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JEKALE CM CONSULTANCY

RISK MANAGEMENT
FOR
CONSTRUCTION PROJECTS

Wubishet Jekale (Dr. Eng)

1 CMC – Engineers (UCBP of GTZ – IS)

March, 2009
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Part I: Preamble
 Why Risk Management
 Risk Management: Definition & Issues
 Risk Management: Processes & Components
 Risk Management: Culture & Methods

Part II: Bases for Management of Construction Risks

OUTLINE

 Construction Process Vs Major Stakeholders

 Major Stakeholders Vs Construction Risks
 Major Construction Risks

Wubishet Jekale (Dr. Eng)

Part III: Construction Risk Management
 Example 1:
 Cost Fluctuations Vs Estimating
 Risks Vs Delivery Systems
 Risks Vs Contract Types
 Risks Vs Procurement Methods
 Risk Management Case Study
 Example 2: 2
 ….
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Wubishet Jekale (Dr. Eng)

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 Clients

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• fail to get their physical infrastructures on time due
to excessive delays
• suffer in getting extra budgets due to cost overruns
RISK MANAGEMENT?

• Suffer excessive operation and maintenance costs

due to quality related problems when completed

Contractors losses reputation (sustainable work) and incomes

(sometimes their profits) due to:
WHY

• excessive price fluctuations

• suspensions and substantial disruption causing idle

Wubishet Jekale (Dr. Eng)

manpower and machineries
• reworks resulting from quality related problems of suppliers
and workmanship
• scarcity of construction materials
• lack of capacity to respond to excessive construction works

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The strategy of dealing with the immediate has served humans well
when the greatest threats were local and immediate.
All decisions about the future are made in the presence of
RISK MANAGEMENT?

considerable risks. Hence, Risks are always with us and can

never be eliminated from our lives.
Risks are important ingredients of and strong stimulus for
creativity, development and investments.
WHY

Often risk is either ignored or dealt with in arbitrary way causing

substantial losses or creates the involvement of unethical
practices.

Wubishet Jekale (Dr. Eng)

When one admits that nothing is certain, one must also accept that
some things are more certain than others. Hence, need for Risk
Management!!

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Risk Management is a logical, systematic and process oriented approach that:
 minimizes losses and maximizes opportunities through enabling improvements
in decision making!
RISK MANAGEMENT:
DEFINITION & ISSUES
 identify, analyse, treat and monitor risks involved in any activity or process of a
company or a project!
Risk Management is a methodology that helps managers make best use of
available information for decision making even during unfamiliar or
ambiguous or complex activities or processes!

Risk Related Issues are raised when:

• damages possible to encounter during activities and processes need to be

Wubishet Jekale (Dr. Eng)

managed
• contracts need to be concluded between / among parties
• extra contractual issues need to be covered
• health, safety and environment issues are protected
• duties and responsibilities are allocated
• Clients and Financiers appraise projects for financing
• parties join to form JV or Consortium or Alliances
• suspensions and prolonged disruptions encountered 6
 Establish the Context

Communicate & Consult

Risk Assessment

Monitor & Review

Identify the Risks
PROCESSES & COMPONENTS
RISK MANAGEMENT:

Analyze the Risks

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Evaluate the Risks

Wubishet Jekale (Dr. Eng)

Treat the Risks

Risk Management Process

Risk Components
• Causes  Risk Type
• Risk Type  Likely hood  Impacts / Consequences
• Risk Type  Ranking  Risk Treatment
• Risk Attitude Vs Risk Exposure
• Contingency Vs Prevention
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 Predictable / Common Cause Risks
1. Almost Certain
2. Most Likely
RISK MANAGEMENT:

Unpredictable / Less Common Risks

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CULTURE & METHODS

3. Possibly

Wubishet Jekale (Dr. Eng)

4. Rarely

Risk Likelihood / Occurrences

Risk Impact / Consequences
Compensable
1. Major Impact
2. Moderate Impact
Retainable
3. Minor
4. Insignificant 8
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1. Integrate Risk Management into the Project / Company Management
System
2. Maintain Risk Database
3. Ensure all decisions are taking account of risk exposures
RISK MANAGEMENT:

4. Developing skills to manage risks to minimize differences in risk attitude

CULTURE & METHODS

5. Prepare Risk Management plan for implementation

6. Communicate and consult risk related issues to all concerned at all times
7. Risk Management methods shall be regularly reviewed
8. Allocate risks to the party that can better manage them

Wubishet Jekale (Dr. Eng)

Risk Management Culture
Risk Identification Methods
1. Objective based risk identification
2. Scenario based risk identification
3. Taxonomy based risk identification
4. Common cause risk identification 9
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Objective based risk identification
 Risk associated with endangering the achievements of the
RISK IDENTIFICATION

project/the company objective.

Scenario based risk identification
METHODS

 Risk associated within different alternatives to achieve

objective.
Taxonomy based risk identification
 Risk associated with their possible sources/causes

Wubishet Jekale (Dr. Eng)

Common cause risk identification
 Previously records of risks

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Qualitative Methods Quantitative Methods
Scenario {What if; If then and / or Brain Probability Analysis
Storming process} Analysis Utility Theories
Check lists of risks compiled from previous
experience Value Analysis
Decision Tree
RISK MANAGEMENT:

Interviews with key stakeholders

Conservative Estimating Detailed Estimating
CULTURE & METHODS

Mixed Methods
Sensitivity Analysis, Simulation and Influence Diagrams

Risk Analysis Methods

Risk Treatment Methods

Wubishet Jekale (Dr. Eng)

1. Risk Retention (Accept / Absorb / Allowance / Contingencies)
2. Risk Transfer (Outsourcing / Insuring)
3. Risk Postpone (Provisional sum / quantity, Contract type)
4. Risk Split / Divide (Delivery System)
5. Risk Reduction (Liquidated damage, Approximate Price Escalation
formulae, Limiting risk exposure)
6. Risk Avoidance (Fixed Fee / Lump sum Contract types)
7. Risk Spreading (Consortia / Joint Venture) 11
 Risk Risk Risk Risk
In-Significant
Retention Retention Retention Retention
LIKELIHOOD VS IMPACTS & TREATMENT
RISK MANAGEMENT:

Risk Risk Risk Risk

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Minor
Reduction Reduction Postpone Retention

Wubishet Jekale (Dr. Eng)

Impacts / Consequences

Risk Risk Risk Transfer Risk

Moderate
Spread Spread / Retention Postpone

Risk
All All
Major Risk Spread Transfer /
Combined Combined
Retention

Most Most
Possibly Rarely
Certainly Likely
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Wubishet Jekale (Dr. Eng)

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Construct Constructi Constru Project –
ion Basic on Design ction Product

Construction
Planning Services Transfer
Works

Process
CONSTRUCTION PROCESS:

Administrative Monitoring, Evaluation & Re Planning

MAJOR STAKEHOLDERS

Procurement and Contract Administration

Stakeholders

Beneficiary
Financiers Client
Client Client
Major

Clients Consultant
Consultant Consultant
Consultant Contractor
Contractor

Appraisal, Financing & Tender, Contract &

Defect Liability
Defining Project Scope Design related Risks Construction related
related Risk
Risk Type
related Risks Risks
Exp. & Capacity
Construction

Low balling
Risks

Experience & Capacity Risk Allocations Defects Remedy

Design Incompleteness Adversarial Relations Remedy works
Feasibility
Design Changes Location Estimation
Design freezing Quality failure Risks
Negative cash flow
Accidents
Regulation changes, Scope changes, Slow decisions, Project delay, Cost volatility, Joint Venture /
Consortia, Inflation, Exchange rate and Force majeure
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Risks related to Procurement & Contracting
 Project delay
MAJOR CONSTRUCTION RISKS
 Cost fluctuations Vs Estimating
 Quality defects
 Law balling
 Negative Cash flow
 Institutional Capacity
 Unforeseen events
 Disputes
 Professional Liability

Risks related to Outsourcing & Alliances

 Relationship and Commitment related risk
Nominated outsourcing risk

Wubishet Jekale (Dr. Eng)



 Sublet outsourcing risk

Accidental Risks
 Third Party
 Works and Resources including workmen
 Company fixed assets
 Transportation
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Wubishet Jekale (Dr. Eng)

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MAJOR CONSTRUCTIONS RISKS
Impact
Risk
Risk
Type Cause Likelihood Rank Risk Treatment
Building Road Allocation

Very
Variation Very High Low 2 Client Risk Postpone
High
Cost Fluctuations Vs Estimating

Project Contractor &

Very High High High 3 Risk Reduction
Delay Client
Risk
Price
High Very High High 1 Client Postpone /
Escalation
Reduction

Unforeseen Client / Risk Spread /

Rarely Moderate High 5

Wubishet Jekale (Dr. Eng)

Events Contractor Retention

Very
Force Major Very low Very High 6 Client Risk Retention
High

Contractor /
Disputes Possibly High High 4 Risk Retention
Client

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EXAMPLE 1: COST FLUCTUATION VS ESTIMATION
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MAJOR CONSTRUCTION RISKS
0.9
0.8
0.7
0.6
0.5
0.4 Contractor
Client
0.3
0.2

Wubishet Jekale (Dr. Eng)

0.1
0
Force Design Design Build Const.
Account Bid Build Operate Mang't
Build Transfer (FM)

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RISKS VS DELIVERY SYSTEMS
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100%
CONTRACT TYPE VS RISK

90%
80%
70%
INTENSITY

60%
50% Contractor
40% Client
30%

Wubishet Jekale (Dr. Eng)

20%
10%
0%
Lump Unit Cost + Cost + Cost +
Sum Price Fixed %age Incen.

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RISKS VS CONTRACT TYPE
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100%
PROCURMENT TYPE VS RISK

90%
80%
70%
60%
INTENSITY

50%
40%
30% Contractor
20% Client
10%

Wubishet Jekale (Dr. Eng)

0%
g d n
rin e n t io
d e T t i a
n d
Te c te e go
en stri t N
Re c
Op i re
D

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RISKS VS PROCUREMENT TENDER
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Given:
MAJOR CONSTRUCTION RISKS
Project: Industrial Building (Concep. Design)
Delivery System: Build Operate Transfer
Project Period: 3 years – Appraisal to Construction
10 years – Concession Period

Required:
Risk Analysis to assess the likely profitability of the project based on
potential major construction risks
Risk Management

Wubishet Jekale (Dr. Eng)

Step I: Establish the Context (Brain Storming Process)
 Project Area (PA) =200,000
 Project Cost (PC) = 80,000,000(C = A*PA; A = 1600)
 Project Time (PT) = 6 years& 11 months(PT = B*PCD; B = 0.5 & D = 0.6)
 Pay Back Period = 6 years
 Project Cost: Time Related & Quantity Proportional

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EXAMPLE 2: RISK MANAGEMENT
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MAJOR CONSTRUCTION RISKS Step II: Risk Identification (Brain Storming Process)
 Self Financing Vs Loan
 Delay in Land Acquisition, Design, Planning Permissions and
Construction
 Cost Fluctuation in Construction and Productions Costs
 Demand for the Product, that is; Production Sales
Step III: Risk Analysis (Probability & Sensitivity Analysis)
 Self Financing Vs Loan (C-B Analysis)
 W/Out Interest

Wubishet Jekale (Dr. Eng)

 IRR = 36.8% & PBP = 6 Years
 With 12 % Interest
 IRR = 31.26 % & PBP = 6 Years & 9 Months

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EXAMPLE 2: RISK MANAGEMENT
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MAJOR CONSTRUCTION RISKS  Likelihood Analysis (Brain Storming Analysis)
 Delay:
 LandA  MostL; Des  Poss; PlanP  MostL & Cons 
AlmostC
 Cost Fluctuations:
 ConsC  AlmostC; ProdC  MostL & EnergC  Poss
 Production Sales:
 Demand for P  Poss
 Impact Analysis (Sensitivity Analysis)

Wubishet Jekale (Dr. Eng)

 Varying the different identified risks (-40% - + 40%), and
 Re-determining IRR

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EXAMPLE 2: RISK MANAGEMENT
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MAJOR CONSTRUCTION RISKS

Demand for
Product

Delay in
Construction

Wubishet Jekale (Dr. Eng)

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EXAMPLE 2: RISK MANAGEMENT

MAJOR CONSTRUCTION RISKS
Step IV: Risks Evaluation (Prioritization)
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 Impact Analysis (Sensitivity Analysis)
 Demand for Product  Major
 Delay in Construction  Major
 Cost Fluctuation  Moderate
 Delay in Others  Minor
 Construction Delay (1st)
 Likely hood  Almost Certain
 Impact  Major
 Cost Fluctuation in Construction / Production (2nd)
Wubishet Jekale (Dr. Eng)
 Likely hood  Almost Certain
 Impact  Moderate
 Demand for Product (3rd)
 Likely hood  Possibly
 Impact  Major
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EXAMPLE 2:
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MAJOR CONSTRUCTION RISKS Step V: Risks Treatment (Slide # 12)
 Construction Delay (1st)
 Exercise for Trainees
 Cost Fluctuation (2nd)
 See Slide # 17 for Construction Part
 Demand for Product (3rd)
Continuous Steps:
 Communicate & Consult; and

Wubishet Jekale (Dr. Eng)

 Monitor & Review

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EXAMPLE 2:
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Impact
MAJOR RISK MANAGEMENT

Risk
Risk
Type Cause Likelihood Rank Risk Treatment
Building Road Allocation

Wubishet Jekale (Dr. Eng)

Delay

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EXERCISE
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C Y
TA N
SU L

Wubishet Jekale (Dr. Eng)

ON
M C
E C
A L o u !!
JE K k Y .e t
a n e t
Th th io n
5 3 4 4
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m c 9 1 1
jc e: 0
h o n
l l p
Ce
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