Chapter 2

Risk and risk management related to

construction business
 LEARNING OUTCOME
At the end of this class, students will be able
to:
-Identify risk, hazard and uncertainty in
construction business
-Compare risk management with other industry
https://www.youtube.com/watch?v=dcdXzQq8
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Risk management in the PMBOK
 Risk management is one of the nine knowledge areas propagated by
the Project Management Institute. The PMBOK® Guide recognizes
nine knowledge areas typical of almost all projects. The nine
knowledge areas are:
 Project integration management.
 Project scope management.
 Project time management.
 Project cost management.
 Project quality management.
 Project human resource management.
 Project communications management.
 Project risk management.
 Project procurement management.
Risk management in the PMBOK
Project risk management includes:
Risk management planning;
Risk identification;
Qualitative risk analysis;
Quantitative risk analysis;
Risk response planning;
Risk monitoring and control.
RISK MANAGEMENT CIRCLE

risk management circle

source : Kontio
RISK MANAGEMENT LIFE CYCLE
Risk
Monitoring
Risk
Identification
Risk
Analysis Controlled
Risks
Risk Risk Environment
Estimation Response

Risk
Evaluation

Risk Management life cycle

Source: Baker et al., 1999
RISK MANAGEMENT PROCESS

Ng et al., (2003) produced a risk-based maintenance management model for

toll road/tunnel operations. The model was based on five core elements of the
risk management process:
1. Identification (finding and understanding risks),
2. Measurement (measuring the severity of risks),
3. Assessment (assessing the likelihood of occurrence of risks),
4. Valuation (determining or ranking the identified risk factors
according to the management objectives and available resources, and
implementing risk response action plans),
5. Control and monitoring (tracking the progress made and results
achieved by the risk response actions taken as a result of the risk evaluation
phase and taking corrective actions).
CONT…

Bajaj et al., (1997) claim that to make a risk management process

beneficial to the client and achieve his objectives (time, cost and
quality), the risk identification stage should be emphasised.
A risk that is not identified definitely cannot be managed, controlled or
minimised. Therefore, the identification process is the most vital
process in risk management and the first step before subsequent
steps (classification, analyse and response) can take place.

In essence, risk and uncertainties affect the fundamental

management of
•Planning
•Implementation
•Monitoring
•Controlling
•Decision making
CONT…

According to Godfrey (1996), systematic risk management helps to:

•Identify, assess, and rank risks, making the risks explicit
•Focus on the major risks of the project
•Make informed decisions on the provision for adversity, e.g.
mitigation measures
•Minimise potential damage should the worst happen
•Control the uncertain aspects of construction projects
•Clarify and formalise the company’s role and the roles of others in
the risk management process
•Identify the opportunities to enhance project management
Risk assessment

Risk assessment and risk analysis of technical systems can be defined

as a set of systematic methods to:
 Identify hazards

 Quantify risks

 Determine components, safety measures and/or human interventions

important for plant safety
 Major incidents
Location & Company Major incident Impact
Date

Flixborough, Nypro UK Ltd – Explosion in oxidation 28 fatalities cases

1/6/1974 production of of cyclohexane process 36 injuries on site, 53
caprolactam injuries offsite

Seveso, Italy , Industrie Chimiche Toxic release of TCDD 477 people reported for skin
10/7/1976 Meda Societa – 2,3,6,8- injuries
Azionara (ICMESA), tetrachlorodibenzo-p- Environmental damage,
batch production of dioxin) 78000 smalls and 700 large
2,4,5 trichlorophenol animals were slaughtered to
prevent dioxin entering the
food chain

Texas City, BP Isomerisation unit 15 fatalities, 180 injuries

USA, 23/3/05 explosion
Piper Alpha, Occidental petroleum Oil platform explosion 167 fatalities, oil platform
UK, 6/7/88 Caledonia Ltd – and fire destroyed and UK
offshore oil and gas hydrocarbon production
 When thinking about your risk assessment, remember:

a hazard is anything that may cause harm,

such as chemicals, electricity, working from
ladders, an open drawer etc
the risk is the chance, high or low, that
somebody could be harmed by these and
other hazards, together with an indication of
how serious the harm could be
 PHASES OF RISK ASSESSMENT
Phases Purpose
Define Consolidate relevant existing information about the project
Fill in any gaps uncovered in the consolidation process

Focus Scope and provide a strategic plan for the risk management process
Plan the risk management process at an operational level

Identify Identify where risk might arise

Identify what we might do about this risk, in proactive and reactive response terms
Identify what might go wrong with our responses
Structure Testing simplifying assumptions
Providing more complex structure when appropriate

Ownership Client- contractor allocation of ownership and management of risks and responses
Allocation of client risks to named individual
Approval of contractor allocations
Estimate Identify areas of clear significant uncertainty
Identify areas of possible significant uncertainty

Evaluate Synthesis and evaluation of the results of the estimate phase

Plan Project plan ready for implementation and associated risk management plan
Manage Monitoring
Control
Developing plans for immediate implementation (Source: Chapman, 1997)
 (Source: Flanagan and Norman, 1993; Turner, 1999; Simister, 1994; Akintoye, et al., 2001; Raz, 2001; Ng et al., 2003)

List of the benefits and tools and techniques used in Risk Management
Risk Management Benefits Tools and Techniques
Elements
Risk Identification Produces lists of the project specific risk Checklists
items likely to compromise a project’s Examination of decision drivers
success. Comparison with experience
Identify where risks might arise in Brainstorming
construction projects. Interview, survey and research
Clear understanding the possible risks. Personal experience
Allow the formulation of more realistic plans External consultation
to manage the risk. Flow charts
Identify the source and type of risks. Event and fault trees
Identify the best party able to handle or Workshop sessions
manage risk. Case studies
Physical inspection/site visits
Plan decomposition
Risk Analysis Assess the loss probability and loss Performance models
magnitude to each identified risk item. Cash models
Builds up statistical information about the Network analysis
risks and can assist in modelling future Statistical decision analysis
risks in future projects. Quality factor analysis like reliability, criticality,
Assessing the severity of the risks. practicality, availability and security analysis.
Evaluate the consequences associated
with the type of risk, or combination of risks
using analytical techniques.
Risk prioritisation Produces a ranked ordering of the risk Risk exposure analysis
items and analysed. Risk reduction leverage analysis- particularly
involving cost benefit analysis
Delphi or group consensus techniques
 CONT…
Risk Management Benefits Tools and Techniques
Elements
Risk prioritisation Produces a ranked ordering of the risk items Risk exposure analysis
and analysed. Risk reduction leverage analysis-
particularly involving cost benefit
analysis
Delphi or group consensus techniques
Risk management Helps to prepare or to address each risk item Checklists of the resolution techniques
planning using risk avoidance, risk transfer or risk Cost benefit analysis
reduction. Standard risk management outlines,
The coordination of the individual risk item forms and elements
plans with each other and with the overall
project plan.
Assist in distinguishing between good
luck/good management and bad luck/bad
management.
Risk resolution Produces a solution in which the risk items are Prototype simulation
eliminated or otherwise resolved. Key personnel agreement
Design to cost approaches
Incremental development
Risk monitoring Involves tracking the project’s progress toward Milestone tracking
resolving its risk items and taking corrective A top 10 risk item that is highlighted at
action where appropriate. every weekly, monthly or milestone
project review
Follow up with reassessment or
corrective action
(Source: Flanagan and Norman, 1993; Turner, 1999; Simister, 1994; Akintoye, et al., 2001; Raz, 2001; Ng et al., 2003)
Tools and techniques for risk management process

Tools and techniques Description

Personal experience Refer to the expertise, knowledge and experience of
professional in an organisation.
Interviews, survey and Provide information on the number and nature of specific
research project risks.
Checklists Traditional method to for risk identification and the most
favoured method (Simister, 1994).
Decision tree analysis The method used to determine the decision to be made.
Involved a probability to each of the possible choices
based on the context of the decision (Magerman, 1995)
Critical path analysis The technique normally used for project planning, control
and monitoring.
Used to identify high impact risks and issued to schedule.
Risk log/register This method allows all the potential problems and
opportunities and managed them proactively before they
become problem to the project.
Cost benefit analysis The cost involved in any project is always compared to the
benefits derivable out of commitments.
If the cost exceeded the benefits, the management team
will re-evaluate and make the best decision.
Source: CCTA, 1995; Akintoye, et al., 2001; White and Fortune, 2002; Williams and Parr,
2004)
 CONT…
Cause and effect diagram Is known as fishbone diagrams. It is used to explore all the potential or
real causes that result in a single effect.
Causes are arranged according to their level of importance or detail,
resulting in a depiction of relationships and hierarchy of events.
This method is a very good technique in identifying programme risks in
view of managing and mitigating risks.
Build a library of risk This is a database that holds various information, such as checklists, risk
experience register, past decisions related to each risks, etc.
This method is very useful for the current project especially pertaining to
risk identification.
Risk identification workshops This method is used to identify risks and similar to brainstorming method.
The method starts with presentations and discussion to identify all the
possible risks relating to a particular case.
Event tree analysis Can be either qualitative or quantitative technique and are widely used
for facilities provider with engineered accident consequences, following
the occurrence of the initiating event.
Used probabilities on the event tree and inductive type of analysis.
Preliminary Hazard Analysis It is an inductive technique and the main objective is to identify the
(PHA) hazards, hazardous situations and events that can cause harm for a
given activity, facility or system.
Carried out at early stage in the development of a project.
Human reliability assessment Deals with the impact of human operators and maintainers on system
(HRA) performance and are used to evaluate human error influences on safety
and productivity.

Source: CCTA, 1995; Akintoye, et al., 2001; White and Fortune, 2002; Williams and Parr,
CONT…

Hazard and Operability Derived from fault modes and effects analysis (FMEA)
Developed for the chemical industry and useful for identifying
unforeseen hazards
Fault modes and effects Is a qualitative technique that systematically identify the
analysis (FMEA) consequences of individual component fault modes
The analysis is organised by creating a table or worksheet for the
information
Fault tree analysis (FTA) Is either qualitative or quantitative technique
Factors contribute to a specified undesired event are deductively
identified, organised in a logical manner represented pictorially
The faults can be from events associated with hardware, human
errors or other pertinent events, which lead to undesired event.

Source: CCTA, 1995; Akintoye, et al., 2001; White and Fortune, 2002; Williams and Parr,
2004)
Basic risks of construction projects

 high rate of accidents and a poor reputation for coping with

problems, with many projects failing to meet deadlines, cost
and quality targets.
 cases the risk of time and cost overruns can compromise the
economic viability of the project, making a potentially
profitable investment untenable.
 construction is subject to more risks due to its unique features,
such as long duration, complicated processes, unpredictable
environment, financial intensity and dynamic organisational
structures.
 According to Pinsent Masons, risks such as tax risks,
interface risks and local site risks are the most common and
inevitable on construction projects
Construction project risks are interrelated and interdependent. The
customary origins for project risks are the following (U.S. Department of
Transportation, 2006):
Performance, scope, quality, or technology issues;
Environment, safety, and health concerns;
Scope, cost, and schedule uncertainty;
Political concerns.
All construction projects share common risks that can be classified as
follows (Guerra & Teixeira):
Construction
 Changes in the work
 Subsurface geological and geotechnical conditions
 Site access
 Level of detail design delivered by the owner
 Late drawings and instructions
 Availability of resources
 Accidents (such as collision, fire and so on)
 Damage to persons or property
 Defective design
 Cost of tests and samples
 Actual quantities of work
 Equipment commissioning
Financial and economic Contractual and legal
Inflation •Delayed dispute resolution
Funding
•Delayed payment on contracts and extras
Performance •Change order negotiation
Productivity of labour
•Insolvency of contractor or a subcontractor
Productivity of equipment
Physical
Suitability of materials
•Subsurface geology geotechnical conditions
Defective work
•Conditions
Conduct hindering performance of the
work •Subsurface conditions and ground water
Labour disputes •Topography
Security •Natural catastrophes
Vandalism
Political and societal
Terrorism
•Soil availability for construction
Corruption
•Environmental pressures
Assaults
•Regulations (safety or labour laws)
Negligence
•Public disorder
Intrusion
•Strike
Construction risks can be categorized into these six categories
Technical risk ( design process, construction)
Logistic risk (availability of transportation facilities and
availability of equipment )
Environment risk (environmental regulation, water quality issues
etc.)
Management risk (organizational, project management etc.)
Financial risk (Inflation, local taxes, and availability and
fluctuation in foreign exchange)
Social politic risk ( local community objection, political factors
etc.)
Common Hazards and Dangers in the Construction Industry
Workplace
 Falls and Heights
 Slips and Trips - uneven surfaces, obstacles, slippery surfaces,
trailing cables, holes and random materials are spread everywhere
on the site
 Moving Objects
 Noise
 Handling - materials and equipment are routinely moved around
 Blue Finger- prolonged use of vibrating power tools and ground
equipment
 Collapses - demolitions sites, scaffoldings, and partially completed
buildings
 Airborne Materials - construction environment contains a mix of
harmful fine powders and fibres that can mainly damage the lungs,
lead to chronic obstructive pulmonary disease, asthma, silicosis,
and other lung diseases.
 Electrocutions -Working near power lines and cables
 Heat - heat-related injuries like heat stroke and heat exhaustion also
contribute to fatalities in the construction workplace
 Safety First
Risk Management in Construction
 The construction industry is heterogeneous and enormously complex. There are
several major classifications of construction that differ markedly from one another:
housing, nonresidential building, heavy, highway, utility, and industrial.
 The success parameters for any project are in time completion, within specific
budget and requisite performance (technical requirement).
 The main barriers for their achievement are the change in the project environment.
The problem multiplies with the size of the project as uncertainties in project
outcome increase with size.
 Large construction projects are exposed to uncertain environment because of factors
such as planning, design and construction complexity, presence of various interest
groups (owner, consultants, contractors, suppliers, etc.), resources (manpower,
materials, equipment, and funds) availability, environmental factors, the economic
and political environment and statutory regulations.
Risk Management in Construction
 Construction projects can be unpredictable. Managing risks in
construction projects has been recognized as a very important
process in order to achieve project objectives in terms of time,
cost, quality, safety and environmental sustainability.
 Project risk management is an iterative process: the process is
beneficial when is implemented in a systematic manner
throughout the lifecycle of a construction project, from the
planning stage to completion.
Risk Management in Construction
 The use of risk management from the early stages of a project,
where major decisions such as choice of alignment and selection
of construction methods can be influenced, is essential.
 The benefits of the risk management process include identifying
and analyzing risks, and improvement of construction project
management processes and effective use of resources.
Risk Management in Construction
 Construction projects carry complex risks for all involved—
including owners, consultants, contractors, and suppliers—that
can increase when construction takes place near an active facility
or congested area.
 Risks include geological or pollution-related conditions,
interference with ongoing operations, construction accidents, as
well as design and construction faults that may negatively impact
the project both construction and when the project is complete.
Risk Management for minimising time overrun

Conceptual time
performance

Matrix considering
factors
Project team’s job
knowledge experience
based on questionnaire
survey

Input from
previous Factor Implementation of Based on effectiveness
project: based identification the mitigation and practicality
on measures schedule
professionals
experience

Adopted from: Mulholland and Christian (1999)

Risk Management process to minimise time overrun for construction
projects

Risk Management Tools and Minimising

Elements Techniques Time Overrun

Identifying possible factors

Questionnaires, that can contribute to time
Risk Identification documents and overrun in construction
previous research projects

Risk Classification Group classification Classified according to the

most parties responsible

Ranking method,
Risk Analysis Develop a risk strategy
effectiveness and
for construction projects
practicality analysis

Proposed a framework for

Risk Response List mitigation minimising time overrun.
measures list possible mitigation
Source: Endut, 2008 measures according to each
factor