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MIT OpenCourseWarehttp://ocw.mit.edu

1.040 Project ManagementSpring 2009

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Presentation by:Professor Fred Moavenzadeh

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Managing Construction Risk1. An Integrated Approach2. Identifying Project Risks3. Allocation of Risk

4. Economical Solutions to Risk

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Integrated Project Risk Management

Risk Financing Self Funded Owner Control

Incentive Bonus

Loss Prevention Risk Identification Contract Formation Scheduling

Dispute Resolution On-Site Resolution Mediation/Arbitration Contractual

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Integrated Project Risk Management

Builders Risk

Risk Financing Owner Buys? Cont. Buys? Build Risk?

Delay of Opening Force Majeure

Loss Prevention Risk ID Contract Wording Site Security Disaster Planning

Dispute Resolution Allocation ofDeductible How Does Claim GetResolved?

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Key Point #2

Identifying Project Risks

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Risk Identificationy Project Type & Sitey Project Participantsy Project Delivery Methody Budget & Financingy Schedulingy Legaly Political

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CM or PM

Owner

ContractorA/E

Sub Subub

Owner

At Risk CM or PM/E

Sububub

Owner

Contractor/E

Owner

Design Builder

A/E Subcontractors

By Project Delivery Methods

CM or PM

Owner

Contractor A/E

Sub SubSub

Agency CM or PM

Owner

At Risk CM or PM A/E

SubSubSub

At-Risk CM or PM

Owner

Contractor A/E

Design-Bid-Build

Owner

Design - Builder

A/E Subcontractors

Design-Build

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Key Point #3

Choice in Risk Allocation

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Responsibility for Risk

By ContractRisk ShiftingInsurance

By DefaultDenial of Responsibility Acceptance of Responsibility

By Law StatutesRegulations

Common Law

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Fair Allocation of Risk

9 Which Party can best control risk9 Which party can best finance the risk9 Which party can best manage the risk9 Which party can more easily accept the

consequence of risk

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Risk MatrixRisks Owner Architect/Engineer

Contractor Subcontractor

Injury to General Liability Professional Workers General Liability

contractors or owners liability or compensationemployees protective general liability

Injury to General liability or Professional General liability Workerssubcontractors owners protective liability or compensationemployees general liability

Injury to general General liability or Professional General liability General liabilitypublic owners protective liability or

general liability

Physical damage to Builders risk Professional Builders risk Builders Riskproject during liability orconstruction general liability

Physical damage to Property policy Professional General liability General liabilityproject after liability (completed (completedconstruction operations) operations

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Approaches to Avoidand Reduce Claims

y Realistic Contractual Allocation of Risksy Match Risk Allocation to Compensation

y Dispute Prevention through Incentive Programs

y Use Integrated Programs to Protect all Parties

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Key Point #4

Economical Solutions forConstruction Risks

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Allocation of Insurance-RelatedRisks & Costs: Strategies

Construction Industry Institute Study (1993)

y Invest in Loss Control and Safety Programs

y Limited Indemnity by Contractors

y Less Insurance, More Risk Management

y Controlled Insurance Programs Not New.

What is New is increasing Utilization

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Key Point #5

Controlled Insurance Programs(CIPs)

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Owner- or Contractor-ControlledInsurance Program

y Wrap-up Advantagesy Cost Savings

y Controly Public Relations

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Wrap-up Feasibility

$5MM

$1.5-3MM

$2-3.5MM

Construction Hard Costs$100,000,000

Bid Reductions

Wrap UpCost Wrap-Up vs.Conventional

Cost Savings

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Key Point #6

Project ProfessionalPolicies

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Pitfalls in ProfessionalLiability Insurance

y Problems Low, Aggregated Limits

y Solutions

y

Good certificate of insurance backed by contractrequirements

y

Buy project professional insurance on larger projectsy Buy owners protective insurance

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Owners Protective ProfessionalLiability: Sample Program

Typical Professional

Liability Limits

D e s i g n

F i r m

P r i m a r y L i m i t s

Project No. 1 Project No. 2

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Owners Protective Professional

D e s i g n F i r m

P r i m a r y

L i m i t s

Liability Sample Program

$0

$2

$4

$6

$8

$10

$12

$14

$16

Arch.#1 Soils Eng. #2 Interiors #3 Arch. #4 Eng. #5 Landscape #6

$10M aggregate limit excess ofEach individual underlying policy

Project No. 1 Project No. 2

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Political Risk ModelingP8P9

P11

P10

P7P6

P5

P4

P1

P2

P3

No compensation

CompensationExpropriation

No Expropriation

No Expropriation

Expropriation Compensation

No compensation

Coup Ideology A

Coup Ideology B

Stability

Probability of Expropriation without compensation = P1xP4xP9 + P2xP6xP11