Risk Management
Construction Engineering 380
Risk Management
• Three types of risk need to be managed
on construction/engineering projects
– Financial or economic risk
– Contractual risk
– Process risk
Risk Management
• Economic risk
– Use engineering economic analysis to select
projects that maximize return and/or minimize
loss (optimization models)
– Assess risk of default by analyzing project
cash flows, owner/client financial strength,
and market factors (volatility, growth, etc.)
Risk Management
• Contractual risk
– Analyze areas where legal exposure puts the
company at risk- have good contracts and
documentation on the project
• Define the scope accurately and completely
• Define the standard of performance
• Exclude consequential or liquidated damages
clauses from the contract
• Use limiting liability language to put a cap on client
claims (can be hard to reach agreement)
Risk Management
– Contractual risk continued
• Reduce third-party access to the project
• Use dispute resolution other than litigation
• Ask for indemnification against certain types of
events (risk sharing with client and others)
• Use insurance to cover risks for which you are not
indemnified (risk shedding)
• Review policies, premiums, coverages, limits,
pricing options, exclusions etc. to make sure
insurance is appropriate but affordable for the risk
profile
Risk Management
• Process risk
– Even if you choose sound economic projects
with good owners and have good
documentation, contracts, and insurance, you
can still face PROCESS risk. Process risk
comes form uncertainty over the process
– Reduce process risk through
• Education and training (have good people running
the project)
• Use of probability estimates to identify processes
that could be changed to reduce uncertainty
Risk Management
• Example for productivity in scheduling
b
a
d
c
g
e
f
Risk Management
• In the previous example, there are7
activities.
• Durations for activities a,b,e,f,g are highly
certain (note the narrow variance in
production rates under each of these
activities
• Durations for activities c, and d are highly
uncertain (note wide variance in
productivity rates under these activities)
Risk Management
• Activity c is a controlling activity for three
other activities. If the critical path is
represented by the bold arrows, the
project is highly risky because two of the
activities on the critical path have low
probability estimates of duration (the
chances of “guessing” at the right
productivity is low for these tow activities)
Risk Management
• For this reason, the project manager or
development team leader may want to
change the design or process to substitute
a similar system for activity c that has
higher certainty (concrete floors for steel
frame)
• Productivity distributions can be generated
from historical data, time and motion
studies, or mock-up trials