Assignment on Contractual Risk Management

Subject Name – QSCM 34 - Contractual Risk Management

Faculty Name – Prof. A R Parasuraman
Name of the Student – Saifuddin Shyamwala
Serial No. - 11

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 Assignment on Contractual Risk Management

Q. 1) Explain the lessons in Risk Management you have learned from the case Colossal
Country Hospital.

We can divide the risk management lessons in two phases from the Colossal Country Hospital case: -
1) Pre-Contract Award Phase
2) Post-Contract Award Phase

1) Pre-Contract Award Phase

The project scope, technical design and project specifications were not finalized in detail before
the award of contract. The project finance was finalized based on the preliminary budget with
incomplete construction documents. The trustees didn’t focus on the project cost and gave
priorities to the individual increasing wish list. The architect complied to those wish list and
designed the over budget hospital. Once, the original contractor came with revised budget
trustees were not convinced. Further, without complying with final budget and specifications
bidding was done and contract was awarded to a builder with budget within original limit.

Lessons learned: -
A) Lack of proper planning
B) Under estimated project
C) Unclear design boundaries
D) Improper selection of preconstruction team
E) Poor coordination between teams
F) Lack of accountability

2) Post-Contract Award Phase

During the execution and supervision stage after the contract is awarded, access to the site was
delayed by the trustees. Also, due to lack of clear drawings and specification decisions were
delayed this led to overall delay in project completion. During the end of project contractor
claimed for huge change order and the hospital trustees denied. Contractor shut the job down
and placed mechanic’s liens on the property.
Lessons learned: -
A) Right to possession delayed
B) Change in project scope led to huge variations
C) Lack of project management and poor monitoring
D) Extension of project due to inadequate cash flow

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 Assignment on Contractual Risk Management

Q. 2) Discuss Diversification, Strategic Planning & Risk.

Diversification is a technique of allocating portfolio resources or capital to a mix of different

investments. The ultimate goal of diversification is to reduce the volatility of the portfolio by
offsetting losses in one asset class with gains in another asset class. A phrase commonly associated
with diversification: “Do not put all your eggs in one basket.”
Having “eggs” in multiple baskets mitigates risk, as if one basket breaks, not all eggs are lost.

Strategic diversification is a tool to manage the risk of an individual strategy underperforming or

failing to meet its objectives, much as asset-class diversification is a tool to manage the risk of an
individual investment underperforming.

In the construction sector, companies also adopt diversification as a strategy for either growth, or
risk management, or both. However, construction has its own heterogeneity, which can be perceived
from four aspects: the physical nature of outputs; the structure of the industry, together with the
organization of the construction process; the determinants of demand; and the method of price
determination. All these characteristics can be shared separately by other industries but in
combination appear in construction alone. The heterogeneity of construction business may lead to
totally different diversification strategies and in turn, diversification patterns.

There are different types of diversification. Ansoff (1957) proposed the typology of vertical,
horizontal, and lateral diversification. Wrigley (1970) distinguished two modes of product
diversification - related and unrelated diversification. Related diversification exists when a firm
owns a number of different business units, all of which are related in one way or another while under
unrelated diversification the firm diversifies into substantively different areas from the existing
ones. There are other typologies of diversification, e.g., concentric diversification and conglomerate
diversification, which are not mutually exclusive. Rather, they can be supplemented with each other
to understand the rich meanings of the concept. Specific forms of diversification could be organic
growth or inorganic growth, such as merger, acquisition, or alliance.

Business diversification strategies have been defined by various researchers as, among other things,
new market entries with new products, new approaches to regions and consumers, and
simultaneous execution of different businesses. In summary, business diversification represents a
strategy for executing two or more businesses. In modern portfolio theory, diversification is a way
to reduce risk, and risk-averse investors desire to be and are expected to be diversified. However,

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 Assignment on Contractual Risk Management

diversification does not necessarily guarantee the enhanced performance of a company. Quantitative
and empirical studies related to the diversification of contractors have often revealed conflicting
results about whether or not diversification has a positive effect on the growth, profitability, and
stability of companies. The main goals of the business diversification of construction companies are
responding to market changes in a stable manner and optimizing return against risk by continuously
changing resource allocation among markets based on various construction market situations and
internal capabilities of the companies. Financial sustainability of a company refers to its ability to
maintain business in a stable manner by efficiently responding to dynamic changes in the market.
Thus, business diversification is critical for a construction company to achieve financial
sustainability. However, there is a dynamic relationship between diversification and the
performance of a construction company due to market changes, but, so far, the existing literature
has considered this relationship only to a limited degree.

Studies on diversification conducted in the construction industries can be divided into studies on
diversification strategy and studies on diversification performance measurement. In the
construction industry, diversification strategies are being researched mainly for identifying the
growth principle of construction companies. Cheah (2002) analyzed the diversification strategies of
21 construction companies conducting business in the international construction market through
the market segmentation matrix. Small companies have a tendency to concentrate and they enter
new markets when their sizes and resources have grown to a certain level.

Diversification is based on portfolio theory, in which risk can be largely divided into unsystematic
risk and systematic risk. Here, unsystematic risk can be controlled by diversification and is unique
to the object of investment, while systematic risk cannot be controlled by diversification and is a risk
caused by macroeconomic fluctuations or general market conditions.

Many construction companies use diversification strategies to secure financial sustainability. The
diversification levels of companies will be different depending on various capabilities, such as
business networks, technologies, and management skills. After all, it is necessary to clearly identify
the strengths and weaknesses of individual companies to effectively respond to ever-changing
macroeconomics and individual markets. Moreover, if the diversification level is raised through
entry into other markets without preparation to secure the survival of a construction company after
market changes, the cash flow can be secured at the moment but the deterioration in the profitability
will be fatal in the end.

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 Assignment on Contractual Risk Management

Q. 3) Explain the Risk Identification process in detail.

Risk identification involves identifying and classifying sources of a risk to realize what must be
managed in a construction project. Risk identification is the first step in Risk management process,
as the potential problems must be identified before assessment, respond and control of the risk can
take place. Although it is one of the key elements in the process, it is also one of the less defined, and
often a neglected element. There are several basic methods for risk identification; documentation
review, information gathering, checklist and risk catalogs, assumption analysis and diagram
techniques. Information gathering is the most common method of identifying risk sources. It involves
brainstorming sessions to obtain a comprehensive list of possible risks. It relies on the knowledge of
experienced project participants, stakeholders and experts to identify the risk. The other methods
involve reviewing all project documentations to identify inconsistencies or uncertainties.

When identifying risks, it is also important to bear in mind that "risk" also has an opportunity
component. This means that there should also be a deliberate attention to identifying potential
opportunities that could be exploited to improve Institutional performance.

In identifying risks, consideration should be given to risks associated with not pursuing an
opportunity, e.g. failure to implement an IT system to collect municipal rates. Risk identification
exercise should not get bogged down in conceptual or theoretical detail. It should also not limit itself
to a fixed list of risk categories, although such a list may be helpful.

The following are key steps necessary to effectively identify risks:

1. Understand what to consider when identifying risks
In order to develop a comprehensive list of risks, a systematic process should be used that
starts with defining objectives and key success factors for their achievement. This can help
provide confidence that the process of risk identification is complete and major issues have
not been missed.

2. Gather information from different sources to identify risks

Good quality information is important in identifying risks. The starting point for risk
identification may be historical information about the current project or similar projects
completed in past and then discussions with a wide range of stakeholders about historical,
current and evolving issues, data analysis, review of performance indicators, economic
information, loss data, scenario planning and the like can produce important risk

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 Assignment on Contractual Risk Management

information. Furthermore, processes used during strategic planning like Strength Weakness
Opportunity and Threat SWOT Analysis and benchmarking will have revealed important
risks and opportunities that should not be ignored, i.e. they should be included in the risk
register.

3. Apply risk identification tools and techniques

It is necessary to apply a set of risk identification tools and techniques that are suited to its
objectives and capabilities, and to the risk the project faces. Relevant and up-to-date
information is important in identifying risks. This should include suitable background
information where possible. People with appropriate knowledge should be involved in
identifying risks. Approaches used to identify risks could include the use of checklists,
judgments based on experience and records, flow charts, brainstorming, systems analysis,
scenario analysis, and system engineering techniques.

4. Document the risks identified

The risks identified during the risk identification are typically documented in a risk register
that, includes (at this stage):
• risk description;
• how and why the risk can happen (i.e. causes and consequences); and
• the existing internal controls that may reduce the likelihood or consequences of the
risks.
• It is essential when identifying a risk to consider the following three elements:
• description/event - an occurrence or a particular set of circumstances;
• causes - the factors that may contribute to a risk occurring or increase;
• the likelihood of a risk occurring; and
• consequences - the outcome(s) or impact(s) of an event.

5. Document your risk identification process

In addition to documenting identified risks, it is also necessary to document the risk
identification process to help guide future risk identification exercises and to ensure good
practices are maintained by drawing on lessons learned through previous exercises.
Documentation of this step should include:
• the approach or method used for identifying risks;
• the scope covered by the identification; and

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 Assignment on Contractual Risk Management

• the participants in the risk identification and the information sources consulted.
Experience has shown that management often disregards well controlled risks when
documenting the risk profile of the project. It is stressed that a well-controlled risk must still
be recorded in the risk profile. The reason for this logic is that the processes for identifying
risks should ignore at that point any mitigating factors (these will be considered when the
risk is being assessed).

6. The outputs of risk identification

The document in which the risks are recorded is known as the "risk register" and it is the
main output of a risk identification exercise. A risk register is a comprehensive record of all
risks across the project depending on the purpose/context of the register. There is no single
blueprint for the format of a risk register and the company have a great degree of flexibility
regarding how they lay out their documents.

As a minimum, the risks register records:

• the risk;
• risk category;
• how and why the risk can happen "cause of risk";
• how will the risk impact the project if it occurs "impact on project";
• the qualitative and / or quantitative cost should the risk materialize;
• the likelihood and consequences of the risk to the project;
• the existing internal controls that may minimize the likelihood of the risk occurring;
• a risk level rating based on pre-established criteria;
• framework, including an assessment of whether the risk is acceptable or whether it
needs to be treated;
• a clear prioritization of risks (risk profile);
• accountability for risk treatment (may be part of the risk treatment plan); and
• timeframe for risk treatment.
Once the risks have been identified and existing control have been assessed and it is has been
established that controls are inadequate, an assessment of whether the risk is acceptable or
whether it needs to be treated needs to be performed.

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