CCP Certification Technical Paper (Rev. 2013-07-10, Rev. 2014-06-05)
AACE Membership Number
List of Tables
List of Figures
Figure 1 – Contribution of Construction to GDP Growth 6
Figure 2 – Risk Management Process 12
Figure 3 - Risk Priority Number 15
List of Equations
Equation 1 8
Equation 2 16
Abstract
There is a sharp difference between construction and other types of projects. Then, it is essential to come up with proper risk managements strategies for the underlying types of project, as construction serves as the backbone for the economy of any country or state. A risk management strategy is composed off four different components including risk identification, risk assessment or analysis, risk treatment, and risk control [11].
Risk identification refers to identifying the certain risks and threats expected to occur during the lifetime of a project. Risk measurement (second phase) involves qualitative and/or quantitative measurements and categorization of different types of threats with respect to their severity. Risk response plan or risk treatment is the name of formulating appropriate response strategy for each type of risk identified and assessed. The impact of risk response plan is evaluated in risk control plan [11]. It is found that the objectives of a construction project can be achieved in the best possible way only through a well strategic risk management plan.
1.0. Introduction
Growth of businesses relating to different industries largely relies on the development of infrastructure. Therefore, it is not out of place to state that construction has great contribution towards the growth of any economy around the globe. A clearer idea of it can be gathered from the figure given below showing the contribution of construction to the overall GDP of UK:
Figure 1 – Contribution of Construction to GDP Growth
[1]
Vital significance of the industry coupled with the uniqueness of construction projects makes it exposed to many critical risks and threats.
As for risk, it refers to the any expected occurrence that can have an impact on the accomplishment of the objectives of a project. Generally, the value of risk is derived from the multiplication between hazard and entry. It can also be shown in an equation as under:
Equation 1
[2]
Hazard = the degree to which a risk can harm the project if it occurs what is feared.
Entry = the chance or probability of its happening.
Therefore, risk management is the set of all the strategies, techniques, and tools directed towards eliminating or minimizing the risks associated to any process or project [3].
As discussed earlier, construction holds central importance in the business posture of any country, and certain risks are inherent in this industry due to its complexity and giant scope, it is important to come up with a comprehensive risk management plan for any construction project. This paper aims to investigate into certain types of risks common to the underlying sector and the most appropriate ways to respond to them.
2.0. Concept of Risk Management in Construction Industry
Risk management in construction is the process that sets out to identify and analyze the risks relating to construction projects, and devising the ways to avert them. It is important for risk management strategy to have all the essential steps included in it. A well thought out risk management plan should perfectly be integrated with any construction project in order to maximize its chances of success.
2.1. Classification of Risk
Before jumping to the possible predefined mitigating strategies, it is wise to have a basic understanding to different types of risks known to the industry under discussion. The table given below serves this purpose:
[4]
2.2. Factors Affecting the Risk
There are several factors that can have positive or negative impact on the probability of occurrence or the degree of impact of a threat. These factors are explained below [5]:
2.2.1. Management Stability
In simple words, management stability refers to the unity of aim. If the objectives are common among all the members of management, it will guarantee the best accomplishment of defined objectives. An otherwise situation may lead to opposite outcomes.
2.2.2. History
Old projects are less prone to risks as compared to new ones. The reason for new projects to associate higher level of risk is their dissimilarity with older projects. On the other hand, older projects have usually gone through experimental process and have worn a clearer direction and outlook on the basis of which stronger predictions about their completion can be made.
2.2.3. Skills and Experience in Staff
It is a generalized fact that highly skilled people in staff are more capable of managing risks and assessing the situation beforehand as compared to inexperienced ones or those who lack expertise. Therefore, degree of expertise and experience in staff is inversely proportional to the severity of risk.
2.2.4. Complexity of Projects
It is obvious that simpler projects are easier to handle as compared to complex ones. Simple projects usually follow traditional patterns. Therefore, the level of risk associated with them is minimal. However, complex projects are always exposed to high level of threats due to requiring intense cognitive effort and dividing the workforce into their opinions with regard to different possible options to accomplish certain phases.
2.2.5. Availability of Resources
If resources are easily available, the management can address any emerging issue in stronger, quicker, and more effective way than otherwise. Therefore, availability of resources is in direct relationship to the risk management.
2.2.6. Size of Team
Usually, small size of team associates low degree of threats, because there is less chance of conflict. Furthermore, small team size also requires less effort in terms of people management.
3.0. Process of Risk Management in Construction
Normally, the process of risk management comprises four different phase that include risk identification, risk analysis, risk measurement, and risk treatment as also shown in Figure 2:
Figure 2 – Risk Management Process
[6]
3.1. Risk Identification
Risk identification refers to a systematic process of identifying all the possible actions or expected occurrences that can hinder or affect the objectives of a project [7]. Risk identification can be performed in some technical ways explained below [7]:
3.1.1. Delphi Technique
In a Delphi technique, each participant involved in the process of risk identification makes investigation on individual basis. There is no consultancy involved in this strategy, so every individual may come up with his own findings basing on his way of identifying the risks. In the end, a facilitator sums up the end-results on the basis of which risk identification report is prepared [7].
3.1.2. Brainstorming
It is totally opposite to the process mentioned above. In brainstorming, all the participants try to identify the risks associated to any project through consultancy. Usually, brainstorming is processed in team meetings. Same as in Delphi technique, there is also a facilitator to provide the ultimate opinion basing the majority’s findings.
3.1.3. A Comparison with Past Experience
Experience with previous projects serves as a strong base not only for devising mutating strategies, but also for assessing the possible threats. By comparing the different stages in a project’s breakdown structure, the participants can compare them with the same phases of a similar type of project accomplished in past. Then, due to the similarity between both the projects, new project is assumed to be exposed to the same kinds of potential risks as faced in the previous case.
3.1.4. Expert Opinion
It is a good technique, especially in case of complex projects. To identify the certain possible risks, different participants are asked to give their expert opinion regarding the expected risks along with justification for each. Hence, the management can boost the strength of its mitigating strategy.
3.2. Risk Assessment
In this phase, it is evaluated to what degree a risk or threat can affect the objectives of a project if occurred. In other words, this stage refers to the measurement of risk. Fundamentally, two different methods are utilized to execute risk assessment [8]. These include qualitative and quantitative methods. Both of these techniques are elaborated as follows:
3.2.1. Qualitative Method of Risk Assessment
This technique is preferably utilized in cases where risks and threats are not numerically measurable or quantifiable. Therefore, certain tested matrices are utilized to evaluate the intensity or possible impact of a probable occurrence to anticipate the way and extent in/to which it can affect a process. Risk Priority Number is one of the most commonly used and technically solid tools in this regard. The chart given below is the info-graphic representation of this concept:
Figure 3 - Risk Priority Number
[9]
In Figure 3, the risks are categorized with respect to their level of criticality along with level of probability for each. Frequent are highly probable threats and are commonly observed and experienced. Probable are also very common types of risks (though not as common as ‘frequent’). Occasional have low level of probability, while remote are very less likely to be faced. Improbable are those risks that have no likelihood of happening. It should be taken into account that level of probability of a risk multiplied with its level of criticality determines the severity of a risk as also shown in the equation below:
Equation 2
[9]
The numbers given in the column titled as ‘Negligible’ denote the risks that are potential enough to become a threat for a project. These are the risks that can be avoided and require no predefined mitigating strategy. Either these threats are not really critical in themselves or stand irrelevant to the type of a specific construction project. For example, if the material is not being transported from distant places, change in fuel prices will have no significant impact on the cost of a project. Hence, this threat can be categorized as negligible. However, negligible threats with higher level of probability have moderate level of severity.
Then, occasional, remote, and improbable categories of risks with marginal impact on the project (as shown in third column in Figure 3) have medium severity and require little attention and response from the management. However, those marginal risks that have high rate of occurrence need proper attention and proper mitigating strategy due to their being critical (highlighted with red color).
Critical risks with high probability are highly severe, and they can lead to disastrous impact if not tackled expertly. These are the threats that need the best part of attention. However, their criticality comes down to moderate level while associating lower levels of probability i.e. risk # 10 and 15. The most threatening types of risks are catastrophic. These types of threats can halt the whole process. Some of these types of risks can include change in laws and regulations, disturbed law and order situation, earthquakes, or any big change on macroeconomic level. These threats when coupled with higher level of probability become critically severe. Therefore, project managers need to prepare immensely well-formulated strategies to mitigate their impact. These threats are severe even with lower chances of occurrence.
3.2.2. Quantitative Method of Risk Assessment
Quantitative technique is utilized for the risks and threats that are quantifiable. Some of the most effective methods to evaluate quantitative types of threats are explained below:
3.2.2.1. Scenario Analysis
In scenario analysis, managers assume the impact of risks in different scenarios basing on past experience or checklists (scanning some other projects of similar types). Hence, it leads to proper evaluation with regard to the quantitative harm expected to cause by different types of scenarios if occurred. It leads to the formulation of appropriate mitigating strategies directed towards minimizing the hazards, severity, or probability of the risk in the best possible strategic manner [8].
3.2.2.2. Analysis of Sensitivity
In this technical type of analysis, those uncertain components of a project are identified that have potential impact on the outcomes of a project. Sensitivity analysis is carried out after the preparation of risk model in order to assess which of the elements in the model can affect the objectives of a project and to what extent. In order to consider all the possibilities, the values of each variable are changed to assess the impact of that variable against all possible values [8].
3.2.2.3. Monte Carlo Simulation
Probabilistic Analysis or Monte Carlo Simulation is the method or technique used to quantify the impact of a threat on the objectives (i.e. budget and schedule) of a project. Since the measurements are executed in numerical data, it provides clues towards preparing the most exact mitigating strategies for each type of risk [10].
3.3. Devising Mitigating Strategies or Risk Management Planning
This is the third stage of risk management. Now the management is aware of the certain types of risks associated to a project along with their level of severity. Therefore, this phase involves planning counter response respective of the types of risks assessed at previous stage [7]. Given below are some of the most common types of responses for different categories of threats:
3.3.1. Contingency Response Plan
Not always only known types of risks are faced by project managers. There are some situations, especially in complex types of projects when they have to tackle uncategorized risks with varied level of severity. Therefore, some cost, time, and other resources are kept reserved in order to handle these miscellaneous types of uncertainties [7]. This method is referred to as ‘contingency plan’.
3.3.2. Risk Acceptance
Construction projects are exposed to some critical or non-critical types of risks that cannot be responded in any way. No mitigating plan can eliminate or lessen their severity. Wars, change on political level, and different external threats belong to this category of risks. All the management can do is to accept them as a misfortune if occurred. Some of them may be potential enough to bring catastrophic impact on the project [11].
3.3.3. Risk Enhancement
In project management, some opportunities in the internal or external environment of a project are termed as ‘positive risks’. Risk enhancement is the strategy to maximize the likelihood of the occurrence of these types of risks to achieve the project objectives in comparatively more fruitful manner [11]. For example, delaying a project if the prices of material are expected to come down in days to come is risk enhancement.
3.3.4. Sharing the Risk
It involves sharing the positive or negative risk with a party that can better enhance or mitigate its impact [11].
3.3.5. Transferring a Risk
It is different from risk sharing in a sense that in this case a party is assigned the total responsibility with regard to risk management (whether positive or negative). Consequently, the party assigned the whole responsibility reserves the rights to enjoy the benefits of all positive outcomes as well as stands liable to any negative outcomes [11].
3.3.6. Risk Mitigation
It is the most common type of risk planning that involves reducing, minimizing, or eliminating the impact of a possible threat through appropriate strategic response [7].
3.3.7. Avoiding a Risk
Risk avoidance works best in case of flexible project plans. Managers can alter the plan without influencing the objectives of a project to make it irrelevant to a certain type of potential threat. Some of the most practical examples in this regard are changing the schedule and/or scope of a project.
3.4. Risk Control
Risk control is the final phase in risk management. At this stage, managers evaluate the effectiveness of risk response plan. It is assessed whether or not different responding strategies are effective or not. The degree of their impact is analyzed and documented for further revision or future considerations [11].
4.0. Conclusion
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