CVE 4070 Construction Engineering Risk Management Prof. Ralph V. Locurcio, PE

Views of risk taking…

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

Sources of risk in construction…  Construction operations are hazardous  Labor capacity, capability, competence…  Subsurface conditions; physical factors  Contractual provisions; timing, LDs…  Economic conditions; prices, labor…  Political & public; new laws, opposition

Basic 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 DesignerBuilder Not yet involved

Risk allocation… traditional Owner DesignerBuilder

Risk allocation… design-build Owner Designer+ Builder

Risk Management Tools  Best Value procurements  Two stage bid process  Contractor helps finalize design  Incorporates VE  Risk Management  Risk identification  Analysis  Response

Pareto Principle  80/20 rule…  States that 80% of the value comes from 20% of the activities.  Therefore, we need a method to focus on the 20% of the activities that have the most influence on the outcomes.  And… we should avoid the 80% of activities that produce little gain

Best Value Process Understand Client Requirements & Intent Brainstorm Possible Areas for Adding Value Find & Include Experts in Key Areas Develop Options With Pros & Cons ID Preferred Solution & Obtain Needed Design Info Present to Exec Team For Decision Preliminary Design Detailed Design Development Plans & Specs Final Review By Exec Team Final Approval By Client Construction Contractor

Risk identification  Identify areas of risk intensity 1.Buildability, logistics, health & safety 2.Environmental, permits 3.Cost environment  Develop risk registers 1.Catalog all risk factors 2.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

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

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

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

Risk Management Strategies  Avoidance  Transfer or Sharing  Mitigation  Insurance  Recovery

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

Pyramid Cost Estimate-1… =SUM(E8/F8+G8*E8+H8* E8)*B8 =SUM((E8/F8*I8)+(G8*E8*J8+10)+(H8*E8*K8+ 10))B8 Labor CostConst Laborers(L)Labor Rate Time (Note1)($/day)Labor Days S/ U Man- days L/da yProd Sup erMgtLSMCost Planning 550S37, $5$15$30$240,625 Master Plan 400S27, $5$15$30$175,000 Site Selection 500S53, $5$15$30$312,500 Build Camp 200U84, $2$10$20$184,667 Demob Camp 150U63, $2$10$20$138,500 Hire Workforce 1800S48, $5$15$30$325,800 Train Team 1 500S65, $2$10$20$170,000 Train Team 2 700S91, $2$10$20$238,000 Train Team 3 650S85, $2$10$20$221,000 Prep Const Site 550U929, $3$12$25$2,948,000 Const Core 3000U 12,144, $3$12$25$38,100,000

Pyramid Cost Estimate-2… Trim Exterior 2400U2,428, $3$12$25$7,656,000 General Design 2000S137, $5$15$30$875,000 Design Structure 520S17, $5$15$30$118,950 Open Quarry 200U33, $3$12$25$110,800 Cut Blocks 2400U971, $3$12$25$3,091,200 Cut Trim 2000U809, $3$12$25$2,576,000 Interior Design 1000S34, $5$15$30$228,750 Room Constr 2500U2,138, $3$12$25$7,025,000 Int Finishes 2200U842, $4$14$30$4,022,857 Final Inspection 200S27, $8$20$50$254,000 Demob Const Site 400U161, $2$10$20$350,400 Bury Pharoah 100S13, $10$30 $10 0$183,111 Labor Sub-total 21,247,55 7 $69,546,160

Pyramid Cost Estimate-3… =SUM(B34*E34 ) Stone Cost #stone s T/ston eTons $/To n =SUM(F34*G3 4) Cut core 2,556, ,670, 964$20$153,419,280 Place Core- Note(3) 2,556, ,670, 964$12$92,051,568 Cut trim 45, ,985$10$229,850 Place Trim-Note(3) 45, ,985$45$1,034,325 Stone Sub-total $246,735,023

Pyramid Cost Estimate-4… =SUM(D8+D9+D10+D13+D14+D15+D16+D20+D2 1+D25+D28+D30) Support Cost#man days $/man-day Skilled Workers(S) 638,856 $10 $6,388,561 Unskilled Workers(U) 20,608,701 $4 $82,434,804 Support Sub-total 21,247,557 $88,823,365 Grand Total $405,104,548

Questions?