CVE 5074 Leading Construction Operations TEAM LEADERSHIP PART VII – RISK MANAGEMENT

Introduction  Risk = uncertainty about some consequence  Causes of risk = design + construction  Project Controls = managing schedule, budget, change orders & quality to minimize risk  Contract Risk = type of contract used

Construction Risk Management Avoidance Retention Insurance Education & Training Exemption Clauses Risk sharing Protection Retention Money Liquidated Damages Rescind contract Contingencies

What is risk???  An outcome different from what you expected or estimated…  Or… different from what you bid!

Generic sources of risk…  Construction is hazardous, costly, uncertain…  Labor capacity, capability, competence…  Subsurface conditions; physical factors…  Contractual provisions; timing, constraints…  Economic conditions; prices, labor…  Political & public; new laws, opposition

Risk in Construction  It’s different than manufacturing:  Every project is one-off… another TJ Hall?  Every site is different…  Every team is different  (like football w/new team every game!)  Environment is different… day to day!  Market cannot be controlled… price of fuel!  Client cannot be controlled

Causes of Risk  Design Risk  Site conditions  Control of design process  Client needs & wants  Materials availability  Cost creep  Stakeholders

Causes of Risk  Construction Risk  Design flaws – Essayons Dredge $46m claim  Site conditions – Rock at WP; library & gym  Policy Changes – ARVIN gym seismic  Weather – Hurricanes in Florida; effect of Katrina  Materials & Market – Cost of fuel, steel & concrete  Changes to schedule & budget – Redesign/rebid  Client input – WP security measures; AT design  Subcontractors – Availability/dependability

Risk identification  Identify areas of risk intensity 1.Buildability, logistics, health & safety 2.Environmental, permits 3.Cost environment  Develop risk registers  Catalog all risk factors  Assign responsibility to team members

Risk analysis  Use decision & simulation theory  Quantify maximum effect of each risk  Identify probability of occurrence  Determine economic impact of each  Determine impact of combinations

Risk response  Plan mitigation strategies  Specific action to be taken  Avoidance, sharing, protection, etc.  Accountable team member  Account for inter-relationships  Account for multiple risk scenarios

Control Risk with Contracts Lump-sum Unit-price Fixed-price with incentives Cost-reimbursable Time & materials (T&M) Cost-plus-fixed-fee (CPFF) Cost-plus-incentive fee Guaranteed Maximum Price (GMP) Fixed Price Cost Plus

Basic legal premise… All risks accrue to the owner unless assigned by contract to another party In assigning risk to another they must be:  (a) able to assess the risk fairly,  (b) competent to do the task, and  (c) result in a better solution

Risk allocation… at start Owner Designer Builder Not yet involved

Risk allocation… traditional Owner DesignerBuilder

Risk allocation… design- build Owner Designer + Builder

Risk Management Planning

Basic risk management-1… Build a Risk Allocation Matrix  Identify all potential risk of loss  Assign to Owner, Contractor or Designer  Quantify your potential loss  Develop a risk management strategy

Basic risk management-2 Management strategies…  Avoid the potential loss  Transfer the risk  Share risk with another firm  Mitigate the potential for loss  Recover any unavoidable loss Claim Insurance Litigation BEST GOOD WORST

Basic risk management-3 Keys to allocation of risk…  Must be a reward for any risk assigned  Assignee must be able to control risk  Must produce “best” solution  Must have financial & management capability  Must follow terms assigned

Avoidance…  Careful estimating & bidding  Study the contract terms  Study the owner’s style & record  Study limits of insurance  Prior planning for construction  Examine the plans, specs & conditions  Examine the contract requirements  Examine the site for unknowns & hazards  Examine each process & plan your method

Transfer or sharing… Reduce source & size of risk  Use the contract terms  General conditions  Plans & specs  Negotiate new terms  May not work with government  Change strategic approach  Merger or joint venture with another firm  Hire subcontractor for high risk work  Purchase additional insurance

Mitigation… Good planning & communication  Quality control processes Use/acquire the right skills  Use/acquire the right equipment  Use your experience wisely Act promptly if the unexpected occurs

Insurance… Covers unexpected situations  Situations beyond your control Your track record is important  Cost is a factor  Do not overuse

Recovery…  Read the contract  Good record keeping… especially impacts  Follow correct procedures  Demonstrate mitigation efforts  Make a convincing presentation  Attempt settlement at lowest level  Seek legal help

Cost recovery 101 (a)… Detailed Work Breakdown Structure (WBS) for estimating  List & code each activity & duration  Establish start & finish dates & labor hours  List materials required & procurement lead  Labor hours for shop drawings & submittals  Have accounting code for each of above

Cost recovery 101 (b)…  Develop change/claim spreadsheet  Use bid data as base line  List all estimated activities & costs in a WBS  Calculate “actual” duration & costs for WBS  Establish % triggers to identify problems  Notify owner’s rep immediately of problems

Cost recovery 101 (c)…  Use data to analyze source of problem  Defective plans & specs  Differing site conditions  Interruption of work flow  Unusual weather conditions  Delay in receiving EI or submittal response  Problems with labor  Bad bid

Cost recovery 101 (d)… Read the contract  Begin mitigation immediately to minimize loss  Stay within contractor’s authority  Determine risk allocation for each problem  Comply with all notification requirements  Request contract change when required  Establish new activity code for all added work  Track cost of new work  Quantify delay to other work

Claims & Disputes

Conflict resolution  Informal discussion  Formal recorded meetings  Negotiation – parties solve together  Expert determination – mediator hired by both  Adjudication – binding expert(s) decision; DRB  Arbitration – administrative trial; summary judge  Litigation – formal legal proceedings

Resolving differences… 1. Negotiation … like a change order 2. Dispute Resolution Board … provided in most standard contract provisions; involved outside panel of experts 3. Alternate disputes procedures … use of facilitator, mediator, mock court, or any non-legal method 4. Arbitration … binding or non-binding; requires signed agreement on procedures 5. Litigation … most time consuming; most expensive; court proceeding in special contracts court

Kuwait Reconstruction  Unspecified scope of work – no right to know  Corps prequalified contractors on assumed scope  Contractors paid to “mobilize” on 14day notice  Corps teams surveyed/estimated priority projects  Contractor teams prepared estimate “on order”  Corps negotiated cost/scope; issued cost plus  Corps inspected/documented every contract action  Negotiated final cost of contract cost on completion  Total = 1200 $600m in 300 days

Hydro Dam – Savannah River  Cost of dam = $275m; 500mw power  Added 4 pump back $80m  SC environmental objection to fish kill  Partnering to find acceptable solution  Failed to resolve; Corps research & design  $25m Fish screen added to dam  Political solution to dispute

And there’s always personal risk… SC political cartoon

That’s all folks!!!!

Questions?