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RISK ASSESSMENT AND MANAGEMENT INCONSTRUCTION PROJECTS by A.DEVIPRASADH CHAPTER 1 INTRODUCTION 1.

1 INTRODUCTION Project management is the application of knowledge, skills, tools, and techniques to project activities in order to meet or exceed stakeholder needs and expectations from a project. Project risk management includes the processes concerned with identifying, analyzing, and responding to project risk. It includes maximizing the results of positive events and minimizing the consequences of adverse events. Generally, risk is a choice in an environment rather than a fate. BS 6079 (British Standard Institution 1996) defines risk as ‘It is the uncertainty inherent in plans and possibility of something happening that can affect the prospects of achieving, business or project goals’. The word ‘‘risk’’ was known in the English language in the 17th century. It is believed that the word was originally a sailor’s term that came from the Spanish and meant ‘‘to run into danger or to go against a rock.’’ The money spent to fund shipments overseas was the first example of risk business in the early days of travel. Each and every activity we do involve risk, only the amount of risk varies. Prof. Kent Miller of Purdue University defines risk as “Unpredictability incorporations/businesses outcome variables”. About Uncertainty he defines as “Unpredictability of environmental and organizational variables that impact the corporations/businesses performance.”Consequences of uncertainty and its exposure in a project, is risk. In a project context, it is the chance of something happening that will have an impact upon objectives. It includes the possibility of loss or gain, or variation from a desired or planned outcome, as a consequence of the uncertainty associated with following a particular course of action. Risk thus has two elements: the likelihood or probability of something happening, and the consequences or impacts if it does. Managing risk is an integral part of good management, and fundamental to achieving good business and project outcomes and the effective procurement of goods and services. Risk management provides a structured way of assessing and dealing with future uncertainty. Project risk management includes the processes concerned with identifying, analyzing, and responding to project risk. It includes maximizing the results of positive events and minimizing the consequences of adverse events. 1.2 RISK IN REAL ESTATE AND CONSTRUCTION INDUSTRY

competitive and human resource/cultural risks. operational. strategic. availability and pricing of inputs. Not unexpectedly. Fitch Ratings have been asked to develop a grading methodology for risk-rating the projects. customer. The third chapter presents the objective of this investigation. Most of the rural development projects are likely to get lower ratings which may drive away private investors and financiers from participating in such projects. the real estate industry will have to dedicate more resources and develop a higher degree of operational sophistication Real estate is vulnerable to the numerous other business risks that often represent greater exposures than those that are traditionally insurable. The rating agencies have come up with detailed analysis of the various risk parameters such as identification. The analysis of results is in chapter six. there are regulatory and legislative risks. Credit rating agencies like Crisil. availability of land and project related infrastructure. Literature survey is explained in the chapter four.3 ORGANISATION OF THESIS The thesis is organized into seven chapters. political. To be successful in this environment. It is an industry driven primarily by private investors. the influence of institutional investors on the real estate industry is formidable.The real estate and construction industry has changed significantly over the past several years. They are beginning to experience a higher degree of scrutiny by investors. consultants and analysts. 1. But some industry experts feel that a risk rating system will discourage private participation in rural development projects on a large scale. resettlement and rehabilitation requirements or status. The second chapter gives detail concepts of risk management. status of statutory clearances. The grading of a project at the pre-bid stage would essentially be a comment on the risks involved in undertaking the project.from property management to risk management. the presence of securitized real estate has increased considerably. legal. The recent move by the Indian government to introduce risk-rating system at the pre-bid stage has evoked a positive response from industry. accessibility to site and other site related infrastructure. Chapter seven gives the conclusion drawn from this investigation and suggestions for future work. where our collective "performance bar" is being raised significantly. and technological risks. contractual. technology risk. professional. The first chapter gives an introduction to the present study. and payment security mechanism envisaged. Finally the bibliographic references are given at the end. . Research methodology is given in the chapter five. financial. and are expected to deliver "best in class" service in all areas . For example. off-take arrangement and market risk and credit risk of off-taker. reputational.

default of business associates and dispute and organization risks. unknown and new procedural formalities. there are various ways for categorizing risk for different purposes too. Some categorize risks in construction projects broadly intoexternal risks and internal risks while others classify risk in more detailed categories of political risk. The types of exposure to risk that an organization is faced with are wide-ranging and vary from one organization to another. The evaluation should generally concentrate on . etc. In the context of construction industry.1 RISK CONCEPTS Risk is a multi-facet concept. Risk management is a formaland orderly process of systematically identifying. mitigation and/or control. economic and political scenarios. Risk is inherent and difficult to deal with. regulatory framework and governing authority.CHAPTER 2 CONCEPTS OF RISK ANALYSIS AND MANAGEMENT 2. analysing. It is desirable to understand and identify the risks as early as possible. It is of considerable importance since the process of risk analysis and response management may only be performed on identified potential risks. etc. financial risk. and responding to risks throughout the life-cycle of a project to obtain the optimum degree of risk elimination. safetyrisk. market risk. The classification is shown in the figure 2. In addition to the different definitions of risk. The typology of the risks seems to depend mainly upon whether the project is local (domestic) or international. The internal risks are relevant to all projects irrespective of whether they are local or international. and this requires a proper managementframework both of theoretical and practical meanings. The risk management process begins with the initial identification of the relevant and potential risks associated with the construction project. the uncertainty associated with estimates of outcomes – there is a chance that results could be better than expected as well as worse than expected etc. Risk analysis and evaluation is the intermediate process between risk identification and management. Significant improvement to construction project management performance may be achieved from adopting the process of risk management. These exposures could be the risk of business failure. International projects tend to be subjected to the external risk such as unawareness of the social conditions. the risk of project financial losses.1. It incorporates uncertainty in a quantitative and qualitative manner to evaluate the potential impact of risk. social risk. so that suitable strategy can be implemented to retain particular risks or to transfer them to minimize any likely negative aspect they may have. the occurrences of major construction accidents. it could be the likelihood of the occurrence of a definite event/factor or combination of events/factors which occur during the whole process of construction to the detriment of the project a lack of predictability about structure outcome or consequences in a decision or planning situation. intellectual property risk.

These mitigation measures are generally based on the nature and potential consequences of the risk. Businesses would like to quantify risk for many reasons.2 PROJECT RISK MANAGEMENT Risk management in a project encompasses identifying influencing factors that could potentially negatively impact a project’s cost schedule or quality baselines. high financial consequences or combinations thereof which yield a substantial financial impact. the costlier the consequences if the wrong decision is made. quantifying the associated potential impact of the identified risk. The process of risk management does not aim to remove completely all risks from a project. The riskier the activity is. . an appropriate method of treating risk must be Figure 2. especially the critical ones. contractors also should decide how to handle or treat each risk and formulate suitable risk treatment strategies or mitigation measures. 2. and implementing measures to manage and mitigate the potential impact.1 Hierarchical risks involved in a project adopted. Once the risks of a project have been identified and analyzed.risks with high probabilities. More the control of one mitigation measure on one risk. the more effective the measure is. Within a framework of risk management. effectively and efficiently. The main objective is to remove as much as possible the potential impact and to increase the level of control of risk. Its objective is to develop an organized framework to assist decision makers to manage the risks.

Traditional risk assessment for construction has been synonymous with probabilistic analysis.2 explains this.Knowing how much risk is involved will help decide if costly measures to reduce the level of risk are justifiable. Such approaches require events to be mutually exclusive. Risk = Probability of an event × Consequence of loss due to that event Per event Graphical representation of risk ratings can be made by plotting graph between probability and seriousness. It can also help to decide if sharing the risk with an insurance company is justified.All choices in life involve risk. but the choice can be made so that risk is minimized.3 2. and conditionally . exhaustive. Somerisks. are virtually unavoidable and affect many people.3 RISK ASSESSMENT Risk assessment is defined in this study as a technique that aims to identify and estimate risks to personnel and property impacted upon by a project. Figure 2. such as natural disasters.2 Graphical representations of risk rating2. Risks cannot be totally avoided. Figure 2.

• Management stability . • Time compression . The qualitative approach relies on judgments. using criteria to determine outcome.If the staff lacks direct experience and knowledge of the subject. 2. then the risks are magnified. A common qualitative approach is a precedence diagramming method. subjective analytical methods that rely on historical information and the experiences of individuals and companies have been used to assess the impact of construction risk and uncertainty. which uses ordinal numbers to determine priorities and outcomes.5 RISK EXPOSURE Several factors can expose projects to higher than normal risk. which in turn means reaching goals.The more sophisticated a project.Newer projects are riskier because the processes have not been refined. A common example of the quantitative approach is decision tree analysis. Management irritability can lead to unrealistic scheduling and inefficient use of resources. and it is often difficult to determine causality. construction involves many variables. communications can be more difficult as the number of participants increases. the risk or risks associated with each process. For example. The more times a project of a similar nature has been done. namely the quantitative and the qualitative approach. • Staff expertise and experience . there is a greater the opportunity of mistake or problem. the higher the probability of a problem arising. • Team size . dependence and correlations.The larger the team. the greater the likelihood of success. applying probabilities to two or more outcomes.independent.If a schedule is highly compressed. and the control or controls that may or should exist for each risk. The number of interactions among people increases and thus they require greater coordination. 2. • History . Having more time means greater flexibility and the opportunity to prevent or mitigate the impact of errors. The quantitative approach relies on statistical calculation to determine risk. people will struggle to learn as they go along.4 DETERMINATION OF RISK There are mainly two methods to determine risk. and its impact on a project. . Another approach is the Monte Carlo simulation. its probability of occurrence. However.Management stability implies unity of direction. which generates value from a probability distribution and other factors. An example of a qualitative approach is to list in descending order specific processes of a project. • Complexity . robbing the project of time and possibly introducing errors. As a result.

A longterm risk has an impact sometime in the distant future. An internal risk is peculiar to a project. technical. more money brings greater ability to secure equipment or people when needed. This risk factorinvolves issues or concerns associated with the social and cultural impacts of the project to the community and region within which it is to be located. • Economic risk The ability to overcome the economic impact risks of the project. and activities confronting the project during the project execution and the project operation. A technical risk is the inability to build the product that will satisfy requirements. the greater the ability to respond to problems as they arise. This risk factor involves issues or concerns associated with the macroeconomic impact of the project to the community and region within which it is to be located. risks are either internal or external.• Resource availability . concerns.The more resources that are available. and national political and regulatory situation confronting the project. such as releasing a product without adequate testing. regional.the ability to overcome the environmental risks of the project. 2. however they do provide the means to respond to it. Plentiful resources. A manageable risk is one you can live with. Risks are viewed as either manageable or unmanageable.6 GENERAL TYPES OF RISKS Risks can be viewed as business. A short-term risk has an immediate impact. but also reserve risk associated with the prospects and discoveries in the area. of course. such as the inability to get the parts of a product to factor involves issues or concerns associated with the local. Finally. and not only the anchor field. This risk factor involves issues or concerns associated with the environmental problems. such asa huge turnover of core team members. Risks are either short or long term. An acceptable risk is one that negatively affects a task on the noncritical path. such as changing the requirements for a deliverable. • Social risk The ability to overcome the social risks of the project. Risks are either acceptable or unacceptable. do not guarantee protection from risk. . An unacceptable risk is one that negatively affects the critical path. •Reserves risk . such as aminor requirement change. An operational risk is the inability of the customer to work with core team members. •Environmental risk . For example. An unmanageable risk is impossible to accommodate.an operations risk factor Addresses the extent of reserves and contingency to be transported. or operational.

•Underground risks . are destabilizing local support and long term operability conditions. •Interface risks .• Credit risk . •People risks . A large risk consideration is that the meteorological-ocean data current and waves is empirical and is changing with new measurement information becoming available every year.a technology risk factor The exploration and production requirements are continuously pushing the deepwater envelope.a financial risk factor Customer credit risk is a new risk issue stemming from the large inflowof small capital independents and the formation of many Limited LiabilityCorporations without any r eal assets. • Engineering risk.an environmental risk factor Wave current (storm risks) are plaguing many off-shore projects.a procurement risk factor The huge costs of projects are driving the search for the cheapest material thatmeets specifications which is to be fabricated in a location that has the least cost-often different countries.a financial risk factor Projects requires many stakeholders to be joint ventures to spread in .a delivery risk factor The risk that several different contractors working on different segments of a project are not being managed in the design phase. yet are increasingly uninsurable. like pipe. •Joint venture risks .an economic risk factor The global reinsurance market currently has severe capital restrictions that are restricting access to project insurance. •Insurance risks . as more work must be executed on a fast track basis under design-build delivery methods. •Weather risks .social risk factorChanging social relationships and forced cultural changes of linear projects.lines.a technology risk factor The unknowns underground will always be a source of risk that affects execution resources and methodologies. •Materials risks .

•Right of way risks .financialrisk.a social risk factor Right of way issues are increasingly causing delay as through indigenous populations experiencing broader democratic approaches are asserting rights to extract social improvement with consequently larger cost to projects. not diminishing. although such risk issues are not fundamentally analyzed when joint ventures are established .a political risk factor Projects of all types are required in many unstable parts of the world. developing. financial risk sharing. •Payment risks . •Security risks . •“Green” risks .and underdeveloped countries with equal ferocity. projects are financed privately through concessions that require payment for the commodity .an economic risk factor In both developing and underdeveloped countries. which is also forcing differing institutional approaches and cultures to clashand increasing. but the militant and terrorist threat and sophistication is well beyond that heretofore experienced.a procurement/contractual risk factor Execution management practices that are not accustomed to design-buildstakeholder expectations and industry practices are reducing designbuild benefitsand exacerbating impacts of risks as they emerge during project execution. especially because many of the key “players” are over-committed.an environmental risk factor: Projects experience increased environmental concerns in developed. which impacts acceptableconstruction methodo logies and resource use. •Design-build risks .