Risk Management in construction

By Rawaz Kanabie Mohammed Ameen

Introduction

For many years, risk management in construction projects has been approached using a
reductionist approach that produces poor results and limits the quality of project
management. For example, most of the times risk is handled through the application of
contingencies (money) or floats (time) that are not determined based on a comprehensive
analysis of the risks that can affect a particular project, and that in many cases are clearly
insufficient to cover the consequences of risks that do occur during the project
realization. Then, in most of the cases projects end with costs overrun and late.

Project risk management has been intensively discussed in recent years. Projects are
becoming shared efforts of multiple parties – construction industry is a good example of
an area, where the project outcome is delivered in an extremely complex actor network.
Still, research on how the project risk management should be adopted to the network
environment is scarce. This study's objective is to identify the risks that are caused by the
network structure and the ways to manage risks in the co-operation of the whole project
network. The focus of the study is put on the informal risk management means. The
purpose is to emphasize other than legally binding contracts as risk management means.

A lot of the risk management research is targeted to the construction projects, which are
seen as extremely risky projects with highly inflexible risk management by contracts.
Number of studies are stressing the importance and superiority of the co-operation and
less formal risk management means, but concrete methods are not introduced. In
addition, the use of already developed risk management methods is modest at
construction sites. The basic idea of the model is to take the advantage of higher-level
co-operation and to switch a project risk management in construction networks from
dyadic relationships more towards the network-level co-operation. According the
understanding gained during this study it is suggested that by enabling more co-operative
risk management methods, the project risk management will become more efficient and
identified inefficient and costly network governance practices – serving as a source for
risks – would be reduced.

In construction, as in all industries, it is necessary for firms to strike a balance between

the avoidance of all risks on the one hand, and rash, risk seeking behavior on the other.
The challenge is not to avoid risk, but to take calculated risks by recognizing and
managing them effectively. Indeed, there is a large, profitable and untapped market in the
construction industry for firms which can manage their risks effectively. Ultimately,
organizations make money by charging customers a fee to manage their risks. Firms
which can manage effectively more risks than their competitors can make more money.
For example, a building owner will pay a facility management company a fee to take and
manage the many risks which can affect the efficient operation of a building in use. These
risks include ongoing maintenance of building fabric and mechanical and electrical
services, security, parking, cleaning, catering etc. The fee charged for managing these
risks will be determined by the level of confidence to manage them effectively.

We also propose a more socially sensitive approach to risk management, which considers
the needs of all stakeholders and recognizes how the activities of the construction and
facilities management industries affect society. This is important in all projects but
especially in large projects which arouse special community interest and expectation. In
particular, because many large projects are now procured via public– private partnerships,
there is an increasing pubic expectation that shared project ownership means shared
project information
Risk Identification:

The main goal of Identifying risks is to generate an organized and structured list of
identified risks, showing their characteristics, causes and consequences, so it can be used
during next phases or even in other projects. This is an iterative process since new risks
can occur during the project life cycle or in which existent risks become more obvious.,
Even if companies have the knowledge of the existing risks, the level of concern
regarding risk management is not high and many companies do not use routinely a
complete risk treatment. Companies mostly identify risks using the brainstorming
technique where an identification list of risks is produced in mutual agreement between
project stakeholders. (9)
Risk identification is an iterative process that involves the project team, stakeholders and
other managers affected by or who affect the project, and finally outside individuals who
can comment on the completeness of the risk identification based on their similar
experiences.(1)
Four techniques are commonly used to identify risks in construction projects:
1. Industrial checklists are typically prepared by a documentation specialist for various
project and product documents. Checklists often key into potential failure points in past
projects and thus are very useful in identifying risks. Interviewing project personnel from
each discipline and staff within the organization who have experience of similar projects
ensures that corporate knowledge and personal experience are utilized in the process of
identifying risks. This technique allows project personnel to identify the risks that they
can see in the project and gives them a feeling of involvement in the process and
ownership of the identified risks, which should then lead to a greater acceptance of any
measures implemented to reduce the risks.
2. Interviews with key project participants or analysis of historical data for similar
projects and examining similar current or previous projects, risk assessments, lessons
learned or project evaluations are other means of obtaining feedback about risks.
3. Examining historic data from previous similar projects utilizes corporate knowledge.
However, an organization may not have carried out a similar project, or the data from a
previous similar project may not have been recorded; thus, this technique can only be
successful in a limited number of cases. Database systems that actively manage and
report the progress of projects may be a useful source of information. However, such
systems are often limited in terms of the useable or relevant data that are stored.
4. Brainstorming with the project team may be valuable for projects involving new or
unusual risks, innovative management arrangements or to develop initial checklists. This
technique may be a useful element of risk management workshops.
Brainstorming sessions involve getting the key project stakeholders together to identify
and priorities the risks in the project. This technique enables the stakeholders to hear what
the other members of the project team see as risks and to use these ideas to inspire them
in identifying additional project risks. It is important to choose the people who comprise
the brainstorming group carefully because the right mix of project personnel with
appropriate experience and seniority is needed to ensure a successful session.

As shown in Table 1, there were three methods related to risk identification in

construction projects ranked on the basis of relative importance from the perspective of
government employees, contractors and consultants. The results show that brain-storming
sessions were the most significant method that contributed to identifying the risks of a
project. Brain-storming sessions and analysis of historical data for similar projects were
found to be the most preferred methods of risk identification in the Iranian construction
industry. However, it was suggested by the respondents that these practices led to
informal risk identification. (1)

Fig 1. Risk Management Process(PMBOK)(2)

Fig. 2. Risk Identification Process

Particular risks for main contractors and specialist contractors:
• Poor tender/briefing documents;
• client who will not commit;
• inexperienced client;
• non-standard contract documentation;
• ultimate client failing to sufficiently acknowledge and reward quality and value for
money;
• poor design for construction, for example when ‘buildability’ is not addressed;
• unexpected problems relating to the site, such as contamination or unusual ground
conditions; • coordination problems – this could be a particular problem for specialists;
• component and/or materials suppliers unable to meet delivery and/or cost targets;
• faulty components and/or materials;
• accidents and injuries to staff;
• weather interrupting work;
• delayed payments;
• poor documentation of records;
• lack of coordination of documentation;
• poor guidance for operatives;
• poorly trained or inadequately trained workforce;
• industrial disruption. (10)
Risk Analysis:
Risk analysis is regarded as the procedure involving the critical evaluation of prospective
risks, arranging them according to importance, and allowing the management team to
select the important ones. Risk analysis is the most tasking procedure in managing risk.
This is due to the fact that it involves assessing the chances of the event of a risk and their
outcomes on a project’s objectives. Its main aim is to evaluate risk by separating the
unnecessary events, the chances of the unwanted event happening, and the size of such
events. Meaning that, it is the transitional process between identifying risk and its
management. It includes uncertainty in a qualitative and quantitative manner to evaluate
the potential effects of risk. The evaluation should largely focus on risks that have high
chances or effects.(3)
In risk analysis, two main approaches are broadly used. They are: qualitative risk analysis
and quantitative risk analysis and sub-category semi-quantitative. The choice of method
depends on the following: the type and magnitude of the intended project, available
information, the financial implication and time available, the experience of the analysts,
the extent of innovation and the ultimate purpose of the results. Quantitative approach is
primarily based on probability spreading of risks. However, if sufficient data are
available, it can provide objective results. Qualitative method on the other hand, is
subject to personal experience, intuition and judgment. The outcomes can therefore
significantly vary from one analyst to another. Consequently, the quantitative approach
remains the preferred option by most practitioners.
Analyzing the mechanism of risk management of construction projects in terms of its
concept, risk management process, risk identification tools, techniques for qualitative
analysis of risk, techniques for quantitative analysis of risk, and risk response strategies
It includes the process of identifying the nature of construction project and its range
through understanding the environment work, and ensuring the control of all project
requirements, and preparation process (beginning phase) includes the following steps:
1) Analyzing the construction project requirements in a standard way -in other words
dealing digitally with the project parts including the time, labor, raw materials, and
financing.
2) Reviewing the current operation capacities as an initial phase of assessing the available
potentials of the company to perform the construction project.
3) Financial analysis of input and output, which includes the average spending in the
construction project.
4) Analytical assessment to distribute tasks in a more efficient way between elements of
work team in the construction project.
5) Creation of a detailed map of the work phases in terms of tasks, cost, delivery
schedules, and expiration of the project.
Identification of the potential risks can be achieved by:
• interviewing key members of the project team;
• organizing brainstorming meetings with interested parties;
• using the personal experience of the risk analyst;
• reviewing past project experiences. (10)

Types of Risks:
a) Technical risks
Inadequate site investigation
Incomplete design
Appropriateness of specifications
Uncertainty over the source and availability of materials
b) Logistical risks
Availability of sufficient transportation facilities
Availability of resources-particularly construction equipment spare parts, fuel and labor
c) Management related risks
Uncertain productivity of resources
Industrial relations problems
d) Environmental risks
Weather and seasonal implications
Natural disasters
e) Financial risks
Availability and fluctuation in foreign exchange
Delays in Payment
Inflation
Local taxes
f) Socio-political risks
Constraints on the availability and employment of expatriate staff
Customs and import restrictions and procedures
Difficulties in disposing of plant and equipment
Insistence on use of local firms and agents.(4)

Example for risk probability, a company may say that there is a 5 per cent probability that
labour costs on a project will increase by $100,000. This means that they have data,
experience or opinions to predict that on five projects out of every 100 projects labour
costs will increase by $100,000. This risk can be expressed in terms of a single figure,
which reflects its consequences for a project’s budget. This can then be included as a
contingency in that budget and is calculated by multiplying the probability of the event
by the consequence if it occurred. In this case, the risk can be expressed as:
Risk = Probability of event ×Magnitude of loss/gain
0.05 × $100,000 = $5000
Calculating risk allowances
By Expected monetary value method
The assessment identifies the impact of risks in terms of both the impact and the
probability of occurrence. This can be expressed as the simple formula:
Risk exposure = Impact x Probability.
It is important that all the potential risks and uncertainties which can affect the project
and are likely to act as constraints on the project be identified as early as possible. Once
the risks have been identified, the risks are then subjected to an assessment that
categorizes the risks into a subjective probability of occurrence and into three categories
of impaction on the project – optimistic, most likely and pessimistic outcome. Two rules
should be obeyed in the calculation: first, the most likely outcome must have the highest
value and, second, the total value of probability for the three outcomes must always equal
one. This method is simple and transparent and allows the consideration of more than one
risk. However it has the disadvantage that it is unable to consider linkages between risks.
(10)
Decision trees
Decision trees can be useful where the scenario is more complex. They are graphical
representations that are useful in assessing situations in which the probabilities of
particular events occurring depend on previous events and can be used to calculate
expected values in these more complex situations.
The decision tree in Figure 3 shows two risks – A (Adverse weather at the contractor’s
risk) and B (Potential claim from the client of delay damages – acceleration is thus
required to make up lost time).

Figure 3 Simple decision tree

Risk A has a 20 per cent chance of occurring, with a monetary value of £10,000. If
outcome A occurs, a second risk, B, is introduced and there are three likely outcomes, 1.1
(pay bonuses to own labour), 1.2 (import additional labour) and 1.3 (subcontractor’s
responsibility). The monetary value of Risk B is £30,000.
Using the decision tree, the following financial risks are identified:
Outcome 1.1 has a financial risk of (£10,000 x 0.2) + (£30,000 x 0.25) = £9,500
Outcome 1.2 has a financial risk of (£10,000 x 0.2) + (£30,000 x 0.70) = £23,000
Outcome 1.3 has a financial risk of (£10,000 x 0.2) + (£30,000 x 0.05) = £3,500.
So, if possible you should try to achieve outcome 1.3 (subcontractor’s responsibility!) as
this has the least potential cost. This example shows how these calculations can easily
become complex and highly theoretical.
Risk Response:

Acceptable mitigation steps of treating risk must be employed once the project risks have
been known and analyzed. These mitigation steps are based mostly on the nature and
potential consequences involved in the risk. The main objective is to increase the level of
control of risk, reduce the negative impact of the risk and remove as much as possible the
potential impact. Measure becomes more effective when there is more control of one
mitigation measure on one risk. Six distinctive risk responses are retention, reduction,
control, sharing, transfer and avoidance. The choice of response must correspond to the
importance of the risk; it should be financially cost effective and realistic with regard to
the project timing; it also must be accepted by other parties involved.(3)

After classifying all risks that occur or may occur in the project actions need to be
undertaken to propose specific countermeasures for each of the identified risk. These
actions can be twofold. Firstly, they may aim to complete neutralization of negative
impacts on the project or focus on reducing the pejorative influence. These reactions can
be divided into four main groups:
 Acceptance of risk (active, passive) – involving acceptance of project’s risk at a specific
level. We accept all the consequences arising both from lack of time as well as financial
resources.
 Transfer of risk - associated with the transfer of hazard to another entity demonstrating
the ability to neutralize risk. One form of transfer is a direct transfer of losses effects to
another entity. The principal form of such an activity is insurance, which allows legal
transfer of occurring effects. An example of risk transfer is to commission an ‘uncertain’
task to the contractor or transport services to the shipping company.
 Reduction, risk mitigation - are actions that reduce the probability of an event and
overcome the effects of risk, for example, through the creation of resources inventories or
balancing one risk by another and thus reducing the overall risk. The principle of risk
mitigation may be introduced at each stage of the project, from the planning period and
organizational activities.
 Avoiding risk - involving either preventing the occurrence of risk or the
removal/elimination of risk from the entire research process. In this case we do not take
the risk that exceeds the acceptable level allowed by us.(5)
Risk response (Figure 4) is also associated with the production phase. Both the clients
and the contractors mostly manage risks in this phase. This is due to the traditional
approach in the construction industry: contractors do not put enough effort into
preventing problems and solve them as they appear in the project.
 Fig 4 Risk response in the different phases
In the programme phase, similarly to the risk identification and assessment processes,
risk response is performed by the client. In the planning phase the client together with the
consultant responded to the project risks. In the procurement phase risk response is
performed mainly by the contractor. In the production phase the role of the contractor is
large and the degree of joint risk management is high.(6)
Monitoring and controlling:
The last process is Monitoring and Controlling Risks that consists in executing Risks
Responses Plans (being followed by the identification of risks), monitoring the residual
risks and identifying and assessing new ones, as well as the efficiency of all evaluation
during the project.1 Although risk responses are executed during the whole life cycle of
the project, the project must be continuously supervised in such a way to detect new risks
and possible changes. (9)

Phases of risk management process:(5)

Figure 5 Example risk management cycle

Case study: The Millennium ‘wobbly’ Bridge, London
The Millennium Bridge over the Thames, linking the newly opened Tate Modern Gallery
at Bankside with the City of London at St Paul’s, was the first pedestrian bridge built
over the Thames for over 100 years.
The bridge was intended to be one of the landmark projects heralding the new
millennium. The innovative and complex structure featured a 4-metre-wide aluminium
deck flanked by stainless steel balustrades, supported by cables, and was designed by a
joint venture comprising architect Norman Foster, sculptor Anthony Caro and structural
engineers Ove Arup.
Such was the interest in the new bridge that, when it opened to the public on 10 June
2000, an estimated 80,000 to 100,000 people crossed it. It soon became clear that all was
not well as the deck swayed about and many reported feeling seasick.
After a prolonged series of tests, it was decided to adopt a passive damping system which
would harness the movements of the structure to absorb energy.
After nearly 2 years of testing the alterations were deemed a success and the bridge
finally opened to the public in February 2002. The alterations had cost an extra £5 million
on top of the initial £18 million.
Postscript: the risk of design failure was not one of the ten principal risks identified in the
pre-contract risk management exercise!(10)
Conclusion:
Risk management is becoming the most challenging aspect of managing software
projects. While we can never predict the future with certainty, we can apply a simple and
streamlined risk management process to predict the uncertainties in the projects and
minimize the occurrence or impact of these uncertainties. Risk management not only
helps in avoiding crisis situations but also aids in remembering and learning from past
mistakes. This improves the chance of successful project completion and reduces the
consequences of those risks. This certainly is not the end of the journey for us on the
effective risk management. It is a constant learning process to be able to constantly
improve our practices to increase our process efficiency.
For Planning Risk Management, the construction company studied has as outputs the
roles and responsibilities, uses checklist analysis and brainstorming techniques has
mentioned in PMBOK. The most common and inherent internal risks to the project,
mentioned by the company were initial project phase risks, construction risks, also
occupational hazards and human risks. The main reasons for the existence of these risks
are lack of control in the quality of materials or construction methods. To avoid those
situations, the company has to fill in documents during the reception or delivery of the
materials, and to verify the Technical Sheets of the materials, where all their technical
specifications are mentioned. (9)
We have reviewed some of the main techniques and methodologies for risk management
relevant for construction projects and identified that real benefits can occur with their use.
However, there is no panacea for successful management of risk; it should be viewed
constructively and creatively. Rigid application of a set technique or procedure is not
advocated or encouraged. Indeed, methodologies are, relatively speaking, in their infancy
and evolving with practice. (10)
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