CON 2001 & 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  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

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

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

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

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…if all else fails  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  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

Change Order Solution

Change Order Solution-1 Student: _________________________________________ HW#7 - Solution to Change Order Item to changeUnitsLW/HQuantityPrice/unitCreditChargeValueScore Add CMU walls - Wall BSF $8.48 $ Credit CMU wall door F)SF $4.24$ Credit CMU wall ASF $4.24$ Add CMU walls - Wall DSF $8.48 $ Credit for windowsEA 1.00$ Add Interior stud wallsSF $4.06 $ Credit Interior stud wallsSF $2.03$ Add precast lintelsLF 0.00$28.00 $0.00 Credit precast lintelsLF $28.00$ Add foundation-wall DLF11.33 $12.54 $

Change Order Solution-2 Credit foundation - wall door F & wall B cancelLF 0.00$12.54$0.00 Add downpours - wall DEA4 4.00$88.00 $ Credit downpours - wall A & door F wallEA5 5.00$88.00$ Add stucco - wall DSF $4.93 $ Credit stucco - wall door F & wall B cancelSF000.00$4.93$ Add roofSF $6.25 $1, Add 4" floor slabSF $3.42 $ Add tile floorSF000.00$3.42 $0.00 Add carpet in FRSY $13.55 $ Add carpet in LR & MBRSY $13.55 $ Subtotal charges $5, Subtotal credits $1, Subtotal job $3,764.18

Change Order Solution-3 2x net materials $7, Add 10% $ Job Total $12, Your score 110 Percent score 100%

Test-3 Review  200 points  Mix of questions… T/F, short answer  Calculations for estimates  Be prepared to “think”

Review-1

Review-2

Ethics HW handout  Due: December 1 st  Read instructions carefully  Cases on my web site

Questions?

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

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