ASSIGNMENT

COURSE TITLE: RISK MANAGEMENT IN CONSTRUCTION

PROJECTS
COURSE NO. :

IDM 32

MODULE: 53
ASSIGNMENT NO: THREE ASSIGNMENT NAME: RISK MANAGEMENT IN CONSTRUCTION

COURSE: PGPIDM (Post Graduate Programme in Infrastructure

Development Management)

NAME: Biswa REG.NO:

Keshan Panda

211-10-32-9995-2134

NICMAR
NATIONAL INSTITUTE OF CONSTRUCTION MANAGEMENT AND RESEARCH PUNE

ASSIGNMENT
For the successful implementation of a project, it is essential that persons involved in its implementation be sensitive to the risk involved in the project and formulates the most suitable structure for the management of such risks. There are certain variables and uncertainties is common to most of the infrastructure projects. Many risk mitigation techniques are applied to infrastructure projects. Discuss in details the risk management in construction with special reference to any project currently in progress with your company.

RISK MANAGEMENT IN CONSTRUCTION: RISK: Risk is nothing more than the variables or circumstances associated with the implementation of a specific project that has the potential to adversely affect the development of a project or the interests of a participant, as the case may be. Risks include circumstances or situations, the existence or occurrence of which will in all reasonable foresight result in an adverse impact on any aspect of the implementation of the project. SPECIFIC CATEGORIES OF RISK: Although risk identification and management are specific to each project, it is possible to identify certain variables and uncertainties that are common to most infrastructure projects. Revenue Risk: Revenue risk is the uncertainty in relation to the revenue that a project would actually generate. The uncertainty of the revenue of an infrastructure project is because of its public n ature, which carries with it, the uncertainty in the ability and willingness of consumers to pay for the benefits arising from the project. This risk may be mitigated to a great extent for construction industry by assuring quality at an adequate price of the product. The manner of managing this risk is essentially to carefully undertake a feasibility study of the project that evaluates not only the economic demand of the project but also the willingness to pay and the ability or credit worthiness of the main consumer.

Revenue risk generally comprise of: (i.) Ability of consumer to pay the tariff, (ii.) Determination of the tariff, (iii.)Collection, appropriation and enforcement of the tariff, and (iv.)Usage of the facility or demand for the services or commodity produced by the facility. Design Risk: This risk relates to any defect in the design of the infrastructure facility or the design requirements stipulated for the project. This is an inherent risk in the project as it is very difficult to conclusively ascertain that damage to the facility is actually caused due to the defect in the design parameters or the very design itself. Generally, it is the design contractor who is responsible for the design aspects of the project. In the event of the design parameters being stipulated by the grantor of the concession or license, this risk would be within the control of the grantor. Construction Risk: The construction risks are essentially a bundle of various individual risk factors that adversely affect the construction of a project within the time frame and costs projected and at the standards specified for the facility. Construction risks generally relate to: (i.) The risk related to availability of land for the project, (ii.) Suitability of the land for the construction of the project facility, (iii.) Delay in completion of construction, (iv.) Cost overruns in supplies, transportation, machinery, raw materials, equipment etc, (v.) Availability of the basic infrastructure required for the construction of the facility such as water, electricity etc. (vi.) Availability of work force, (vii.) Occurrence of force majeure events, and (viii.) Failure of the facility to meet the performance criteria and the standards stipulated.

The constructions risks are generally distributed and sought to mitigate by adequately drafted construction risks are best handled by, and are generally within the control of the construction contractor. Operating Risk: These risks are similar to the construction risks. They are a bundle of risks associated with the operation of the infrastructure facility. Operating risks generally relate to: (i.)Operating costs overrun, (ii.)Risks relating to obsolescence, (iii.)Risks associated with the compliance of specified performance criteria, quality and quantity, (iv.)Force majeure risks, and (v.)Risks associated with the inability to comply with the maintenance standards and availability of funds required for the operation and maintenance of the facility. Financial Risk: This risk is the totality of all risks to financial developments external to the project that are not in the control of the project developers. These risks include: (i.) Risks associated with the fluctuation in foreign exchange rates, (ii.) Risks associated with the devaluation of the local currency, (iii.) Risks associated with the non-convertibility or non-repatriation of foreign exchange from India, and (iv.) Risks associated with the fluctuations in interest rates. The general mechanism for mitigating some of the risks constituting the overall financial risk of the project is to include, in the security package for the lenders, hedging facilities against exchange rate risks such as currency rate swaps, caps and floors. Political Risk: -

Political risks are a bundle of distinct risk that can include not only political factors but also administrative, social and economic factors. Political risks associated with project are closely evaluated as they are generally outside the control of the parties to the project, other than the government to a certain extent. But even the government granting the concerned concession rights does not have control over all the categories of political risks. It should be kept in mind that many of the political risk arise from the possibility of arbitrary action by the government and altering the framework on which the very foundation of the project rests. Political risk can be: (i.) Relating to the manner of investing and doing business in a particular country or (ii.) They may be specially relating to the project or (iii.) May arise from certain general events. The main categories of political risks include: (a) (b) (c) (d) (e) Risk of political instability such as riots, revolution, terrorism, guerrilla warfare, War, whether declared or undeclared, International sanctions, Expropriation, Nationalization, Creeping Expropriation, Failure to grant or renew approvals, and Excessive interference in the implementation of the project, thereby causing severe prejudices to the concessionaire. Legal Risk: These are risks presented by the legal framework governing the project and include the possibility of alteration of the concerned legal framework to the prejudice of the implementation of the project on commercial lines. Environmental Risks: These are risks relating to occurrence of environmental incidents during the course of implementation of the project. These risks are generally within the control of the construction, and the operation and maintenance consortium. This risk has increased due to the presence of

strict legal liability in relation to such environmental incidents, which can result not only in adverse effects on the financials of a project but may also cause a closure of any work or operations of and in relation to the facility. Force Majeure Risks: These risks are regarding the events that are outside the control of any party and cannot be reasonably prevented by the concerned party. These risks generally arise due to causes extraneous to the project. The defining of force majeure events, these include: (i.) Natural Force Majeure events. (ii.) Direct political force majeure events, and (iii.) Indirect political force majeure events. Natural force majeure events comprise of all events that can be attributed to natural conditions or under act of god such as earthquakes, floods cyclones, and typhoons. These risks should be shared equally among the parties. Direct political force majeure events, which are attributable to political events that are specific to project itself such as expropriation, nationalization. Indirect political force majeure events are events that have their origins in political events but are not specific such as war, riots etc. However, the mechanism of managing and mitigation for such risks cannot be categorically stated as they vary with each project and the circumstances surrounding each project.

RISK MANAGEMENT: Risk management is a planned and structured process aimed at helping the project team makes the right decision at the right time to identify, classify and quantify the risk and then to manage and control them. The aim is to ensure best value for the project in terms of cost, time and quality by balancing the input to manage the risk with the benefits from doing so In other words it is cost-benefit analysis of any project for a company.

The main techniques of risk management that have evolved and are generally applied to infrastructure projects are: (i)Risk Avoidance: Risk avoidance signifies the giving up of an opportunity to invest, as the probability of loss is too high as compared to the potential profit. In adopting risk avoidance technique, the concerned party may opt to either completely exit from the proposed project or restrict its role, rights and exposure to a particular project. (ii)Loss Prevention: Loss prevention techniques are directed towards formulating structures for reducing the frequency of loss or the severity of the loss. (iii)Risk Retention: Risk retention techniques recognize that not all risks are capable of being avoided or prevented or transferred, and the party agrees to absorb the exposure to the risk and formulate suitable mitigation structures, such as creation of a distinct fund. A planned risk retention strategy provides definite measures for absorbing the risk losses upon occurrence. However in many circumstances an unplanned risk retention technique would be preferred as the cost of treating the risk is too great as compared with the loss if the risk is left untreated or that the risk is financially relatively insignificant and there is no other viable alternative. (iv)Risk Transfer: Risk transfer is the technique that plays a far greater role in infrastructure development projects and involves the complete or partial transfer of risks among the various parties involved in the implementation of the project. This is achieved through the web of documents that is formulated during the course of implementation of infrastructure projects. The documentation structure provides for the flow of risk transfers that are negotiated and agreed to in the course of development of an infrastructure projects. For

example, the construction consortium would distribute and transfer the risks among themselves or to various sub-contractors. (v)Insurance: Insurance is the mechanism that allows parties regulating a risk to bring down their expected exposure to any loss from the occurrence of such risks. The costs of loss due to specific risks are transferred to insurers for a specific consideration in the nature of concerned insurance policy payments. The nature of risk management techniques adopted in relation to an infrastructure project is generally linked to the policies of individual parties and investment policies and decision taken by each party involved in the development of a project. (vi)Allocation Of Risks: Allocation of risks would entail a party to undertake: (i)The measures of control or mitigate a risk, and (ii)Bear the adverse consequences if it is not able to redress the risk, thereby insulating the other participants from the direct adverse consequences entailed with the risk. Consequently it is not surprising to find that most of the negotiations involved between the various participants centers around the allocation of risk with each participants eager to allocate the risks to some other participant and unwilling to bear any risks directly. The main principle for evaluating an adequate allocation of risks is that the party can best placed to control or reduces the risk or the circumstances that may arise if the risk occurs should be allocated the risk.

MITIGATION: Risk response and mitigation is the action that is required to reduce or eliminate the potential impact of risk. There are two types of response to risk:

1.

One is an immediate change or alteration to the project which usually result in elimination of the risk,

2.

Second is a contingency plan that will only be implemented if an identified risk should materialize.

(i)Risk Avoidance: Risk avoidance include review overall of project objective leading to reappraisal of project as a whole. Risk avoidance is often perceived as ultimate mitigation strategy in that it implies that project may be aborted. In simple terms, this method of mitigation involves removal of cause of risk, by risks itself. Ideally any approach involving avoidance is best implemented by consideration, adoption of alternative course of action. Other examples of risk avoidance include use of exemption clauses in contracts, either to avoid certain risks or to avoid certain consequences following from risks. Risk avoidance is most likely to take place where level of risk is at level where project is potentially unviable. (ii)Risk Reduction: This method adopts an approach where by potential exposure to risks and their impact is alleviated. Often this is achieved by the managing or designing out of potential risk. Risk reduction occurs where the level of risk is unacceptable and alternative action is available. Typical action to reduce risk could be: Detailed site investigation where adverse ground condition are known to exist but full extent is not known; detailed ground investigation will improve the information upon which estimate has been prepared. Alternative procurement route by utilizing an alternative contract strategy risks will be allocated between project participants in a different process. Changes in design to accommodate the findings of the risk identification process.

Risk reduction invariably leads to greater confidence regarding the project outcome. However risk reduction will result in an increase in the base cost but should offer a significantly greater reduction in the level of contingency required. It goes without saying that risk reduction should only be adopted where the resultant increase in costs is less than the potential loss could be caused by the risk being mitigated. (iii)Risk Transfer: This method involves the transfer of risk to other project participants. Commonly, risks are transferred through the placement of contracts, the appointment of specialist sub contractors or suppliers or by taking out an insurance policy. Transference of risk should comprise passing of risks to those better placed or more capable to maintain control, influence outcome of the risk. Transference should never be viewed as negative risk response. Its intention is not to pass buck by making someone else responsible. When transferring risk it is important to differentiate between the transference of risk itself and the allocation of risk responsibility. Where a risk is transferred the intention should be to transfer the whole of h risk including its potential impact. Where a portion of the risk is transferred whilst some risk is retained this is known as risk sharing. This approach may be adopted where the risk exposure is beyond the control of one party. In such instances it is imperative that each party appreciate the value of the portion of risk for which it is responsible. (iv)Residual or Retained Risk: Once all the avenues for response and mitigation have been explored a number of risks will remain. This does not imply that these risks can be ignored; indeed it is these risks, which will in most instances, undergo detailed quantitative analysis in order to assess and calculate the overall contingency levels required. The aim of the previous responses is to reduce project uncertainty and in so doing increases the base estimate to reflect the more certain nature of the project. However it does not imply that these retained risks can simply

be ignored. Indeed they should be subject to effective monitoring, control and management to ensure they are contained within the contingency allowance set. It should be noted that this contingency should be made up of residual risk, which are assessed, to be of a low likelihood and low potential impact. High probability and high impact risks should undergo further rigorous examination so that an alternative response can be found.

PROJECT: Name of Project: - Sudev Venture, Shivajinagar, Pune. Scope of Work: - Residential Building cum multi-complex. Duration: - 9 months. Aug 2012 to March 2013. Scheduled by contractor. Cost: - Estimated cost is Rs. 84000000/- (8.4 Cr). It is fluctuating cost estimated by contractor, which will change as per change in requirement by owner, and also changes require to be done as per addition work to done on site.