Risk Management

for
Projects
K V Prasad
Assistant Professor
NICMAR University, Hyderabad
kvprasad@nicmar.ac.in

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 Project Risk Management

Risk Management Overview

and the Risk Management Plan

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 Project Risk Management
Risk Management Overview

 What is risk?
Risk: An uncertain event or condition that, if it occurs, has a positive
or negative effect on a project’s objectives

VENTURE OUTCOME
(Project) (Products)

FAVORABLE
UNKNOWNS (Opportunity)
(Uncertainty)
UNFAVORABLE
(Risks)

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 Project Risk Management
Risk Management Overview

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 Project Risk Management
Risk Management Overview

Project Lifecycle
Risk vs. Amount at Stake

I
CONCEPT DEVELOPMENT IMPLEMENT CLOSE
N
PHASE PHASE PHASE PHASE
C
R $
OPPORTUNITY AND RISK
E
A V
S A
PERIOD WHEN
I HIGHEST RISKS L
N ARE INCURRED U
G E

PERIOD OF
R HIGHEST
I RISK IMPACT
AMOUNT AT STAKE
S
K
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Construction Business Risks

 Construction Business Risks

 Risks in projects and possible remedies
Strategy in construction business
 The construction industry has been slower than most to adopt
technological innovations, and wary of modernizing strategies
and processes.
 Labour productivity in construction has in fact fallen in the last
40 years. This is particularly surprising considering the
industry’s central role in everyone’s daily life and its powerful
impact on other industries, the environment and the economy as
a whole.
 The construction sector now accounts for 6% of global GDP,
and about 30% of greenhouse gas emissions are attributable to
buildings.
 Given the industry’s size and weight, even small improvements
in performance would generate huge benefits for the world.
Strategy in construction business
Strategic Risks
› Bids are projects in their own right, often with very tight and
immovable deadlines, and they need to be managed as such.
The challenge in developing the bid is that the delivery
project often has a high degree of uncertainty, meaning the
outcomes in terms of timelines and costs are hard to predict.

› Clients expect that the bid timeline will be ‘aggressive’ and

the price very ‘competitive’.

› The first step is for the bid team to have a coherent view of
the impact of the project’s risks and uncertainties on the
deliverables. Only then can you assess the probability of
achieving particular timeline targets or budget, and make
informed decisions.

› Quickest route to developing a risk-based bid is to access

information on the risks and uncertainties from similar
previous projects
Growth Risks
› Nail your value proposition – define company and projects

› Create measurable KPI’s – identify key indicators affecting the

growth of your business

› Verify your revenue streams – sustainable; potential for new ones

› Identify your ideal customer - outline your key customers

› Understand their key requirements - what needs to be delivered at

each stage

› Make the most of existing company data

› Define the best communication strategies - what channels are

most effective

› Personalise your approach to retain leads - right automation

software

› Re-evaluate your competition - Never stop monitoring

› Focus on your strengths - help to establish the best strategies

People / Human Resource Risks

› Finding Qualified Workers - search for top talent; common

perception that construction jobs are low paying, dangerous,
and strenuous

› Maintaining Worker Safety - constant concern; could be at

risk of high medical bills; emphasize the importance of
safety; training of employees operating machinery

› Lowering Workers' Compensation Costs - can greatly restrict

a construction company's ability to operate efficiently and
grow

› Reducing Employee Turnover - make sure you're able to offer

your employees competitive wages and benefits packages, safe
and appealing working environments, and ongoing training
Technology Risks

› Today’s contractors need to combine tools and tech to get

ahead in the marketplace.

› Construction lags behind almost every other major industry

in the adoption of technology despite an onslaught of
technological advances and opportunities in the industry

› Green technologies - property owners and developers are

adopting green initiatives. Contractors will need to educate
themselves on the latest green technology

› Worker Adoption of Connected Devices - Showcasing your

organization’s use of innovative technology as yet another
tool in the toolbox, however, can be highly appealing to up-
and-coming digital natives

› Construction Technology Costs and Disruptive

Implementation - view technology as investment rather than
another costly endeavor
Profitability and Liquidity Risks
› Construction is a high-risk industry

› Liquidity is the most important resource for construction

firms

› Poor cash flow negatively impacts upon company

profitability which further impacts upon project delivery

› High competition motivates contractors to introduce low

profit margins in tender bids to compete within the industry
and this in-turn affects company liquidity

› lack of liquidity represents a major problem that leads to the

failure of construction projects and bankruptcy of
construction companies

› problematic cash flow can also damage the congenial

atmosphere shared amongst members of the project
management team and negatively influence site productivity,
affect the quality of delivery and reduce profit margin
Operational Excellence
› Project complexity - measure of difficulty of executing a
complex production process

› Having a number of complicated individual parts brought

together in an intricate operational network to form a work
flow that is to be completed within a stipulated production
time, cost and quality

› Project complexity helps determine planning, co-ordination

and control requirements

› Construction industry has developed great difficulty in

coping with the increasing complexity of major construction
projects

› Understanding of project complexity and how it might be

managed is of significant importance for achieving successful
projects for all the parties involved
Other Risks
Risks in projects
– Construction is a risky industry. Each project is unique and
individualized, with its challenges and outcomes.

– Risk can appear in any form and at any stage of the construction
process. Lack of risk mitigation can result in threats of budget,
profitability, efficiency, and project schedules.

– One of the trickiest parts of the building process is identifying and

managing construction risks. With thorough planning and risk
mitigation, it’s not impossible.

– Risk management is critical for every company. Having unknown risks1

can make a company vulnerable and unprepared for what’s to come. 9
Risks in projects

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0
Shifting Workforce and Personnel

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Construction Defects

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Contractual Risks

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Contractual Risks Remedies

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Overextension

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Overextension Remedies

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Fire related Hazards

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Site Protection

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Site Protection

 Unattended and unprotected job sites can result in damage to frozen or leaking

pipes and theft or vandalism of equipment and materials. Not all sites have extensive

security on off-hours, and unattended job sites are susceptible to damage and

vandalism.

 Ultimately, a fenced or well-lit site has a less likely chance of vandalism compared to

a site with nothing guarding it.

 Estimates state that there are approximately $1 billion a year in losses from theft

and vandalism. Additionally, that number of losses and costs to builders 3and

companies rose 10% since 1996 and is predicted to continue increasing. 2

Site Protection

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Environmental Risks

 It is important to consider the conditions of the site because natural disasters

do happen. If your job site is near a fault line, you, as the Project Manager
should consider the risk of natural disasters. It is hard to predict a natural
disaster, but it can never hurt to be prepared. Natural disasters include but,
not limited to:

– Hurricanes

– Tornadoes

– Floods
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– Fires

– Lightning storms
Change Orders
 A change order is a specific type of documentation that you use to record an
amendment to your original contract. Change orders consist of the additional
work completed that is not specified in the contract. Common causes for change
order requests are:
 Incorrect estimate of a project,

 Team or client reached an obstacle that steered away from the original plan

 Team or client is incapable of completing their deliverables within budget

 Extreme weather or job site conditions cause delays in work

 Typically, contractors split change orders into two sections: the price and scope of
work. The scope of work is necessary to determine the precise amount of
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materials, labor, and time needed for the additional updates
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Coordination Complications

 In any industry, miscommunication occurs. But in the construction industry specifically, a

mishap or delay in communication can push back a project schedule and risk the overall
success.

 Picture this, you’re a subcontractor that specializes in electrical, and due to the lack of
communication, a change order is late; the HVAC sub or plumbing sub might be delayed or
have to work around you. Miscommunication can result in simultaneous delays in schedule
and the possibility of cost overruns. In terms of risk management, coordination
complications are very crucial to think about because it can lead to the waste of
unnecessary materials and pricey reworks.

 Construction management software is a great way to reduce coordination complications.

They allow collaborative engagement through mobile technology and cloud-based
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accessibility. Implementing software into your management operations can help get
subcontractors, contractors, and PMs all on the same page.
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Documentation

 Document control is one of the construction industry’s biggest risks. Proper

document management is one of the PM’s most tedious and time-
consuming tasks.

 Construction projects require hundreds, maybe thousands, of documents

that would take laborious effort to sort through and file. Nowadays,
contractors are transitioning from paper documentation to digital
documentation.

 Additionally, construction software platforms use cloud-based technologies

that allow you to search for any document at any moment, reducing
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schedule delays and the accessibility in a central document location.
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 Project Risk Management
Risk Management Overview

 What is risk management?

– Identifying, analyzing, prioritizing, and responding to
risk events
– Integration of risk management activities into your
other project management functions
– Developing responses to risk to meet your project
objectives
– Project risk management is PROACTIVE

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 Project Risk Management
Risk Management Overview

INTEGRATING RISK WITH OTHER PROJECT MANAGEMENT FUNCTIONS

PROJECT
MANAGEMENT
INTEGRATION
INFORMATION /
SCOPE
COMMUNICATIONS
Life Cycle and
Expectations Environment Variables
Ideas, Directives, Data
Feasibility
Exchange Accuracy

QUALITY
Requirements PROJECT Availability HUMAN
Standards RISK Productivity
RESOURCE

Services, Plant, Materials:

Time Objectives, Performance
Cost Objectives,
Constraints Restraints

CONTRACT /
TIME
COST PROCUREMENT

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 Project Risk Management
Risk Management Overview

 Components of the Risk Management Plan

– Methodology
– Roles and responsibilities
– Budgeting
– Timing
– Risk categories
– Definitions of risk probability and impact
– Probability and impact matrix
– Stakeholder’s tolerances
– Reports
– Tracking
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 Project Risk Management
Risk Management Overview

 Results from developing the Risk Management Plan

– You have a written plan

– You know what actions you have to do

– You know who is responsible for what

– You can track your work

– You can learn from your risk activities and help others with
their risk

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 Project Risk Management
Risk Management Overview

 Risks vs Issues
– Many projects use risk and issue logs. Sometimes the management of
issues and risks can become confusing.
– The PMBOK definition of an Issue:
 A point or matter in question or in dispute, or a point or matter that
is not settled and is under discussion or over which there are
opposing views or disagreements.
– If you have the freedom to define these items and their logs and the
subsequent management of risks and issues, then great. Handle risks and
issues as you desire. My suggestion is to follow as closely as possible the
PMBOK guidelines.
– If you are dictated by the company, organization, or management team to
handle risks and issues in a particular manner, then follow these
guidelines. Document in your Project Management Plan, Risk
Management Plan, and or Issue Management Plan how you will handle
43 risks and issues.
 Project Risk Management
Risk Management Overview

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Objectives of Risk Management

 Risk management has objectives before and after a loss

occurs
 Pre-loss objectives:
 Prepare for potential losses in the most economical way
 Reduce anxiety
 Meet any legal obligations
Objectives of Risk Management

 Post-loss objectives:
– Survival of the firm

– Continue operating

– Stability of earnings

– Continued growth of the firm

– Minimize the effects that a loss will have on other persons

and on society
Need of Risk management

Need of formal risk management process

 arises from the nature of risk and the typical complexity of projects

 risks on a project are often interrelated and change organically during the course
of the project

 formal, repeatable approach allows project teams to sort through numerous risk
events

 to identify the risks, opportunities, and their interrelationships

 pinpoint those risks that are the most critical

 identify cost-effective ways to reduce those risks or capitalize on those

opportunities
Risk management process

 Systematic process helps provide a reliable way to ensure objectivity and minimize
any unwarranted optimism, bias, or self-interest

 Helps project sponsors and project teams make informed decisions regarding
alternative approaches

 Risk management encourages the project team to take appropriate measures to –

– Realistically plan the project activities given the desired scope, schedule, and budget

– Realize potential conflicts in resource utilization early to avoid conflicts proactively

– Maximize opportunities to improve the project’s objectives with lower cost, shorter
schedules, enhanced scope, and higher quality

– Establish consistent project practices and communication strategies to create

predictability in project activities and minimize management by crisis
Risk management process