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Risk Management
B UILD IN G C O MMISSIO N IN G
by Scott Cullen Hanscomb Faithful & Gould Last updated: 09-25-2008
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Within This Page Introduction
In design and co nstructio n, risk analysis can be described as a systematic metho do lo gy and o ngo ing pro cess by which Major Resources o ccurrences that may substantially affect the end pro duct can be identified, quantified, mo deled, managed, and mo nito red. This to o l is especially useful as a metho d o f go o d pro ject management and planning, because the business o f building is inherently risky—the risk mitigatio n metho ds can be applied to pro ject co st, schedule, quality/perfo rmance, safety, and business o peratio ns, especially as co nstructio n risk increases with the size o f the pro ject. Go o d risk management pro cedures ultimately measure the team's co nfidence level in the pro ject o n an o ngo ing basis, and allo w the intro ductio n o f co rrective actio ns, mo netary co ntingency, and schedule flo at in o rder to minimize lo sses to the pro ject and increase the likeliho o d o f the pro ject being co mpleted o n schedule and within budget.
Cost Impact of the ISC Security Criteria Threat/Vulnerability Assessments and Risk Analysis UFC/ISC Security Design Criteria Overview and Comparison Value Engineering VIEW RESO URCE PAG E INDEX
The applicatio n o f risk management pro cedures in co nstructio n can give early visibility to po tential "pro blem areas" and o ppo rtunities, where effo rt and mo ney can be expended early in the design and co nstructio n phases to reduce vulnerability, insurance co sts, business o r missio n interruptio n, and claims. Early risk identificatio n ensures that design and team effo rt is co ncentrated in critical areas, fo cusing the pro ject team's attentio n o n actio ns and reso urces where there is a majo r risk expo sure, o r where the greatest time/co st savings can be made thro ugh reengineering and streamlined pro ject management. The o bjective is pro active management o f pro jects, where pro blems are reduced as they are identified, as differentiated fro m the traditio nal appro ach to co nstructio n, which waits until critical pro blems develo p and then implements an immediate (and typically expensive) respo nse which may reduce the impact to the pro ject but likely do es no t avo id lo sses as effectively as early risk respo nse. Over time, risk management allo ws the pro ject team to build a histo rical pro file o f risk based upo n experience and lesso ns learned, which will allo w fo r better management o f future pro jects. PDFmyURL.com
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Risk management is an o rganized metho d o f identifying and measuring risk and then develo ping, selecting, implementing and managing o ptio ns fo r addressing risks. There are several types o f risk that an o wner sho uld co nsider as part o f risk management metho do lo gy. These include: Schedule risk Co st risk Technical feasibility Risk o f technical o bso lescence Dependencies between a new pro ject and o ther pro jects Physical events beyo nd direct co ntro l Risk management seeks to identify and ultimately co ntro l po ssible future events and sho uld be pro active rather than reactive. To be effective, risk management must rely o n to o ls and techniques that help predict the likeliho o d o f future events, the effects o f these future events and metho ds to deal with these future events. Risk management is the respo nsibility o f everyo ne invo lved in a pro ject.
Tools and Techniques Paying attentio n to detail and implementing appro priate co st and schedule co ntro l systems will assist in risk analysis and management. Ho wever, o ne area that deserves clo ser scrutiny is the use o f range estimating as a risk analysis to o l. Range estimating can be do ne in a rather simple fashio n by selecting the 20 percent o f the line items in an estimate that represent 8 0 percent o f the co st then develo ping a range fo r each o f tho se 20 percent and do ing a simple pro cess o f adding the lo w and high ranges. A mo re advanced appro ach co uld take the same 20 percent items, establish the range and then use any o ne o f several available so ftware packages to perfo rm a Mo nte Carlo simulatio n and pro duce a risk pro file. This appro ach wo uld give a mo re accurate pro jectio n o f the lo gical highs and lo ws invo lved with 20 percent drivers. A sensitivity analysis can also be prepared to vary the key risk parameters. Finally, it is po ssible to use a co mplete risk analysis package that includes range estimating and prepares a risk pro file that estimates co nfidence ranges and co ntingency amo unts. This type o f an appro ach can establish co ntingencies fo r no t o nly individual pro jects but fo r entire pro grams. Mo nte Carlo o r risk analysis is used when establishing a baseline o r baseline change during budget fo rmulatio n. The co ntingency develo ped fro m the Mo nte Carlo analyses sho uld fall within the co ntingency allo wance ranges presented previo usly. Mo nte Carlo analyses and o ther risk assessment techniques use similar metho do lo gy to o btain co ntingency estimates. There are a number o f so ftware packages bo th publicly and co mmercially available. The estimato r must subdivide the estimate into separate phases o r tasks and assess the accuracy o f the co st estimate data in each phase. After the pro ject data have been input and checked, the co mputer pro gram will calculate vario us co ntingencies fo r the o verall pro ject based PDFmyURL.com
o n the pro bability o f pro ject underrun. The rando m number generato r acco unts fo r the kno wn estimate accuracy. Once the pro gram has co mpleted its iteratio ns (usually 1,0 0 0 ), it pro duces an o verall co ntingency fo r the pro ject with certain accuracy. The applicatio n o f this type o f quantitative risk analysis allo ws the co nstructio n pro ject expo sure to be mo deled, and quantifies the pro bability o f o ccurrence and po tential impact o f identified risks. The results can be used to pro duce a realistic representatio n, in graphic s-curve fo rm, o f the pro ject's to tal uncertainty and risks. Referring to the s-curve figure belo w as an example, a co ntingency amo unt o f appro ximately $4 millio n represents 6 5% co nfidence in achieving that pro ject co st. Fo r 8 0 % co nfidence, co ntingency sho uld be increased such that to tal pro ject co st is $51 millio n.
Sample project cost s- curve
Risk management with pro babilistic mo deling can be used to reduce pro ject co ntingency fro m a guesstimate o f 10 -20 % to a quantitatively determined amo unt, typically in the range o f 3-8 %. As the pro ject pro gresses, and the co nfidence level in pro ject co st increases, the early release o f co ntingency amo unts may be achieved and the mo ney may be invested elsewhere.
Risk Mit igat ion and Monit oring Risk mitigatio n and the develo pment o f appro priate respo nse actio ns is o ften the weakest part o f the risk management pro cess - the o ngo ing management and mo nito ring o f identified risks, and the additio n o f new risks to the mo del, require co nstant vigilance. PDFmyURL.com
When managing risks, there are several risk strategy o ptio ns to be co nsidered. Risks may be avo ided entirely (usually by eliminating their cause o r ro o t), transferred to ano ther party (thro ugh co ntracts o r insurance), o r expo sure to the risk can be reduced (thro ugh planned actio n measures). Acceptance o f the risk sho uld be co nsidered o nly as a last reso rt, and sho uld o nly be applied fo r items that canno t be addressed by any o ther strategy. Fo r each risk item, an achievable target risk reductio n go al sho uld be set, and pro active steps o r actio n items identified by which the go al can be attained. The mitigatio n steps must be appro priate, co st effective, and achievable. The develo pment o f these steps sho uld enco urage pro blem so lving and inno vative so lutio ns, with the o bjective o f avo iding the risks o r reducing their impact as much as po ssible. When discussing actio n items, it is impo rtant to remember that interpretatio n o f each risk will differ fro m perso n to perso n, with the reco mmended co urse o f actio n varying acco rding to the perso n o r o rganizatio n's perceptio ns o f pro ject management, o bjectives, enviro nment, experience, and risk to lerance level. Similarly, o ppo rtunities can be discussed, and steps o r actio n items develo ped which can increase their pro bability o f o ccurrence o r their level o f impact. In additio n to creating actio n items fo r the risk, the risk manager may want to ask the fo llo wing questio ns: What is the ro o t cause o r trigger fo r this risk? Do es this risk have an impact o n business, o r just o n the pro ject? Ho w will we kno w when the risk has o ccurred? What will happen if the risk o ccurs? Ho w are we currently handling this risk? What steps can we take to better manage o r mitigate this risk? What sho uld we do if we fail to manage this risk? The risk assessment sheet (RAS), o r Risk Entry Fo rm, is the appro priate place to reco rd all kno wn info rmatio n abo ut the risk. The RAS can also be managed in a database enviro nment, such as MS Access.
Sample risk assessment sheet with action items PDFmyURL.com
Risk management is an o ngo ing and iterative pro cess, which sho uld be co nducted thro ugho ut the lifecycle o f the pro ject. Each risk manager must review all o f their risks o n a mo nthly basis o r mo re frequently, and update the risk assessment sheets, even if o nly to no te that there has been no change. The risk management pro cess o r pro gram is typically driven by a single individual, the pro ject risk manager, in co ncert with the pro ject manager o r o ther high-level o versight. Individual acco untability fo r risks can be assigned, such that each risk has its o wn manager. Updates fro m the risk managers are co llated o n a perio dic basis by the pro ject risk manager, and added to the mo del. Risk status co mmunicatio n and awareness must o ccur regularly as a no rmal part o f pro ject meetings, so as to no te changes to existing risks. The risk pro bability o f o ccurrence may increase o r decrease, as may the time and co st impacts. Changes to the estimate line items, such The risk management cycle as updated equipment quo tes o r actual co sts, must also be updated in the mo del. As actio n items are implemented and the o riginal risks are reduced, additio nal "seco ndary risks" may arise, which need to be added to the mo del. As design and co nstructio n pro gress, new risks will also be identified. Changes in sco pe can also be acco mmo dated in the risk mo del, thro ugh analysis o f their o verall effect o n the o utco me o f the pro ject. The steps of identify-quantify-model-manage need to be taken for all new risks, secondary risks, and changes in project scope. The nature o f co nstructio n is such that, as time passes, the range o f minimum and maximum expected values beco mes mo re narro w, and co nfidence level in the mo st likely value increases, fo r each mo deled risk item. This causes the pro ject s-curve to straighten o ut, and its lo catio n to mo ve to the right o r left as expo sure to risk either increases o r decreases. The pro ject risk manager must thus regularly review and update the risk mo del, and re-run the risk simulatio n.
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Sample project cost s- curve after several iterations
As the pro ject risk is being mo nito red, the data and trends can be co llected and co mpared against the baseline risk assessment. Fro m these trends, pro gress can be measured and "lesso ns learned" can be do cumented. The info rmatio n can also be sto red as histo ric risk data fo r future pro jects.
Conclusion Risk management is a pro active pro ject management to o l used to reduce the susceptibility to lo sses incurred during a co urse o f actio n, which leaves an auditable trail o f changes. The pro cess fo cuses pro ject reso urces o n reducing vulnerability, pro viding early visibility o f po tential pro blem areas and creating mitigatio n actio ns. Go o d risk management sho uld invo lve the entire pro ject team, including design, engineering, business, co ntracts, finance, purchasing, estimating, and pro ject co ntro ls. The pro cess is o ngo ing, a never-ending cycle and iterative pro cess o f identificatio n, quantificatio n, mo deling, management and mo nito ring. The analysis can include identified risks, estimate and schedule items, new risks, seco ndary risks, sco pe changes, change o rders, and actual co sts, so as to pro vide a graphic depictio n o f the changing nature o f pro ject risk o ver time. As mentio ned abo ve, risk management with pro babilistic mo deling can be used to reduce pro ject co ntingency fro m a guesstimate o f 10 -20 % to a quantitatively determined amo unt, PDFmyURL.com
typically in the range o f 3-8 %. As the pro ject pro gresses, and the co nfidence level in pro ject co st increases, the early release o f co ntingency amo unts may be achieved and the mo ney may be invested elsewhere. BACK TO TO P
MAJOR RESOURCES Publicat ions Managing Risk in Construction Projects by Nigel Smith. Blackwell Publishers, January 19 9 8 . Risk Analysis: A Quantitative Guide, 3rd Edition by David Vo se. New Yo rk, NY: Jo hn Wiley & So ns, Inc., May 20 0 8 . Risk Management and Construction by Ro ger Flanagan and Geo rge No rman. Blackwell Publishers, August 19 9 3. BACK TO TO P
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