218.

321 | Construction Estimation and Risks

RISK MANAGEMENT
PRINCIPLES
Fei Ying
PhD, MEMgt (Hons), BEng, CPEng, CMEngNZ, FHEA

Senior Lecturer in Quantity Surveying

Learning Outcomes

1. Describe the risk management process

2. Identify different categories of risk factors
3. Illustrate approaches for risk analysis and assessment
4. Suggest approaches to respond project risks and
opportunities
Reading Materials

Chapter 7 Managing Risk Chapter 11 Project Risk Management

Content

• Project risk
• Risk management process
• Risk identification
• Risk analysis
• Risk evaluation
• Risk treatment
Project Risk
“Project risk is an uncertain event or condition that, if it
occurs, has a positive or negative effect on one or more
project objectives such as scope, schedule, cost, and
quality.” (PMI, 2013)
• Deviation from the expected
• Positive or negative
• Objectives can have different aspects (financial, health
and safety, and environmental goals)
• Apply at different levels (strategic, organisation-wide,
project, product and process) (NZS ISO31000:20090)
Project Risk
o Deviation from the expected
o Positive or negative
o Objectives can have different aspects (financial, health
and safety, environment goals)
o Apply at different levels (strategic, organisation-wide,
project, product and process)(
NZS ISO31000:20090)
Project Risk
 Risk Management
A proactive attempt to recognise and manage internal
events and external threats that affect the likelihood of a
project’s success.
• What can go wrong (risk event).
• How to minimise the risk event’s impact
(consequences).
• What can be done before an event occurs
(anticipation).
• What to do when an event occurs (contingency plans).
Construction Risk Management
Challenges in construction risk management
• Failure to keep within the cost estimate
• Failure to complete on time
• Failure to achieve the required quality and operational
standards
Construction Risk Management
Benefits of Risk management
• A proactive rather than reactive approach
• Reduces surprises and negative consequences
• Prepares the project manager to take advantage
of appropriate risks
• Provides better control over the future
• Improves chances of reaching project performance objectives
within budget and on time
Risk Management Process

NZS ISO 31000:2009

Risk Management Process

Step 1 •Planning and context

Step 2 •Risk identification

Step 3 •Risk analysis and evaluation

Step 4 •Risk treatment

Step 5 •Implementation and control

Risk Planning and Context
Risk Management Planning
Determine and document the objectives, scope and process

Figure 11-2, PMBOK Guide

Risk Management Planning
Risk Management Plan
• Objectives
• Methodology
• Roles and responsibilities
• Budgeting, timing
• Risk categories
• Scoring interpretation
• Tolerance thresholds
• Reporting formats
• Tracking
Establishing the context
• Align risk management with objectives
• Identify stakeholders and responsibilities
• Provide background information for risk identification
Establishing the context
• The external context (the environment such as political,
social, legal, financial and geographical)
• The internal/organisational context (culture, values,
governance, capabilities, policies, processes, strategic
objectives)
• The project context (full set of objectives and project
outcomes)
Establishing the context

• [Link]
sets/projects/awhc/docs/Ad
ditional-Waitemata-
Harbour-Connections-
Executive-Summary-
[Link]

• [Link]
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Risk Identification
Risk Identification

The process of finding, recognising and describing risk and its key causes

Figure 11-5, PMBOK Guide

Risk Identification

• Identify the source and type of risk

• Occurs throughout all the project phases
• Some risks are controllable
• Eg: lack of coordination between the main contractor and specialist
trade contractor
• Some risks are uncontrollable
• Eg: inclement weather
Risk Identification

Godfrey, 1996
Risk Identification
Tools and techniques

• Historical reviews of projects

• Project assessment
• Assumptions and Constraints Analysis
• Brainstorming
• Cause and Effect Diagrams
• Checklists
• Past experiences
• Risk breakdown structure
Risk Workshop
Brief intensive meeting (or series of meetings) emphasising
exchange of information
• Highly inter-active
• Small group – 12-15 people
• Multidisciplinary (e.g. project manager, architect, design
engineer(s), construction manager, QS, Client Rep, etc)
• Facilitated by a neutral facilitator
Roles of the workshop facilitator
• A facilitator is someone who helps a group of people
understand their common objectives and assists them to plan
to achieve them without taking a particular position in the
discussion.
• A facilitator:
• Supports everyone to do their best thinking
• Assists the group towards consensus
• Contributes structure and process to interactions
• Develops a strong basis for future action
Sample agenda
Risk Identification
Risk Identification
Particular risks for MC

[Link]
g-risk/
Risk Breakdown Structure

Project Management: The Managerial Process

Risk Analysis and Evaluation
Risk Assessment

• Risk assessment is about developing an understanding of

the risk.
• The purpose of risk assessment is based on the outcomes
of risk analysis, to assist in making decisions about
Ø which risks need treatment, and
Ø the priority for treatment implementation
 Risk Analysis

• Risk analysis is the process of understanding and deducing

the level of risk
• Likelihood
• Consequences
• Qualitative risk analysis
• Quantitative risk analysis
Risk Analysis

• Qualitative risk analysis employs

subjective scoring techniques
• Quantitative risk analysis uses
statistical and probabilistic
approaches
Risk Analysis key terms

• Determine likelihood
• Determine magnitude of consequence
• Evaluate existing controls
• Estimate level of risk
Risk Analysis methods

• Risk assessment matrix

• Failure mode and effects analysis (FMEA)
• Probability analysis
• Decision trees, NPV, and EPV
Qualitative risk matrix
Probability
Consequences
Probability/Consequence Matrix
 Qualitative Risk Analysis

Rank the risk factors

• Risk factor 1: Likely to happen, with moderate impact
• Risk factor 2: Rarely happen, with catastrophic
consequence
• Risk factor 3: Possible, with major impact
Risk Evaluation

• The process of comparing the level of risk against risk

criteria
• Do I need to do anything about this risk?
• Classify, intolerable, undesirable, acceptable, negligible
• Determine risk tolerance
• Know your risk appetite
Risk Evaluation

• Develop an understanding of the risk factors

• Based on the outcomes/insight of risk analysis
• Make decisions about
• Which risk factors need treatment
• The priority for treatment implementation
Risk Appetite
Risk Appetite

You are an explorer choosing among three treasure chests, each

with different risks and rewards.
Which chest will you select?
Chest 1: Guaranteed 50 coins
Chest 2: Even numbers win 100 coins, Odd numbers win nothing
Chest 3: With a six wins 500 coins, else wins nothing
Risk Evaluation
Risk Evaluation
Risk Treatment
Risk Treatment

The process of identifying and assessing options for

treating risks and then planning the implementation

Threats

Avoid Transfer Mitigate Accept

Risk Treatment

Threats

Avoid Transfer Mitigate Accept

ü Changing the project scope or approach to eliminate the impact of a risk.

ü Some threats can be avoided entirely. This can be done by changing the way the project is
performed or by de-scoping the portion of the project that contains the risk element.

ü Getting the job done in a risk-free environment is likely to cost more.

ü Eliminating the risky scope might disappoint a critical stakeholder or degrade the
business reason for performing the project.
Risk Treatment

Threats

Avoid Transfer Mitigate Accept

ü Moving a risk to another party who is more capable of handling the risk (such as the
developer or insurance company).
ü This may involve the payment of a fee (outsourcing to a skilled expert or fixed price
construction contracts) or a premium (insurance).
ü Transferring risk will almost always have an added cost and most likely will still be a
project cost that must be considered. Some risk, such as schedule risk, cannot be
transferred.
ü Even though one can contract (transfer) the scheduling responsibility to third parties, if
they are late, the project is still late.
Risk Treatment

Threats

Avoid Transfer Mitigate Accept

ü The Project Team may seek to lessen the impact of a specific risk item, which may involve
the consumption of additional time and/or money.

ü Mitigation usually requires positive action which may affect the project base cost and
schedule (for example, issuing a new work package for additional utility or geotechnical
investigation).

ü Mitigation can be a very effective strategy and is often better than a “do nothing”
approach.
Risk Treatment

Threats

Avoid Transfer Mitigate Accept

ü Decide to not take action to deal with a specific risk. After trying to avoid, transfer, or
mitigate the threats to the project, the project will be left with residual risks, which are
threats that cannot be reduced further.
ü Active acceptance - the Project Team sets up a contingency reserve fund to account for
the residual expected value of the remaining risks.
ü Passive acceptance - merely acknowledging the risk and moving forward on the project
without reserves, which may seem sensible for risks with small expected values.
ü Another form of risk acceptance is denial. Professional risk management seeks to reduce
the use of denial as a strategy.
Risk Treatment
Risk Treatment

Burtonshaw-gunn, Simon A. (2009)

Risk Treatment Plan

• Purpose: how the chosen treatments will be implemented.

–The reasons for treatment selection
–Who are accountable for approving the plan
–Who are accountable for implementing the plan
–Proposed actions
–Resource required
–Performance measures and constraints
–Reporting and monitoring requirements
–Timing and schedule
Risk Allocation
Contingency Management
Contingency Management
• Contingency is the sum built into the budget price or tender sum to
cover the impact of risk variables
• Not expecting to cover all possible risks
• Bridge the gap between the risks impinge on cost and the best
estimate
• Adequate 50% of the time
Risk Monitoring
Monitoring and review of the risk management process
• Ensuring that controls are effective and efficient
• Obtaining further information to improve risk assessment
• Analysing and learning lessons from events, changes,
trends successes and failure
• Detecting changes in the context
• Identifying emerging risks
Risk Monitoring
• Risk management activities should be traceable
• Provide improvement in methods and tools
• Provide improvement in the overall process