Risk Management

COEM 6003 – Organisation & Management of Construction

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RISK MANAGEMENT
“If we don't succeed, we run the risk of
failure.” Al Gore

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Risk Management
• The objective of Risk Management is to help ensure that risks are
identified at the outset of the project, their potential impacts are
allowed for, and, where possible, these risks are minimized.
• Risk Management is thus a systematic process involving an
identification process to determine what the risks are, an

• Risk Management process involves three major stages:

 Identification;
 Analysis (Assessment); and
 Response

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Risk Management Process

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Risk Management

Risk Identification
• Commonly, risk are identified in workshops or by interviewing key
project stakeholders. Those that surface may, for example, include
buildability, healthy and safety, or logistics.
• On occasion, at this stage in the process, Probability Impact Analysis
charts are used to gauge the expected impact of these risks and the
probability of them occurring.
• However, almost certainly, risk registers are developed that identify
the members of the project team who are to be held responsible for
mitigating the effects of the risk should they occur.

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Risk Matrix

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Risk Register

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Risk Management
Risk Analysis
• Flanagan and Norman (1993) provide a useful classification of risk
analysis techniques, namely, decision trees, sensitivity analysis and
probabilistic analysis.
• The former, based on a series of either/or decisions is seldom used
in practice, unlike sensitivity analysis which often finds application
at feasibility stage.
• However, probabilistic analysis is the most widespread. With the aid
of risk management software, Monte Carlo simulation considers the
likely impact of risks in combination.
• Programs such as @Risk, Primavera and Crystal Ball are all capable
of generating probability distributions, and illustrating the likely
effect of risk variables on the economic return of the project
typically involving between 1000 and 5000 iterations.

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Risk Management
Risk Analysis

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Risk Assessment

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Risk Management
Risk Response
• Crucially, it is at this stage that action is taken to mitigate risk.
• Flanagan and Norman (1993) present a model of the process,
suggesting that responses may take the form of risk avoidance,
transfer, reduction, or retention.
 Avoidance – where risks have a such serious consequences on the outcome
of the project they become totally unacceptable.
 Reduction – actions can include the re-design of the project, different
equipment or materials, methods of construction.
 Transfer – in cases where acceptance of a risk would not achieve Value for
Money, therefore transfer to another party.
 Retention – those not avoided or transferred are retained by the client and
must be managed to minimise negative impacts.

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Risk Responses Continuum

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Risk in Construction
• Construction is undeniably a risky business for many reasons,
including:
 Poor record of cost and time certainty for clients
 Adversarial attitudes and high levels of disputes and litigation
 The intense competition for work
 Low margins and profit risk
 The industry’s poor safety and occupational health record
 Pressure from management and shareholders to produce a high return on
funds invested
 Pressure on construction teams, especially site management and
operatives, to save time and money
 Pressure on health and safety provision

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Risk in Construction
• Smith (Smith) distinguishes between risk and uncertainty in
decision-making such that a risk is a decision having a range of
possible outcomes to which a probability can be attached, whereas
uncertainty exists if the probability of possible outcomes is not
known.

• Risk falls into three categories:

 Known risks – risks that are an everyday feature of construction
 Known unknowns – risks which can be predicted or foreseen
 Unknown unknowns – risks due to events whose cause and effect cannot be
predicted.

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Project Risk lifecycle

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Risks Allocation

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Client Risk
• Uncertainty is greatest at the earliest stages of a project and time
and cost overruns can invalidate the client’s business case for a
project by turning a potentially profitable venture into a loss-maker.
• The risks with the most severe effects for the client are:
 Failure to keep within the cost estimate
 Failure to achieve the required completion date
 Failure to achieve the desired quality and functional requirements
• The Client risks are identified as being risks associated in Feasibility,
Design, Funding, Tender documentation, Time and Commercial
aspects.
• Appropriate strategies are necessary for the control and allocation
of risk and that, while risk cannot be eliminated through
procurement, contractual arrangements can greatly influence how
risks are managed.

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Client Risk
• Feasibility risk
• At the early stages of projects, clients must confirm the business case,
identify options and develop the preferred solution. Once a scheme is
sanctioned by the client, major commitments are made in terms of deign,
procurement and construction.

• Design risk
• Business decisions are all about risk and reward and the client must decide
how much control is required over the design of the project.

• Funding risk
• The contractor’s income is the client’s negative cash flow and arrangements
must be made for available funds to draw down in order for the client to
make regular monthly or stage payments for work in progress.

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Client Risk
• Tender documentation risk
• The traditional bills of quantities contract came about in order to give
tendering contractors a level playing field.

• Time risk
• The obligation to complete the project on time is the contractor’s
responsibility and the client has redress in standard contracts through the
liquidated and ascertained damages (LADs) provisions.

• Commercial risk
• For most clients, buildings represent assets which are used to generate
income and profits. The commercial success of a project may well be
undermined if the job is delivered late or over budget or the quality below
the necessary standard.

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Contractor Risk
• Some of the biggest risks taken by contractors are at the tender
stage when they commit to a price and programme. A contractor’s
risk assessment at the estimating stage may include consideration of
the following risk areas.

• Tender risk
• At tender stage, the contractor needs to consider many factors
before submitting a bid. Among these are:

 Previous experience (good/bad) working with the client team

 The financial stability of the client
 Market conditions and the level of competition for the contract
 Inflation- is a firm or inflating price required?
 Ground conditions and the balance of risk in the contract and method of
measurement

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Contractor Risk
• Quantity risk
• The contractor must assess the accuracy of the bills at tender stage because
margins can be lost if the quantity work is subsequently reduced on
remeasure.
• Subcontractor risk
• On many contracts, the contractor may simply be responsible for managing
subcontractors, with very little work directly under his control. The ultimate
success of the project may lie in the performance and organisation of
subcontract operations.
• Design risk
• The contractor may be responsible for temporary works design only or may
be involved in partial or complete design of the permanent works.

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Contractor Risk
• Programme-time risk
• Where the time for completion is stated in the tender documents, the
contractor may be at risk if the client/project manager has got it wrong. On
the other hand, where the tender documents require the contractor to
insert his own assessment of the contract period, the contractor will be
gambling on his own judgment.

• Method risk
• The contractor’s choice of construction method at the tender stage is
crucial to winning the contract, but also fraught with risk. The ground
conditions on site may be different to those expected and the type of
earthwork support required may be more expensive than that allowed for
in the tender. Relief may be obtained through the method of measurement
but this is not always the case, especially on civil engineering projects.

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Contractor Risk
• Health & Safety risk
• Health and safety risk arises from the impact of hazards.
Where there is no hazard there is no risk, but in construction
there are hazards everywhere on a site. The best that can be
done is to eliminate hazards in the design of the building and
reduce the possible effects of residual risks through good
management.

• People at risk from construction work include:

 Persons at work
 Visitors to site (including client representatives)
 General public
 Children

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Contractor Risk
• Documentation risk
• Clarity of tender documentation is important. Bills of
quantities containing extensive provisional quantities need
careful pricing. Prices based on drawings and specification, or
schedules of work containing extensive spot items, may prove
difficult to price accurately.

• The contractor needs to scrutinize the tender documentation

very carefully in order to assess the implications of:
 Onerous contract terms
 Clauses deleted from standard contracts
 High levels of liquidated damages
 Unrealistic contract period
 Possible novation of the design (design and build contracts)
 Contract bonds and guarantees required

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Tendering Risk
• When competition for work is fierce, contractors have to find ways
of winning work and making a profit at the end of the job.
• Many contractors will carry out a risk assessment at tender stage
and this may identify areas for making savings in the tender figure.
The contractor may spot undermeasure or overmeasure in the
contract bills or there may be scope for variations in the documents.
• Alternatively, the contractor may take into account buying ‘muscle’
on suppliers’ and subcontractors’ prices as a means of reducing the
tender figure. This is frequently referred to as commercial
opportunity or scope.

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Tendering Risk

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Tendering Risk
• In the example in table 7.3 it can be seen that the contractor’s
adjustments bring the tender figure (£1 780 500) below the
estimator’s net cost (£1 800 000).
• Effectively, the contractor is tendering at below net cost or, in other
words, tendering at a negative margin. This is achieved simply by
transferring the risk to others, principally the domestic
subcontractors.
• The contractor is taking a gamble in that he might not be able to
squeeze down subcontractors’ prices once the contract has been
awarded, or the anticipated returns from variations and claims may
not be forthcoming.

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Tendering Risk
• Tender loading is a similar technique and is another way for
the contractor to move risk on the employer and make
money at the same time.
• Front-end loading reduces the early negative cash flow
effect by increasing the margin. This is done by pricing the
bill of quantities so that the margin is allocated to those
items which will be carried out during the early stages of
the project.
• Back-end loading is a similar technique but involves
increasing both margin and net cost on early items of work.
This is a dangerous practice and involves moving part of the
net cost allowance for later items of work in the bill of
quantities to those which are to be carried out earlier in the
contract.
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Procurement Risk

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Health and Safety Risk
• Despite having a much superior safety ‘record’ than their European
counterparts, fatalities in the UK construction industry continue to
give rise for concern and they have yet to make the ‘step change’ in
construction health and safety expected in the 1990s.
• On average someone dies every week as a result of construction
work and the large, well-organized contractor is no less prone to
suffer a fatality than a smaller company.

• Construction health and safety risk is managed through legislation

and in particular:
 The Health and Safety at Work Act 1974
 The Management of Health and Safety at Work Regulations 1999
 The Construction (Design and Management) Regulations 2007
 OSH Act 2004 (amended 2006) (Trinidad & Tobago)

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Fire Risk
• Fire is an ever-present risk on construction sites, especially with respect to:
 Hot work such as welding, blowlamps, cutting and grinding
 Heating appliances, especially gas bottles in welfare facilities
 Litter, especially in rest rooms and drying areas
 Arson
 Smoking
 Burning of waste on site
 Stored materials, including adhesives and solvents
• Construction (Design and Management) Regulation
2007 provides for such eventualities and requires
contractors to:
 Take measures to prevent risk of injury from fire
 Provide and maintain fire-fighting equipment, fire detectors and alarm systems
 Give instructions to people in the use of fire-fighting equipment
 Give instructions to people where their work activities involve a fire risk
 Indicate fire- fighting equipment with suitable signs
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Reference

• Fryer, B. (2004). The practice of Construction Management: People

and Business Performance. 4th Edition. Blackwell Publishing; UK.
• Rogers, M. and A Duffy (2012). Engineering Project Appraisal. 2nd
Edition. Wiley-Blackwell: UK.
• Fisk, E. (2003). Construction Project Administration. 7th Edition.
Pearson Education Ltd:US.
• Cooke, B. and P. Williams (2009). Construction Planning,
Programming and Control. 3rd Edition. Wiley-Blackwell: UK.

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