CONSTRUCTION RISK MANAGEMENT

Construction Contract and Risk Management

• This presentation covers construction contract and risk management.
• The material is part of a Project Management Institute (PMI) course.
• Copyright ©2024 Project Management Institute, Inc.

Avocet Island Project

• The presentation uses a hypothetical project, Avocet Island Project.
• The text highlights the importance of anticipating the unexpected and evaluating its impact on the project.

The Butterfly Effect

• Monitoring and managing risk is a collective responsibility within a project.
• Aim to ensure project success.
• Aim to reduce potential for loss within projects

Objectives

• Classify, prioritize, and mitigate risks.
• Introduce a risk management process.
• Review risk management tools and techniques.

Historical Context: Asipu People

• The presentation shows historical context in the Asipu people with focus on:
  • Risky business ventures
  • Marriage arrangements
  • Suitable building sites.

The Four Revolutions

• Slides show the four revolutions (Steam, Electricity, Computer, Technology).
• Key characteristics of each revolution, including the technologies of each are detailed.

Innovations in Risk Management

• Formalization and standardization of risk management.
• Analysis to understand and categorize risks.
• Holistic risk management.

Risk Management Is the Process of ...

• Risk management is a continuous and cyclical process.
  • Identifying risks
  • Classifying risks
  • Analyzing risks
  • Prioritizing risk
  • Mitigating risk

Key Principles

• Identify potential project risks.
• Analyze and determine impact of risk
• Reduce or offset proven risks
• Plan how to implement risk mitigation strategies

Risk Management Benefits

• Increased safety
• Increased productivity
• Increased quality
• Reduced time
• Reduced cost

Sorting Activity: Approaches to Risk

• A sorting activity is available for the user to interact

Approaches to Risk

• The slide outlines approaches to risk for Owners, Designers, and Contractors.

Real or Perceived Risk?

• Lists of potential factors considered as real or perceived risks:
  • Availability of information
  • Experience of project participants
  • Understanding risk factors
  • Knowledge of local conditions
  • Stability of risk factors
  • Reliability of assumptions

Types of Risk

• Strategic risk
• Program risk
• Subprogram risk
• Project risk
• Contractor risk
• The slide shows a hierarchy of risk, with risk types becoming narrower.

Causes of Risk

• The possible sources of risk within a project include:
  • Project-related
  • Competitiveness
  • Contractual
  • Financial
  • Stakeholder-based
  • Occupational
  • Environmental

Identifying and Classifying Risk

• Stay objective.
• Introduce structured techniques for risk identification and classification.
• Enables risk tracking and mitigation.

Risk Assessment

• Time and/or cost impact
• Occurrence of risk
• Likelihood
• Probability.

Generating Risk Estimates

• Identify all potential risks
• Determine necessary mitigation methods
• Consider likelihood and frequency of risk occurrence.

Risk Prioritization

• Define the value of risk.
• Likelihood of risk occurrence
• Relative impact
• Availability of quantifiable evidence.
• Identify and address gaps in information.

Consider Risk Assessment

• The slides prompt consideration of whether an incident (Avo) is negligible or impactful, and the risks associated.

Risk Analysis

• Probability of impact.
• Probabilistic analysis models
• Identifying possible outcomes (best and worst case scenarios).
• Estimating cost and schedule contingency estimates.

Advantages of Probabilistic Methods

• Management of project costs, schedules, and risks.
• Improved confidence in decision-making
• Improved collaboration within project.

Risk Mitigation

• Risk avoidance (prevent the risk from occurring).
• Risk acceptance (accept/embrace a risk).
• Risk control (reduce likelihood/impact of a risk).
• Risk transfer (transfer a risk to another party).
• Contingency planning.

Risk Evaluation

• Evaluate risks, mitigation, and opportunities (threats and benefits).
• Determine which risks can be closed.
• Enable contingencies to be executed
• Allows for management of risk using resources and expertise

Risk Management Is a Team Sport

• Risk mitigation and awareness.
• Risk tracking and closing associated processes.
• Conducting risk workshops.
• Formal risk workshops help the team focus on risk management.

Risk Management Process Summarized

• Risk identification
• Risk mitigation
• Team member responsibilities.

Avocet Island Project: Risk Management Process

• Presents questions for project risk management:
  • Which risk has the greatest impact?
  • What ramifications might result from the risk?
  • Which solutions might you consider?
  • How will you evaluate your choices?

Capacity for Risk

• Amount and type of risk stakeholders can support.
• Access to financing.
• Projected project returns.
• Project type and expected outcomes are key elements to building risk capacity.

Understanding Risk Appetite

• Strategy
• Incentivization and performance management
• Risk Management Approach
• Funding structure and budget — critical factors to understanding and accepting levels of risk.

Prioritize and Compare Criteria

• The criteria for prioritization and comparison of project elements:
  • Budget
  • Design
  • Risk
  • Schedule
  • Owner expertise.

Project Delivery Methods and the Capacity for Risk

• Select project delivery method (Design-bid-build, Design-build, Construction manager at risk, Integrated project delivery).
• Articulate and consider project risks associated with the delivery method chosen.

Matching Activity: Project Delivery Methods

• Activity for assessing project delivery methods

Discussion: Project Delivery Methods and Risk Appetite

• Discuss the project delivery methods and their capacity for risk.
• Which method offers the greatest capacity for risk?

Project Delivery Model Selection and Risk Mitigation

• Increased profits and reduced costs.
• On-time project completion
• Reduction in loss to project due to mitigation strategies.

Risk Allocation and Mitigation

• Risk allocation strategies
• Risk mitigation strategies.

Risk Profile

• Action taken to manage risk.
• Unintended consequences.
• Unforeseen events.

Risk Mitigation Factors

• Type of risk.
• Effort.
• Contract terms.
• Delivery model.

Risk Mitigation Treatments

• Risk avoidance
• Risk retention/acceptance
• Risk control/reduction
• Risk transfer/deflection
• Contingency

Contingency Risk Scenarios

• Lack of risk clarity or definition.
• Cost and schedule mitigation cannot be reliably established.
• Accounting for known risks.
• Risks that the team is aware of, but cannot identify.

Matching Activity: Risk Mitigation Treatments

• Matching activity for different risk mitigation treatments.

Risk Management Tools and Techniques

• Tools for risk management include:
  • Documentation reviews and experience interviews
  • Risk registers
  • Brainstorming and facilitation workshops
  • Monte Carlo simulations
  • The Delphi technique

Benefits of Standardized Techniques and Tools

• Benefit of standardizing in risk management:
  • Checklist of potential risks
  • Standardized risk terminology
  • Risk identification and assessment processes
  • Progress monitoring
  • Project alignment
  • Improved communication
  • Risk evaluation and reconciliation
  • Training
  • Benchmarking
  • Capturing lessons learned

Documentation and Experience Interviews

• Documentation helps in identifying risks (contracts, design documents, project plans, risk checklists).
• Project management information systems (PMIS)
• Experience-based interviews.

Risk Matrices

• "Big picture" visualization of problems and opportunities in risk management.

Risk Registers

• Description and cause of risk
• Likelihood of occurrence
• Relative impact
• Mitigation actions
• Responsible parties
• Status of risks

Integrated Project Risk Assessment (IPRA) Tool

• IPRA tool to evaluate risks in a project.

Consider Risk Registers

• Stakeholders' differing viewpoints on recording and managing risks associated with a project event (Avo incident)

Brainstorming

• Bringing together relevant parties
• Creating a risk-free environment.

Facilitated Workshops

• Common approach to gathering input.
• Reduce biases and provide facilitated guidance.

Monte Carlo Simulations

• Continuous distribution (Normal, Uniform, Triangular)
• Discrete distribution methods
• Probability of risk events and their outcomes.

The Delphi Technique

• Questioning technique to get a consensus estimate on the duration or other aspects of a project—how long it will take, how confident are you?

The Delphi Technique in Action

• Example of how the Delphi techniques work on a graph—maximum, expected, and minimum costs with various scenarios.

Tools and Techniques: Summary

• Effective communication.
• Regular risk reviews.
• Sound business planning.
• Pre-project planning and alignment.
• Solid project execution — critical aspects of well-executed risk management.

Consider Tools and Techniques

• The Delphi technique is suggested for risk assessment and outcome prediction, but this must be considered against the benefits and costs of the extra effort.

Adopting Risk Management

• Key aspects in adopting risk management:
  • Minimizing project risks
  • Increasing predictability of project estimations
  • Preventing project disasters

Embedding a Risk-Aware Culture

• Breaches and near misses (incidents).
• Communication effectiveness
• Assessing lessons learned and necessary remedial actions

Implementation Challenges

• Lack of process knowledge
• Changes to project culture
• Lack of policies or procedures
• Lack of transparency
• Lack of resources (people, equipment, finances)

Recommendations for Successful Adoption

• Developing risk management process.
• Implementing a governance structure
• Implementing a process to categorize and assign ownership of risk levels (risk management workflow).
• Documenting all risks.
• Conducting regular risk reviews

Avocet Island Project: Risk Mitigation Treatments

• Questions for risk mitigation/treatment and treatment selection strategy:
  • Which risk mitigation strategy applies?
  • Which risk assessment tools and techniques can support this choice?

Questions

• Presentation concluded with a Questions section, as expected.

Thank You

• Presentation concluded with a thank you slide.

Test your knowledge on the key principles and practices of risk management in project management. This quiz covers the essential concepts such as risk analysis, mitigation strategies, and the responsibilities involved in managing risks. Discover the unexpected impacts and the importance of effective risk management in projects.