2/27/2016

Risk Management In
Construction
Dr. Hossam Mohamed Toma

Contents

• What is Risk

• Characteristics of Construction Industry

• Risk Management

Concept of Risk

• Risk is something that we deal with in our daily lives. For

the most part, we assess it on an unconscious level,
usually out of habit. Will I get hit by a car if I cross the
street? Will I burn my hand if I take a pan out of the oven
without a hot pad? Most of us are. This type of risk
analysis is intuitive and is built upon years of experience,
intuition, and instinct. Generally speaking, the decision
making involved is pretty straightforward and seldom do
we devote much time to our analysis. It seems that when
we face risks personally, they are generally easier to deal
with and we arrive at answers rather quickly.

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Decision making

Characteristics of Construction Industry

• Highly specialized (changing market, increased technology)

• Success for contractors is based on:
―Manage personnel
―Control cost
―Finance work
―Estimate jobs
―Schedule the work
―Manage cash flow
―Manage safety
―Manage quality
―Manage risk

Characteristics of Construction Industry

• Construction projects are difficult to manage because:

―Construction projects are unique

―Involve many skills (repetitive and non-repetitive)

―Dependent upon environmental conditions

―Subject to varied regulations from numerous government

agencies

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Introduction

• Change is inherent in construction work. For

years, industry has had a very poor
reputation for coping with the adverse effects
of change, with many projects failing to meet
deadlines and cost and quality targets.

Introduction

• Change cannot be eliminated, but by applying the

principles of risk management, engineers are able
to improve the effective management of this
change.

Introduction

• Change is normally regarded in terms of its adverse effects on

project cost estimates and programmes. In extreme cases, the risk
of these time and cost overruns can invalidate the economic case
for a project, turning a potentially profitable investment into a loss-
making venture.

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Characteristics of Construction Industry

• There are countless risks that construction projects can encounter
at any point of its lifecycle.

• What if the geotechnical information is wrong and the foundation

collapses?

• What if the price of steel skyrockets two years from now when
construction starts? What if it drops?

• What if the project’s environmental document is held up in review

and delays the construction bid date?

Project Risk

• A risk event implies that there is a range of

outcomes for that event which could be both more
and less favourable than the most likely outcome,
and that each outcome within the range has a
probability of occurrence. The accumulation, or
combinations of risks can be termed project risk.

Experience to Recognize Risks

• In construction projects each of the three primary

targets of cost, time and quality will be likely to be
subject to risk and uncertainty. It follows that a
realistic estimate is one which makes appropriate
allowances for all those risks and uncertainties
which can be anticipated from experience and
foresight.

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Role of Project Managers

• Project managers should undertake or propose

actions which eliminate the risks before they occur,
or reduce the effects of risk or uncertainty and
make provision for them if they occur when this is
possible and cost effective.

Role of Project Managers

• It is vital to recognise the root causes of risks, and not to

consider risks as events that occur almost at random.

• Risks can frequently be avoided if their root causes are

identified and managed before the adverse consequence
– the risk event – occurs.

• They should also ensure that the remaining risks are

allocated to the parties in a manner which is likely to
optimise project performance.

Risk Management

• To achieve these aims it is suggested that a systematic

approach is followed: to identify the risk sources, to quantify
their effects (risk assessment and analysis), to develop
management responses to risk and finally to provide for
residual risk in the project estimates. These four stages
comprise the core of the process of risk management. Risk
management can be one of the most creative tasks of
project management.

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What is an Estimate?

The definition of an estimate has the following key words:

tentative, rough, approximate, judgment, opinion.

In other words, an estimate is not a precise number, but

rather, an approximate judgment of what the actual costs
or time will be.

What is an Estimate?

There seems to be something magical about the act of

printing a number, any number, on a piece of paper that
somehow conveys to us that it is a fact, whether it really
is or not. For example, when you go to the mechanic to
get your car fixed you typically receive an estimate as to
the cost of the repairs. You ‘‘know’’ that this is just the
mechanic’s best guess; however, in practice you tend to
take it for granted that it is factual. When you return to
pick up your car from the garage, you find that the price
has increased significantly, and you tend to feel cheated.
‘‘But that’s not what the estimate said!’’ you cry out in
shock.

What is an Estimate?

‘‘Well, once I removed the carburettor to get to the

transmission, I found out that the head gasket was
leaking, which damaged the catalytic converter. I ended
up having to replace that. I also noticed that the fan belt
was shot and that you also needed an oil change. You
really ought to take better care of your vehicle!’’ says the
mechanic, his overalls covered in grease. It is easy to see
how a $200 repair turned into a $1,000 repair very quickly.
We can only accurately estimate what we know.
Uncertainty will always throw us for a loop and turn even
the most careful estimate into a bad joke.

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Estimating uncertainty

It must be acknowledged that there is estimating

uncertainty and then there is event uncertainty.

These two elements are independent, but together

comprise the risk profile of a project.

What is Uncertainty?

The term uncertainty refers to a lack of knowledge about

current and future information and circumstances.

What is Uncertainty?

• Figure illustrates Jay Galbraith's definition of uncertainty

as the difference between the information required for a
decision, and the information available.

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What is Uncertainty?

Uncertainty Sources

• Complexity, or the condition where the information is in principle

available, but it is too costly or time-consuming to collect and
analyse;

• Predictability, or the condition where the past is not a reliable

guide to the future -the future is, by definition, unknowable, but
past experience is a valuable, if not infallible, guide to the future
in many situations.

Uncertainty Decreases Through Time

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Uncertainty Decreases Through Time

As the project moves through the life cycle, uncertainty is

reduced as more information becomes available -
ambiguities in design are resolved; geotechnic surveys are
completed; regulatory approval is obtained; component
suppliers provide their shop drawings; and contractors
successfully complete their tasks.

WHAT IS RISK?

It is often assumed that the word risk implies a negative outcome.

A negative risk is defined as a threat while a positive risk is

defined as an opportunity. Therefore, something that is properly
defined as risky does not necessarily mean that it is a bad thing,
only that it is an uncertain thing.

We must maintain an unbiased outlook and be neither pessimistic

nor optimistic in our assessment of risk and be prepared to
address both threats and opportunities as they arise.

Risk vs Uncertainty

Uncertainty can be regarded as the chance occurrence of some

event where the probability distribution is genuinely not known.
This means that uncertainty relates to the occurrence of an event
about which little is known, except the fact that it may occur.

Those who distinguish uncertainty from risk define risk as being

where the outcome of an event, or each set of possible outcomes,
can be predicted on the basis of statistical probability. In most
cases, project risks can be identified from experience gained by
working on similar projects.

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Risk Categories

Risks fall into three categories;

known risks,

known unknowns

unknown unknowns.

Risk Categories

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.

Classification of risk sources

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Risk Definition

Project risk is an uncertain event or condition that, if it

occurs, has a positive or a negative effect on a project
objective. A risk has a cause and, if it occurs, a
consequence.

WHAT IS RISK MANAGEMENT?

‘‘Risk Management includes the processes concerned with

conducting risk management planning, identification,
analysis, responses, and monitoring and control on a
project. The objectives of project risk management are to
increase the probability and impact of positive events and
decrease the probability and impact of negative events in
the project.’’ PMBOK Guide

WHAT IS RISK MANAGEMENT?

Another definition of risk management provided by the

International Organization for Standardization (ISO)
identifies the following principles of risk management:
Risk management should:
■ create value
■ be an integral part of organizational processes
■ be part of decision making
■ explicitly address uncertainty
■ be systematic and structured

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WHAT IS RISK MANAGEMENT?

■ be based on the best available information

■ be tailored
■ take into account human factors
■ be transparent and inclusive
■ be dynamic, iterative, and responsive to change
■ be capable of continual improvement and enhancement

Why Risk Management

The Channel Tunnel cost double its original budget and

only returned a profit 20 years after the project started.

Denver’s international airport saw its eventual cost triple

from what had originally been planned

Why Risk Management

Sydney’s Opera House—as amazing as it might look—still

holds the world record for worst project cost overrun at
1,400 percent over budget. Its construction started in
1959 before either drawings or funds were fully available
and when it opened in 1973, 10 years later than the
original planned completion date and scaled down
considerably, the building had cost A$102m rather than
the meagre A$7m budgeted.

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Why We Need Risk Management

One of the drivers for the recent sudden increased need to

manage risk is:

• The rapid development of technology; as a result risk and its

management have turned to be wholly specialized subject.

• With the adequate assistance of risk management two

essential advantages will be captured:
o more confidence can be given to the estimated project costs
o profits will be maximized

Benefits Of Risk Management

The benefits of risk management can be summarised as

follows:
• project issues are clarified, understood and considered
from the start;

• decisions are supported by thorough analysis;

• the definition and structure of the project are

continually monitored;

Benefits Of Risk Management

The benefits of risk management can be summarised as

follows:

• clearer understanding of specific risks associated with a

project;

• build-up of historical data to assist future risk

management procedures.

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RISK MANAGEMENT DEFINITION

Risk management is the systematic process of planning for,

identifying, analysing, responding to, and monitoring project
risk. It involves processes, tools, and techniques that will
help the project manager maximize the probability and
consequences of positive events and minimize the probability
and consequences of adverse events.

Project risk management is most effective when first

performed early in the life of the project and is a continuing
responsibility throughout the project.

Risk Management

Thank You

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