Risk Management for
Construction
Dr. Robert A. Perkins, PE
Civil and Environmental Engineering
University of Alaska Fairbanks
Class for DOT Construction
Managers
• Get started
– Who we are
– Where we are
– Why are we here?
• Book and Syllabus
• Handout Material
– Electronic
– http://www.faculty.uaf.edu/ffrap/CM%20Cours
e%20Info/CM%20Index.html
Risk and Safety
Class Outline
• Class 1, Basic risk concepts applied to
project and construction management
• Class 2, Specific risk concepts applied to
construction – qualitative risk analysis
• Class 3, Quantitative risk analysis, a little
probability, tools.
• Class 4, Risk Assessment
• Class 5,
– Risk Management, owner’s perspective
– How contractors manage risks
• Class 6, Presentations and Wrap up
Today
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Risk in general
Risk in projects
Risk in construction
Analysis of Risk
Management of Risk
Assessments
• Quiz following Class 4, 30%
– Definitions
– Problems
• Practicum, 60%
– Team project
– Risks from a project
– Plan for handling them
“Clouded his future is…
The future is always in motion”
Estimation of Future Events
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AKA “divining”
Oracle at Delphi to my financial analyst
Pigeon guts, Roman augers
“The diviners have seen a lie, and have
told false dreams; they comfort in vain
(Zechariah 10. 2).
Management
• An understanding of and dealing with the
stochastic nature of management systems.
– designating a process having an infinite progression
of jointly distributed random variables.
– of, pertaining to, or arising from chance; involving
probability; random
– from the Greek stochastikos meaning, proceeding by
guesswork
Estimates
• Estimates are essentially guesses and
often have a serious downside if they are
wrong.
• The reason they are guesses is that there
are future events (“states of nature”) that
are uncontrollable and these events will
control the outcome.
• Regarding what we can say about these
future events, there is a continuum.
Terms
• Certainty
– If we have full knowledge (we believe) of the future. We might
approximate that if we have a firm quote from a bonded sub or supplier.
• Risk
– Many estimating decisions are made under “risk.” In technical terms,
“risk” means we feel we can state the probability of the events. For
example, we know the price of concrete in the summer is likely to be
$200/CY but may vary by 15%.
• Uncertainty
– We recognize alternate states of nature may happen, but we don’t have
a clue how likely they are.
– Note the difference between the technical use of terms and the common
usage. While the entire future is “uncertain,” if we feel confident we
know the probability of the future we say there is “risk” and limit the use
of “uncertain” to situations where we do not know the probability of
events.
• Knowns
• Known-unknowns
• Unknown-unknowns
• Road freeze up by October 1
• Foreman quitting
Examples
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Projects
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Nature of Projects
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DOT Projects
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Project cycle
» Graphs, ease of change vs. completion
» Cost of change vs. design
Work Breakdown Structure
Type
What can go wrong?
Participation
• Risks must be evaluated according to the
project cycle.
WBS
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Work Breakdown Structure
The tasks needed to complete the project
Tie WBS to risks
Contracting strategies
High Level WBS
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Planning
Pre-design
Design
Procurement
Construction
M&O
Mid-level Pre-design
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Survey
Soils
ROW
Environmental
Public
Other
More Detail - Soils
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Review Records
Schedule Drilling
Drill
Analysis
Report
Finer Detail - Drill
• Costs
– Labor
– Equipment
– Subcontract
• Schedule
– Permits and approvals
– Section A
– Section B
– Section C
And more
• Labor
– Bare
– Benefits
• Vacation
– Supervision
Nomenclature - sometimes
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Program
Project
Phase
Task
Sub-task
Work Packages
Etc.
More
• Coordination Matrix
• Who is responsible, involved, needs to be
copied, and, almost forgot,
• Who will do the work
• Contract v. In-house
WBS to RMP
• Risk Management Plan
• Risks should be considered with respect to
the WBS
• Who is responsible for apprizing risk
• Minimizing Risk
• Reporting on Risk
Forecasting, Time
• Short-term
– 1-3 years
– Generally based on current knowledge
• Medium-term
– 3-15 years
– typically the issue
• Long-term
– >15 years
Your Organization’s Risks
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Discuss
Who manages?
Technical Risks
Performance Risks
– AKA Programmatic Risks
Forecasting Methods
• Subjective methods
– from within firm
• User Expectation methods
– from outside the firm
• Statistical Methods
– extrapolation
• Modeling methods
User Expectation Methods
• Customers asked to forecast needs
– Availability of gravel
• Pilot trials
– test demand in one location
– Alyeska tests of trenching in permafrost
Statistical
• Time series
Subjective Methods
• Jury of Executive Opinion
– meeting of in-house experts
• Delphi Method
– Aims to remove domineering effect of senior
company officials
– Three rounds
• 1st anonymous
• 2d knows results of first, but not authors
• 3d discussion following 2d round
Extrapolation
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From time series
(See next)
Various methods of extrapolation
All based on past data
Which is likely to change in future
Known
data
Extrapolated
data
from Rose, 1976
Some terms
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Precision
Accuracy
Biased
Precise estimate
Accurate, not precise
Precise, not Accurate
Bias (left)
Precise, not Accurate
Experts
• Feedback
– Jury
– Delphi
– Etc.
• Get parameters
“Precise Estimate”
• Use the best number(s) you have.
Other Precise
• Breakeven
• Sensitivity
• Examine the impact that variability will
have
Problems
• Problems (or events) => Decisions
• Kinds of problems
– Simple
• Cash or credit card
– Intermediate
• Buy or lease equipment
– Complex
• Open a new plant in New Jersey or Alabama
The Decision Process
Rational Decision Making
• Recognition of
problem
• Definition of goal
• Assembly of data
• Select criteria
• Interrelationship
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objective
alternatives
data
criteria
• Predict outcomes
• Choice of best
Recognition of Problem
Define the problem area, carefully and completely determine all uncontrollable
conditions (random events) inherent in the situation.
Define Goal or Objective
• A problem is something that prevents us
from achieving our goal
• Determine the objective(s) to be achieved
and how attainment of the objectives is to
be measured.
• But what is the objective?
Assembly of Data
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Accounting Data
Cost
Benefits
Difficulties
– Allocation of Overhead
– non-market consequences (shadow prices)
– Intangibles
• Define precisely all alternative actions that can
be taken, and calculate the payoff (degree of
attainment of objectives) in each case.
Identify Feasible Alternatives
• Do nothing
• Brainstorming
Select Criteria
• Non-profits
• Time
• Use money most efficiently
– Fixed input
– Fixed output
– Neither fixed
Model Interrelationships
• Select and apply a decision criterion (rule)
which orders the alternatives and defines
which one is the best or optimum
alternative.
Model Interrelationships
• Room Capacity = (l * w )/ k
• k is factor based on seating
– k = 0.5 for expensive fixed seats
– k = 0.7 for cheap movable seats
Numeric Models: Scoring
• Unweighted 0-1 Factor Model
• Unweighted Factor Scoring Model
• Weighted Factor Scoring Model
• Constrained Weighted Factor Scoring Model
• Goal Programming with Multiple Objectives
Chapter 2-6
Numeric PS Models:
Scoring
• Unweighted 0-1 Factor
Model
• Unweighted Factor
Scoring Model
• Weighted Factor
Scoring Model
• Constrained Weighted
Factor Scoring Model
(c=0 or 1)
• S = ∑(x)
• S = ∑(s)
• S = ∑(s·w)
• S = ∑(s·w) ∏(c)
Predict Outcomes
• From model
• Arrange in orderly way
• Resolve consequences
– market
– extra-market
• State intangibles
Choose Best
• Using all relevant experience and
judgment, make a choice from among the
alternatives.
Home Fire Insurance
• House cost $150,000
• full insurance cost $1400/yr
• p of fire 0.004/year
More on Models
• Idealized view of reality
• Representing the STRUCTURE of the
problem, not the detail
• Deterministic or stochastic
Caveats
• Project decisions are made by Project
Manager --- NOT by models!
• A model APPROXIMATES, but does
NOT DUPLICATE reality!
Types of Models:
Nonnumeric
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Sacred Cow
Operating Necessity
Competitive Necessity
Product Line
Extension
• Comparative Benefit
Model
Choosing the Model
• Dependent on wishes and philosophy
of management
• 80% of Fortune 500 firms choose
“nonnumeric” models
• Firms with outside funding often chose
scoring models
• Firms without outside funding often
chose profit / profitability models
Risk in Construction
• All the risks belong to who?
• Unless
• Which party should bear risk?
Risk management
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Minimizing risks – regardless of whose
risk it is
Equitable sharing of risks among the
various project partners.
Contrast with Risk Assessment
• The parties must be prepared to discuss
and decide on the following issues:
• What are the levels of risk are realistic to
assume?
• Who can best assume each risk?
• What levels and kinds of risks are properly
and most economically passed on to
insurance carriers?
Fisk’s Categories of risk
• Construction-related risks
– Crane failure
• Physical risks (subsurface conditions)
– Differing site conditions
• Contractual and legal risks
– Law suits
• Performance risks
– Project does not meet expectations
• Economic risks
– Loose money or cost overruns
• Political and public risks
– Lots
Exculpatory Clauses
• Seek to reduce risk with contract language
• Limitation thereof