1. CON 2001 & CVE 4070 Construction Engineering Risk Management Prof. Ralph V. Locurcio, PE

2. Views of risk taking…

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

4. 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

5. 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

6. Risk allocation… at start Owner DesignerBuilder Not yet involved

7. Risk allocation… traditional Owner DesignerBuilder

8. Risk allocation… design-build Owner Designer+ Builder

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

10. 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

11. 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

12. 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

13. 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

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

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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

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

23. 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

24. 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

25. Change Order Solution

28. Change Order Solution-1 Student: _________________________________________ HW#7 - Solution to Change Order Item to changeUnitsLW/HQuantityPrice/unitCreditChargeValueScore Add CMU walls - Wall BSF5.66845.28$8.48 $383.97 5 Credit CMU wall (@ door F)SF5.66845.28$4.24$191.99 5 Credit CMU wall ASF11.33890.64$4.24$384.31 5 Add CMU walls - Wall DSF11.33890.64$8.48 $768.63 5 Credit for windowsEA 1.00$310.00 5 Add Interior stud wallsSF11.33890.64$4.06 $368.00 5 Credit Interior stud wallsSF5840.00$2.03$81.20 5 Add precast lintelsLF 0.00$28.00 $0.00 Credit precast lintelsLF4.5 4.50$28.00$126.00 5 Add foundation-wall DLF11.33 $12.54 $142.08 5

29. 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 $352.00 5 Credit downpours - wall A & door F wallEA5 5.00$88.00$440.00 5 Add stucco - wall DSF11.33890.64$4.93 $446.86 5 Credit stucco - wall door F & wall B cancelSF000.00$4.93$0.00 5 Add roofSF11.3324.33275.66$6.25 $1,722.87 5 Add 4" floor slabSF11.3324.33275.66$3.42 $942.75 5 Add tile floorSF000.00$3.42 $0.00 Add carpet in FRSY5.6611.332.38$13.55 $32.18 5 Add carpet in LR & MBRSY11.3324.3310.21$13.55 $138.34 5 Subtotal charges $5,297.68 5 Subtotal credits $1,533.50 5 Subtotal job $3,764.18

30. Change Order Solution-3 Labor @ 2x net materials $7,528.35 5 Add Extras @ 10% $752.84 Job Total $12,045.37 10 Your score 110 Percent score 100%

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

32. Review-1

33. Review-2

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

35. Questions?

36. 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

37. 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

38. 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

39. 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