Risk Management Construction Engineering 380

Risk Management Three types of risk need to be managed on construction/engineering projects –Financial or economic risk –Contractual risk –Process risk

Risk Management Economic risk –Use engineering economic analysis to select projects that maximize return and/or minimize loss (optimization models) –Assess risk of default by analyzing project cash flows, owner/client financial strength, and market factors (volatility, growth, etc.)

Risk Management Contractual risk –Analyze areas where legal exposure puts the company at risk- have good contracts and documentation on the project Define the scope accurately and completely Define the standard of performance Exclude consequential or liquidated damages clauses from the contract Use limiting liability language to put a cap on client claims (can be hard to reach agreement)

Risk Management –Contractual risk continued Reduce third-party access to the project Use dispute resolution other than litigation Ask for indemnification against certain types of events (risk sharing with client and others) Use insurance to cover risks for which you are not indemnified (risk shedding) Review policies, premiums, coverages, limits, pricing options, exclusions etc. to make sure insurance is appropriate but affordable for the risk profile

Risk Management Process risk –Even if you choose sound economic projects with good owners and have good documentation, contracts, and insurance, you can still face PROCESS risk. Process risk comes form uncertainty over the process –Reduce process risk through Education and training (have good people running the project) Use of probability estimates to identify processes that could be changed to reduce uncertainty

Risk Management Example for productivity in scheduling a b c d e f g

Risk Management In the previous example, there are7 activities. Durations for activities a,b,e,f,g are highly certain (note the narrow variance in production rates under each of these activities Durations for activities c, and d are highly uncertain (note wide variance in productivity rates under these activities)

Risk Management Activity c is a controlling activity for three other activities. If the critical path is represented by the bold arrows, the project is highly risky because two of the activities on the critical path have low probability estimates of duration (the chances of “guessing” at the right productivity is low for these tow activities)

Risk Management For this reason, the project manager or development team leader may want to change the design or process to substitute a similar system for activity c that has higher certainty (concrete floors for steel frame) Productivity distributions can be generated from historical data, time and motion studies, or mock-up trials