Chapter 1

Risk Management

Risk (hazard or threat): This is what managers often mean when talking about risk. It is referred to as a negative event or threat to the organization. Managing risk in this context means using management techniques to reduce the probability or impact of the negative event without undue cost.

The goal of risk management is to measure and assess risk, with the ultimate goal of managing that risk. Risk management falls into the arena of Project Planning. Over time, Over Budget, Environmental Impacts etc. Specific standards and methods have been developed with respect to risk management.

This Chapter discusses the various definitions of risks and its relationships with uncertainty and its causes. The chapter also includes the risk categorization and classification.

In the end the Risk management cycle will be covered in order to introduce the risk management processes.

Objectives

The objective of this chapter is to make the student to have a good understanding in the following topics:

Definition of risk and its importance in construction projects,

Concepts of risk management process,

Processes of Risk Management

Various strategies of uncertainty reasoning in construction events

Risk Management Cycle

Definition of RiskA situation involving exposure to danger.

ORExpose to danger, harm, or loss

OR

The possibility that something bad or unpleasant (such as an injury or a loss) will happen.

THREE TARGETS

IN CONSTRUCTION PROJECTS THE PRIMARY TARGETS ARE

COSTTIMEQUALITY

WHICH ARE LIKELY TO BE SUBJECTED TO RISK & UNCERTAINITY

Uncertainty & Risk

Uncertainty: It can be described as the chance of occurrence of some event where the probability is not known. This means that uncertainty relates to the occurrence of an event about which, little is known, except the fact that it may occur.

Risk: Being where the outcome of a event, or each set of possible outcomes, can be predicted on the basis of statistical probability.

Uncertainty Uncertainty is a subset of risk and involves situations when no probability distribution can be established for the risk variable. If the nature of a risk is unknown or unpredictable it comes within the bounds of uncertainty.

Events that are very rare also tend to be classified as uncertainty. The key test is usually is that if the risk is not insurable then it is uncertainty.

For a risk to be insurable requires data to compile actuarial tables. This ensures that there is no objective approach to dealing with uncertainty and things will depend on prejudice or preconceptions.

Risk Categories / Types of Risks

Known Risks

Known Unknown

Unknown Unknowns

Known Risks : Which include minor variations in productivity and swings in material costs.These occur frequently and are inevitable in all construction projects.

Known Unknown : These are the risks whose occurrence is predictable or foreseeable. Either their probability of occurrence (or) their likely effect is known.

Unknown Unknowns : These are events whose probabilities of occurrence and effect are not foreseeable by even the most experienced people.

Risk Categories / Types of Risks

Definition of Risk Management

Risk Management is about understanding your project

and making a better decision with regard to the

management of your project.

Risk Management Decision Process

Identify

Evaluate

SelectSelect/ Implement

Monitor/ Modify

It is important to recognize the root cause of risks. Risks can be

frequently be avoided if their root causes are identified and

managed before the adverse consequence occurs.

To achieve the above aims, it is suggested that a systematic

approach is followed.- To identify the risk sources

- To quantify their effects

- To develop management responses to risk

- To provide for residual risk in project estimates

THIS 4 STAGES COMPRISE THE CORE OF THE PROCESS OF RISK MANAGEMENT

THE RISK MANAGEMENT PROCESS

The Risk Management Process

Step 1. Identify Hazards

Step 2. Assess the Risks Assess the Likelihood & Consequences Classify the Risk

Step 3. Control the RisksThe hierarchy of risk control can be used as a guide

Step 4. Monitor / Review Control Measures

Benefits of Risk Management

• Project issues are classified , understood from the start.• Decisions are supported by thorough analysis.• The definition and structure of the project are

continually monitored.• Clear understanding of specific risks associated with a

project.• Build up of historical data to assist future risk

management procedures.

Risk analysis and risk management in construction

Risk analysis and risk management policies are particularly difficult to apply in construction due to the structure of the construction industry, the nature of the product and its vulnerability to the state of the economy.

The lack of effective strategies over the years has manifested itself in, failure to keep within the cost estimate, failure to complete on time, failure to achieve the required quality and operational standards.

Risk Management CycleRisk management Cycle in construction is best viewed as 3 distinct stages:

•Risk identification: This involves the identification of the risks that may be encountered on a project or process. This process should lead to a schedule of potential risks liable to affect the out-turn of the project, or to jeopardize the objectives of the project.

•Risk analysis: This in concerned with the assessment and analysis of the risks identified. This involves the understanding of the likelihood of occurrence and the possible impact of potential risks.

•Risk response: This is concerned with the action taken in response to risks identified and analysed.

About Risk Manager

• Risk managers advise organizations on any potential risks to the profitability or existence of the company. They identify and assess threats, put plans in place for if things go wrong and decide how to avoid, reduce or transfer risks.

• Risk managers are responsible for managing the risk to the organization, its employees, customers, reputation, assets and interests of stakeholders. They may work in a variety of sectors and may specialize in a number of areas including enterprise risk, corporate governance, regulatory and operational risk, business continuity, information and security risk, technology risk, and market and credit risk.

Role of Risk Manager• Planning, designing and implementing an overall risk management process for the

organization.• Risk Assessment, which involves analyzing risks as well as identifying, describing and

estimating the risks affecting the business.• Risk Evaluation, which involves comparing estimated risks with criteria established by

the organization such as costs, legal requirements and environmental factors, and evaluating the organisation's previous handling of risks.

• Risk reporting in an appropriate way for different audiences, for example, to the board of directors so they understand the most significant risks, to business heads to ensure they are aware of risks relevant to their parts of the business and to individuals to understand their accountability for individual risks.

• Carrying out processes such as purchasing insurance, implementing health and safety measures and making business continuity plans to limit risks and prepare for if things go wrong.

• Conducting audits of policy and compliance to standards, including liaison with internal and external auditors.

• Providing support, education and training to staff to build risk awareness within the organization.