Risk Management

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What is Risk?
A dictionary definition of risk is the
possibility of loss or injury
Project risk involves understanding
potential problems that might occur on
the project and how they might impede
project success
Risk management is like a form of
insurance; it is an investment
Speculative risk
A speculative risk is a risk that accompanies the
possibility of earning a profit.
Most business decisions, such as the decision
to market a new product, involve speculative
risks.
If the new product succeeds in the
marketplace, there are profits; if it fails, there are
losses.
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Pure risk
A pure risk is a risk that involves only the
possibility of loss, with no potential for gain.
The possibility of damage resulting from
hurricane, fire, or auto accident is a pure risk.
In the above examples, there is no gain or profit
if such damage does not occur.
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Opportunities
Risks
Try to balance risks and opportunities
Why Take Risks? Because of
Opportunities!
Risks and Uncertainties
Basic concepts
Risks and uncertainties are associated with specific
events/activities which can be individually identified.
A risk event has a range of outcome and each outcome
has a probability of occurrence
Some risks only has adverse consequences (loss); e.g.
structural collapse, bankruptcy: low/high probability but
high impact
Common risk in construction offer either loss or gain
prospect; productivity, variation, inflation: typically high
probability with low or high impact
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Costs of Risks
Any risk entails two types of costs.
The first is the cost that will be incurred if a
potential loss becomes an actual loss.
The second consists of the costs of reducing or
eliminating the risk of potential loss.
These two types of costs must be balanced
against each other if risk management is to be
effective.
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Risk management
Risk management is the process of
evaluating the risks faced by a firm or an
individual and then minimizing the costs
involved with those risks.
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The Importance of Project
Risk Management
Project risk management is the art and
science of identifying, assigning, and
responding to risk throughout the life of a
project and in the best interests of meeting
project objectives
Risk management is often overlooked on
projects, but it can help improve project
success by helping select good projects,
determining project scope, and developing
realistic estimates
Risk Management
Requires that we accept that uncertainty exists
Generate a structured response of risk in term of
alternative plans, solutions and contingencies
Is a thinking process requiring imagination and
ingenuity
Generates a realistic (and sometimes different)
attitude in project staff by preparing them for risk
events rather than being taken by surprise when
they arise
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Risk Management
The goal of project risk management is to
minimize potential risks while maximizing
potential opportunities. Major processes
include
Risk identification: determining which risks are
likely to affect a project
Risk analysis: evaluating risks to assess the
range of possible project outcomes
Risk response development: taking steps to
enhance opportunities and developing responses
to threats
Risk response control: responding to risks over
the course of the project
Risk Identification
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IMPACT
LIKELIHOOD
HIGH
LOW
HIGH LOW
RARE
CATASTROPHE
PROBABLE
DISASTER
LIKELY &
MINOR
FREQUENT/
TRIVIAL
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Time, Financial, and
Technology Risk
Time risk: Will the new project complete
according to schedule? What is the effect of
delay to this project?
Financial risk: Can the organization afford to
undertake the project? Is this project the best
way to use the companys financial
resources?
Design/Technology risk: Is the project
technically feasible? Could the project design
accommodate future changes?
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Potential Risk Conditions Construction
Project
Risk Conditions
Integration Inadequate planning; poor resource allocation; poor integration
management; lack of post-project review
Scope Poor definition of scope or work packages; incomplete definition
of quality requirements; inadequate scope control
Time Errors in estimating time or resource availability; poor allocation
and management of float; early release of competitive products
Cost Estimating errors; inadequate productivity, cost, change, or
contingency control; poor maintenance, security, purchasing, etc.
Quality

Poor attitude toward quality; substandard
design/materials/workmanship; inadequate quality assurance
program
Human Resources Poor conflict management; poor project organization and
definition of responsibilities; absence of leadership
Communications Carelessness in planning or communicating; lack of consultation
with key stakeholders
Risk Ignoring risk; unclear assignment of risk; poor insurance
management
Procurement Unenforceable conditions or contract clauses; adversarial relations

Primary sources of risk
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Physical
Loss or damage by fire, earthquake, flood, accident,
landslide
Environ-
mental
Ecological damage, pollution, waste treatment
Public enquiry
Design
New technology, innovative applications, reliability,safety
Detail, precision and appropriateness of specifications
Design arising from surveys, investigations
Likelihood of change
Interaction of design with method of construction
Logistic
Loss or damage in the transportation of materials and
equipment
Availability of specialized resources
Access and communications
Organizational interfaces
Primary sources of risk
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Financial
Availability of funds, adequacy of insurance
Adequate provision of of cash flow
Losses due to default of contractors,suppliers
Exchange rate fluctuations, inflation, taxation
Legal
Liability for acts of others, direct liabilities
Local law, legal differences between home country and
countries of suppliers, contractors, designers
Political
Political risks in countries of owner and suppliers,
contractors war, revolution, changes in law
Construc-
tion
Feasibility of construction methods, safety
Industrial relations
Extent of change, Climate, Quality and availability of
management and supervision
Operational
Fluctuation in market demand for product or service
Maintenance needs, Fitness for purpose
Safety operation
Risk Analysis
Many risks are quantifiable in term of
terms of their effect on cost or time or
revenue
Can be analysed by measuring their
effects on the parameters used to assess
project or contract viability
Application of statistical probability
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Risk analysis techniques
Sensitivity analysis
Probability analysis (e.g. Monte Carlo)
Decision tree
Utility theory
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Sensitivity analysis
SA seeks to place a value on the effect of
change of a single variable within a
project.
Defining a likely range of of variation for
those variables which have a high impact
on cost, time or economic return and to
which the project will be most sensitive.
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Sensitivity Analysis Spider Diagram

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Sensitivity Analysis Spider Diagram
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Probability Analysis
Specifying a probability distribution for each
variable and then considering situations where
any or all of these variables can change their
initial values at the same time.
Though defining probability of occurrence may
be difficult, it has proved possible to make a
tentative estimate
Example using Monte Carlo technique
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Decision tree
Graphical means of bringing together the
information about investment possibilities and a
sequence of decision choices.
It shows the present possible courses of action
and future possibilities
It requires the decision maker to place some
degree a probability on an outcome occurring.
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Utility theory
Utility theory attempts to take into account
of the attitude of the decision maker to risk
or to the magnitude of risk
It endeavours to assess the decision
profile of the decision maker and formalize
managements attitude toward risk
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Risk Utility
Risk utility or risk tolerance is the amount of
satisfaction or pleasure received from a
potential payoff
Utility rises at a decreasing rate for a person who
is risk-averse
Those who are risk-seeking have a higher
tolerance for risk and their satisfaction increases
when more payoff is at stake
The risk neutral approach achieves a balance
between risk and payoff
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Risk Utility Function and Risk
Preference
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Risk Responses
Risk avoidance: eliminating a specific
threat or risk, usually by eliminating its
causes
Risk acceptance: accepting the
consequences should a risk occur
Risk mitigation: reducing the impact of a
risk event by reducing the probability of
its occurrence
Risk Avoidance
In extreme cases, risks may have serious
consequences as to warrant a reappraisal or
even the replacement of the project by an
alternative one.
Such an action should be determined at the
project appraisal stage
Risks can be avoided by redesign, different
packaging of the work content or different
method of construction
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Risk Acceptance
An individual or firm will-and probably must-take on
certain risks as part of living or doing business.
Risk assumption is the act of taking responsibility for the
loss or injury that may result from a risk.
Generally, it makes sense to assume a risk when one or
more of the following conditions exist:
- The potential loss is too small to worry about.
- Effective risk management has reduced the risk.
- Insurance coverage, if available, is too expensive.
- There is no other way of protecting against a loss.

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Risk Reduction
If a risk cannot be avoided, perhaps it can be reduced.
In general risk may be reduced by:
Obtaining additional information
Performing additional tests/simulations
Allocating additional resources
Improving communication and managing organizational
interfaces
The risks involved in management decisions can be
reduced only through effective decision making.
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Risk Transfer
Common route of risk transfer in construction projects
are:
- client to contractor or designer
- contractor to sub-contractor
- client, contractor,sub-contractor or designer to insurer
- contractor or sub-contractor to surety
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Risk Transfer
The transfer of risk should ensure the client best
interests in the project.
Factors to consider:
The party which can best control the events which
may lead to the risk occurring
The party which can best control the risk if it occurs
Whether or not it is preferable for the client to retain
an involvement in the control of the risk
The party to carry the risk if it cannot be control

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Risk Transfer
Whether the premium to be charged by the party to
which the risk is allocated is reasonable and acceptable
Whether this party is likely to be able to sustain the
consequences if the risk occurs
Whether, if the risk is transferred, it leads to the
possibility of risks of a different nature being transferred
back to the client
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Risk Transfer
The most commonly used method of dealing with risk is to
shift, or transfer, the risk to an insurance company.
An insurer (or insurance company) is a firm that agrees,
for a fee, to assume financial responsibility for losses
that may result from a specific risk.
- The fee charged by an insurance company is called the
premium.
- A contract between an insurer and the person or firm
whose risk is assumed is known as an insurance policy.
Insurance is thus the protection against loss that is
afforded by the purchase of an insurance policy.
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Risk Management Plans,
Contingencies
A risk management plan documents the
procedures for managing risk throughout the
project
Contingency plans are predefined actions
that the project team will take if an identified
risk event occurs
Contingency reserves are provisions held by
the project sponsor for possible changes in
project scope or quality that can be used to
mitigate cost and/or schedule risk
Contingencies
The setting of contingencies is an essential
part of project management
Three types of contingencies:
Time (float)
Cost (allowance in budget)
Performance/quality (tolerance)
This requires a named person in-charged
and consistent monitoring
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Application of
risk management
The greatest degree of uncertainty about the
future is encountered in the appraisal stage of a
new project
Decisions taken in this stage tend to have the
largest impact on final cost
Change is an unavoidable characteristic of
major capital projects and its extent and effects
are frequently under-estimate during this phase
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Application of
risk management

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Risk decision during appraisal
The related decisions or action during
appraisal stage:
- identification of all project risks
- quantification of each risk in term of time and cost
where possible
- assessment of relative impact/probability of each
risk
- identification of the most serious risks for
consideration project management
- allocation of these risks to various parties,
establishment of contingency funds to protect the
client against those risk which are unavoidable
and retained by him
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Top 10 Risk Item Tracking
Top 10 risk item tracking is a tool for
maintaining an awareness of risk throughout
the life of a project
Establish a periodic review of the top 10
project risk items
List the current ranking, previous ranking,
number of times the risk appears on the list
over a period of time, and a summary of
progress made in resolving the risk item
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Example of Top 10 Risk Item
Tracking
Monthly Ranking
Risk Item This
Month
Last
Month
Number
of Months
Risk Resolution
Progress
Inadequate
planning
1 2 4 Working on revising the
entire project plan
Poor definition
of scope
2 3 3 Holding meetings with
project customer and
sponsor to clarify scope
Absence of
leadership
3 1 2 Just assigned a new
project manager to lead
the project after old one
quit
Poor cost
estimates
4 4 3 Revising cost estimates
Poor time
estimates
5 5 3 Revising schedule
estimates
Project Managers roles
An in-depth study of risk and uncertainty for
all projects
Estimates cost and time that include specific
contingency allowance and also provide
ranges commensurate with the identified
major risks and uncertainties built in
Proposal of ways of at least reducing effects
of risks and uncertainty
The adoption of methods for allocating the
remaining risks to the various parties in a way
which will optimise project performance
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Project Managers roles
The recognition that risk and reward go hand-in-
hand and that the allocation of risk to a party
should be accompanied by a motivation for good
management
An open minded approach to innovative
solutions to problems
A regular and preferably independent review of
project proposals and conceptual design to
reduce misunderstandings and ensure that the
full spectrum of uncertainties is exposed
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Using Software to Assist in
Project Risk Management
Databases can keep track of risks
Spreadsheets can aid in tracking and
quantifying risks
More sophisticated risk management
software helps develop models and
uses simulation to analyze and respond
to various project risks
e.g. @RISK