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org

RISK MANAGEMENT
Vinod Nakra, MRICS
Professor 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

RD
3

SEMESTER JUL TO NOV 2015

RISK 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 OBJECTIVES
TO 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 ASSESSMENTS
BASED 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 THE
PROSPECT OF BUSINESS OR PROJECT
GOALS.(BS 6079-3:2000)
WHY DO PROJECTS FAIL?

2. COMBINATION OF THE PROBABILITY

OR 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?

THREAT OR POSSIBILITY
UNCERTAIN
ACTION EVENT ADVERSELY
BENEFICIALLY AFFECT
ABILITY
ACHIEVE OBJECTIVES
THE

THAT AN

OR

WILL

OR

AN ORGANISATIONS

ITS

KEY WORDS:POSSIBILITY, UNCERTAINTY, ADVERSELY, BENEFICIALLY,

OBJECTIVES

TO

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 I
A 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 MAY
BE 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 STATEMENT

EXAMPLE 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
1. CUSTOMER

EXAMPLES
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
4. SITE

EXAMPLES
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
6. COMPLEXITY

EXAMPLES
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
8. ENVIRONMENTAL

EXAMPLES
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
10. POLITICAL VISIBILITY

EXAMPLES
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
12. LABOUR
SKILL/PRODUCTIVITY

EXAMPLES
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
14. MANUFACTURING

EXAMPLES
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
16. PROCUREMENT

EXAMPLES
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
18. CONSTRUCTION

EXAMPLES
FEASIBILITY
COMPLEXITY & DEPENDENCIES
RESOURCING
SPECIAL STANDARDS
PROCESS
DOCUMENTATION
FABRICATION/MANUFRING

19. INTERFACES

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

PROJECT MANAGEMENT RISK

EXAMPLES
TYPICAL RISKS IN A CONSTRUCTION PROJECT
20. PROJECT MANAGEMENT
PLANNING & RESOURCING
RESOURCE CAPABILITIES
DEPENDENCIES
STAKEHOLDERS
ORGN./ INTERFACES
COMMUNICATIONS
CONSTRAINTS
PROCESS
TRANSITION & SERVICES