVESTMENT-HOSPITALS, SCHOOLS, COLLEGES.

FULFIL DIRECT NEED-HOUSING, RECREATIONAL.

1. DIRECT ROLE-MAJOR NATIONAL INVESTMENT

VITAL ROLE-DELIVERY OF COMPETITIVE GOODS AND SERVICES BY REST OF ECONOMY.

STIMULATES OTHER SERVICES & SUPPLIERS--ESTATE AGENTS, LEGAL, CARPETS, CURTAINS, FURNITURE AND FIXTURES.

2. DIRECT ROLE

EMPLOYMENT OPPORTUNITIES-NUMEROUS.

ATTRACTS CONTRACTING FIRMS, SPECIALIST FIRMS, CONSULTING ARCHITECTS, ENGINEERS, QS, SUPPLIERS OF BUILDING MATERIALS AND MANUFATURERS OF MATERIALS AND EQUIPMENT

INDIRECT ROLE-STIMULUS OF ECONOMY

SYSTEM INTEGRATOR AND ECONOMIC MULTIPLIER.

FROM MACRO ECONOMIC PERSPECTIVE IT REQUIRES THREE CLASSIC FACTORS OF INPUTS REGULATED BY GOVT POLICY (NATIONAL AND LOCAL LEVEL)?

[ LAND, LABOUR AND CAPITAL]

WHAT IS THE INTERNATIONAL DIMENSION OF CONSTR INDUSTRY?

NOT ONLY A NATIONAL BUT INTERNATIONAL INDUSTRY-REQUIRING:

HOW TO FIND & UNDERTAKE CONSTR IN DIFFERENT COUNTRIES?

WHAT IS LEVEL OF COMPETITION AND PROCUREMENT ACTIVITIES?

WHICH- COMPLIANCE WITH LOCAL AND NATIONAL GOVT CONTROLS AND LAWS ETC..

COMPETITIVE RIVALRY

WHAT ARE KEY DRIVING FORCES IN CONSTRUCTION BUSINESS?

POTENTIAL ENTRANTS:THREAT OF NEW ENTRANTS (MAINLY DOMESTIC COMPANIES)

INDUSTRY COMPETITORS-RIVALRY

SUBSTITUTES-PRODUCTS, SERVICES AND DESIGN

BARGAINING POWER OF SUPPLIERS & BUYERS

DIFFERENCE BETWEEN PROBLEM AND RISK STATEMENT??

PROBLEM STATEMENT

We have insufficient LABOUR AND MATERIAL Resources to construct the Building which will delay the project by One Month and we will incur a loss of Rs. 40 Lacs.

RISK STATEMENT ??

We may have insufficient labour resources to construct the Building which might delay the project moderately but we might incur a major loss of money due to penalty/Liqudated damages..

RISK STATEMENT

We may seriously fail (PROBABILITY.) the HVAC Commissioning tests due to insufficient material resources causing the delivery scheduled date to slip substantially and incur a major loss of (IMPACT..).

RISK IDENTIFICATION-RISK STATEMENT

EXAMPLE IA CUSTOMER, WHO RETIRED GROM GOVT SERVICE APPROACHES A CONTRACTOR WITH A PROPOSAL TO CONSTRUCT A BUILDING FOR A RESTAURANT. THE CONTRACTOR ASKS THE CUSTOMER TO SPECIFY THE INTERNAL FITOUT REQUIREMENTS SO THAT THE PROJECT CAN BE COMPLETED. AS A PROJECT MANAGER, HOW WOULD YOU PHRASE THE RISK STATEMENT SO THAT THERE IS NO MISUNDERSTANDING.

SUGGESTED RISK IDENTIFICATION PHRASE-I

THERE IS A SERIOUS RISK THAT THE CUSTOMER MAYBE UNABLE TO SPECIFY THE INTERNAL FITOUT REQUIREMENTS BY .(DATE) IN A TIMELY MANNER CAUSED BY LACK OF EXPERIENCE IN PROCURING SUCH EQUIPMENT BY . (DATE). THIS MIGHT RESULT IN IN DELAYED PAYMENT, PROJECT OVERRUN AND DELAYED INITIATION OF SUPPORT SUB CONTRACTS BY AND WE MIGHT INCUR MAJOR LOSSES.

RISK IDENTIFICATION-RISK STATEMENTEXAMPLE II

A DEVELOPER ASSIGNED THE CONTRACT OF A HOTEL COMPLEX TO A CONTRACTOR. THE TIME PERIOD SPECIFIED IN THE CONTRACT WAS 3 YEARS AND SIX MONTHS. HE EXPECTED TO PAY BACK THE LOAN AMOUNTS TO THE BANK FROM RECEIPTS FROM OPERATIONS/HOTEL GUESTS. AFTER ONE YEAR AND SIX MONTHS, THE DEVELOPER FINDS THAT ONE OF HIS PARTNERS HAS LEFT HIM AND HE MAY NOT BE ABLE TO REPAY THE LOAN/INTEREST AS EARLIER PLANNED, IF HE TAKES 3 YEARS AND 6 MONTHS TIME. HE MAY THEREFORE, REDUCE CONSTRUCTION PERIOD BY ONE YEAR.

AS A PROJECT MANAGER OF CONTRACTOR, PREPARE A RISK STATEMENT TO IDENTIFY THE RISK CLEARLY.

TITANIC

WHAT ARE TYPICAL RISKS IN A CONSTRUCTION PROJECT?

PROJECT MANAGEMENT RISK EXAMPLES

1. CUSTOMER CUSTOMER FOCUS SPECIFICATION QUALITY SCOPE CHANGE

2. COMMERCIAL

3. FINANCIAL

SUB CONTRACTOR AGRMNT INTERPR-TERMS/CONDITIONS PROFIT MARGIN ACCURATE COST FORECAST PAYMENT PLAN PENALTY CHARGES/LD

TYPICAL RISKS IN A CONSTRUCTION PROJECT

PROJECT MANAGEMENT RISK EXAMPLES

4. SITE GROUND/SOIL CONDITIONS FLOOD PLAIN CONTAMINATED GROUND ARCHAEOLOGICAL FIND PROTECTION OF ANIMALS, BIRDS,

FLORA/FAUNA

5. SITE ACCESS/NOS. LOCATIONS GEOGRAPHIC DISPERSION SITE OWNERSHIP/ACCESS

TYPICAL RISKS IN A CONSTRUCTION PROJECT

PROJECT MANAGEMENT RISK EXAMPLES

6. COMPLEXITY ISSUES WITH DESIGN CRITERIA COMPLEX DESIGN FEATURES BREAKTHROUGH TECHNOLOGY OR

EXISTING AS BUILT CONDITION DOCUMENTS

7. FUNDING/COST SHARING PROJECT DURATION INVILVEMENT/FUNDING OTHER

PARTIES & STABILITY OF MONETARY INPUTS

TYPICAL RISKS IN A CONSTRUCTION PROJECT

PROJECT MANAGEMENT RISK EXAMPLES

8. ENVIRONMENTAL ENVIRONMENTAL LAWS & COMPLIANCES

LICENCES & PERMITS

9. REGULATORY INVOLVEMENT INVOLVEMENT BY OTHER REGULATORY AGENCY & SAFETY EXECUIVE NATIONAL, STATE AND LOCAL GOVTS

TYPICAL RISKS IN A CONSTRUCTION PROJECT

PROJECT MANAGEMENT RISK EXAMPLES

10. POLITICAL VISIBILITY SIGNIFICANCE TO NATIONAL, STATE OR LOCAL GOVTS

SPECIAL INTEREST GROUPS

11. PUBLIC RIGHT OF WAY CITIZEN INTEREST OR INVOLVEMENT, RIGHT OF WAY

TYPICAL RISKS IN A CONSTRUCTION PROJECT

PROJECT MANAGEMENT RISK EXAMPLES

12. LABOUR SKILL/PRODUCTIVITY

ADEQUACYSPECIALITY OF RESOURCES RAPID LABOUR FORCE BUILDUP EXPOSURE TO

ENVIRONMENTAL EXTREMES

13. SYSTEM DESIGN AND INTEGRATION

SYSTEM COMPLEXITY INTERFACES HUMANWARE, SOFTWARE

HARDWARE

TYPICAL RISKS IN A CONSTRUCTION PROJECT

PROJECT MANAGEMENT RISK EXAMPLES

14. MANUFACTURING MANUFACTURING/BUY PLANNING

DESIGN PRODN CAPACITY NEW TOOLS/EQPT REQMNT NEW MANUFACT/TEST

REQMNTS

15. TECHNOLOGY TECHNOLOGY/TECH APPROACH CHOSEN TO ACHIEVE PROJ OBJECTIVE, TECH TRANSFER

TYPICAL RISKS IN A CONSTRUCTION PROJECT

PROJECT MANAGEMENT RISK EXAMPLES

16. PROCUREMENT PLANNING VENDOR APPRAISALS CRITICAL LEAD TIMES SINGLE SOURCE? COMPONENT OBSOLESCENCE MARKET VOLATALITY

17. SUB CONTRACTOR CAPABILITIES

ABILITY OF SUB CONTRACTORS/OTHER VENDORS TO PERFORM PROJ OBJS, STRATEGY

TYPICAL RISKS IN A CONSTRUCTION PROJECT

PROJECT MANAGEMENT RISK EXAMPLES

18. CONSTRUCTION FEASIBILITY COMPLEXITY & DEPENDENCIES RESOURCING SPECIAL STANDARDS PROCESS DOCUMENTATION FABRICATION/MANUFRING

19. INTERFACES IN MULTI PROJECT/ ENVIRONMENT, INTERFACING WITH EXISTING OP ACTIVITIES/OTHERS

TYPICAL RISKS IN A CONSTRUCTION PROJECTPROJECT MANAGEMENT RISK EXAMPLES20. PROJECT MANAGEMENT PLANNING & RESOURCING

RESOURCE CAPABILITIES DEPENDENCIES STAKEHOLDERS ORGN./ INTERFACES COMMUNICATIONS CONSTRAINTS PROCESS TRANSITION & SERVICES