Risk management – a Quantity Surveyor’s role

The concepts of risk management have been around for hundreds, if not thousands, of years . It all started with gambling . Gambling is based on games of chance, where skill makes little or no difference . Gaming houses are able to make a profit because they can predict the chance of the gambler winning and tilt the balance in their favour . We assess risk in our daily lives from crossing the road, making everyday decisions, taking out insurance policies or even deciding to leave a job for another – we weigh the options . We make judgements on risk in everyday events and where possible use previous judgements to help inform our decisions . Risk is inherent in ALL activities and ALL future events, particularly in the construction industry .

The 1994, Sir Michael Latham, who was a British Conservative Member of Parliament wrote an influential joint government and industry report on the UK construction industry titled Constructing the Team that introduced risk management to the construction industry . He stated: “No construction project is risk free . Risk can be managed, minimized, shared, transferred or accepted . It cannot be ignored . ”

RISKS IN THE CONSTRUCTION INDUSTRY

It is essential that risks are recognized and there are three ways that risks can be dealt with:

• Risks may be avoided – this is not a viable proposition as construction by its very nature has many risks and avoiding it will result in non-activity and projects not proceeding . • Risks may be accepted – it is essential that risks are not accepted in ignorance or unintentionally, e .g ., contractors entering into biased contracts which places more risk on them . Also, transfer or minimization of risks should always be considered e .g ., design for specialized works such as piling being transferred to sub-contractors to avoid the structural engineer taking on the risk . • Risks can be ignored – never a good idea and will result in unsuccessful projects .

SO, WHAT IS RISK MANAGEMENT?

Risk management has been identified as ‘a process of identifying and then actively managing risk for projects with the aim of making the project more likely to succeed . ’

Hence, it is important that risks need to be identified, assessed and managed to enhance the successful outcome of a project . As with most things it is necessary to take risks to maximise benefits, which is all about the weighing the risks . It is important to note that nothing ventured is nothing gained, and the key principle is that risk-taking is necessary to gain rewards . Risk management is not about eliminating risks altogether, but about controlling risks, just as we control costs .

THE RISK MANAGEMENT PROCESS

As Quantity Surveyors, our cost plans often cover design and construction risks through the design reserve and the construction contingency; however, we should consider a risk contingency, which would cover for informed identification of risks . However, this would require an active risk management process, which should form part of design team meetings . It is recommended that this be undertaken at the start of any project Diagram 1 (Source: Davis Langdon Management Consulting)

“Risk management is an underutilized tool, which should be part of every project.”

Diagram 2 (Source: Davis Langdon Management Consulting)

to ensure active management and mitigation of risks . For risk management to be effective, risks need to be: • Identified – what risks would affect the achievement of the project’s objectives . • Assessed – risks are assessed and ranked . • Re-evaluated – risks may go away but at the same time some further risks may be identified . • Controlled – this includes identifying appropriate responses to the risks, allocating owners, and then monitoring, executing, and controlling the responses . The above should be undertaken through a risk register, with a baseline register set through a risk management workshop and then discussed/reviewed at every design team meeting .

With risk identification, the earlier the better as opportunities to mitigate or remove reduce with time with circa 80% of costs committed at the concept stage .

Diagram 1 shows that potential for change reduces with time, resistance to change increases with time and the cost of the change increases further down the line . It is best to focus the risk study at inception of the project .

Identification of risks can be supported by categorization of risks as shown below . Typically, we only consider and manage project risks, but we could alert the Client to other risks such as business, political, funding, business strategy and even global risks .

In identifying risks, we need to have a risk description i .e . ‘there is the risk that…’ and a consequence i .e . ‘this will result in…’ – we should consider the result of a risk occurring, things that cause damage and also that a risk can remain a threat but never cause damage .

Having identified the risk, one then needs to understand that will happen if the risk occurs . These are the consequences of risk occurring and the things that can cause damage . Risks can remain a threat and never cause damage except maybe keep you up at night .

Once identified, these should be put into a risk register, analyzed in terms of likelihood, impact and rating in order for a risk status to be allocated, and then actively managed . There are numerous templates/tools for this to be undertaken .

The risk register should be an active tool reviewed at every design team meeting and updated for new and mitigated risks .

THE QUANTITY SURVEYOR’S ROLE

As the Quantity Surveyor we can facilitate the risk workshop, draft the risk register and actively manage it as part of our scope . As a further risk management scope, we can also cost the risks for a risk contingency to be included within our cost plans, which can also be undertaken through various methods such as Monte Carlo simulation and the Central Limit Theorem .

Risk management is an underutilized tool, which should be part of every project, and which we as Quantity Surveyors are well placed to lead and provide advice to the client .

About the author

Angela Lai, FRICS, PQS, LEED AP O+M is the Managing Partner of Core Two, a property and construction cost consultancy based in Vancouver, BC . Angela has over 18 years’ experience in the construction and development industry spanning South Africa, the UK and Canada . Angela’s experience is diverse having worked as a cost manager, loan monitor and a management consultant, and having specialist expertise in sustainability, life cycle and FM costing . She is also an instructor at BCIT, Passive House Canada and for the RICS training hub .