Table of Contents for Construction Risk Management Techniques-
- What is Construction Risk Management?
- Technique 1: Setting the Risk Management Objectives
- Technique 2: Identification of Risks
- Technique 3: Analysis of Risks
- Technique 4: Evaluation of Risks
- Technique 5: Treatment of Risks
- Risk Register
What is Construction Risk Management?
With the increase in the size of the construction projects and their dynamic nature, the involved risks have also increased. Here, the term risk implies an uncertainty that can affect the project. The risks are both positive and negative. Generally, the construction risks are negative in nature and have an adverse impact on the project.
The risk management plan is an integral part of project management. The PMBOK 6th Edition defines the Project Risk Management as-
“Project Risk Management includes the processes of conducting risk management planning, identification, analysis, response planning, response implementation, and monitoring risk on a project. The objectives of project risk management are to increase the probability and/or impact of positive risks and decrease the probability and/or impact of negative risks, in order to optimize the chances of project success.”PMBOK 6th Edition
The risks associated with the construction projects are the construction risks. The poorly managed construction risks are detrimental to the business objectives. These risks derail the project from the planned attributes. Certain types of construction risks can also be managed to the advantage of the project.
Construction Risk Management addresses the risks that are not covered by other project management processes. The aim of the risk management plan is to promote or enhance the positive risks and avoid, transfer, or mitigate the negative risks.
The six essential risk management techniques in order of application are as follows-
Types of Risks
The PMBOK 6th Edition divides the risks into two parts based on their applicability to the project. The bifurcation is as follows-
Individual Project Risk- It is an uncertain event that impacts one or more than one objectives of the project. Individual project risk can either be negative or positive. For example, an accident of the equipment during its’ transportation is a negatively impacting risk.
The ground conditions were found easier to work with at the execution stage is a positively impacting risk.
The shuttering failure of one of the slabs of Lucknow Metro in 2016 injured eight workmen. The safety lapse, time and money loss, and the quality issue of this incident is an example of individual project risks.
Overall Project Risk- The events that affect the complete project. These risks can also be due to the accumulation of individual project risks. This type of risk can also be either positive or negative. For example, the liquidation of the promotor is an overall project risk as the promoter can no longer operate and the financing institution will not lend more money.
Another example of overall project risk being the declaration of project land as protected land by the government for environmental reasons. One such project is the Lavasa City Project near Pune, India. The project was badly affected by the negligence of environmental laws by the promoters. By the time, the clearances had been obtained the project had been put into jeopardy. Later, the project was downsized for many reasons and has been unsuccessful in achieving the targeted objectives.
Technique 1: Setting the Risk Management Objectives
The risk is an inherent characteristic of any project. Some risks are involved since the inception of the business case and some arise in the project lifetime. Thus, risk identification is required at every step of the project. With the correct identification, the risks can be analysed, evaluated, monitored and controlled.
Before the identification of the risks, metrics for the same needs to be identified. The importance of this step is that the understanding of risks is subjective to the stakeholders. For some, a risk may be small and for some, it may be critical. Thus, the pre-defined metrics will help in the development of the proper risk management plan.
The objectives of the risk management plan help in setting up the guidelines, identification methods and assessment/evaluation techniques for the project risks.
The following metrics are defined in setting the risk management objectives are-
- Objectives of risk assessment
- Criteria definition for assessing the risk
- Acceptable variation in project objectives
- The organisational risk management plan
The outcomes of the above exercise help in outlining the risk register, issue logs and risk report.
Technique 2: Identification of Risks
In the risk identification process, the uncertain individual and overall project affecting events that can occur during the project life cycle are listed. The project charter and the project management plan lay the foundation of the risk management plan.
Types of Construction Risks
The identification of risk starts with the segregation of the project aspects and identifying the risks in each of them. Some of the construction project risks are given below
- Statutory laws, Natural & Environment Risks: Such risks are related to the approval for construction, clearance from the fire department, licensing for workmen mobilisation, company registration, environmental clearances, pollution control related clearances, force majeure like a pandemic, earthquake, flood etc.
- Legal Risk: The risks related to default on contractual terms, litigation against the project etc.
- Financial Risk: This segment involves the risks relayed to the liquidation of promoter, liquidation of lending institution, delay in loan approval, inadequate cash flow, below target sales of constructed units, material price increase, increase in taxes etc.
- Project Related: Some of the project-related risks are procurement dispute or delay, dispute due to unclear scope, slow mobilisation, theft at the site, accident of material transporting vehicle, project duration slippage, misuse of resources, wastage of construction material, slow progress, quality non-conformance, change in design/drawings, liquidated damages, performance failure, the strike by workmen, etc.
- Safety: It is a crucial part of project management. Thus, the risks related to safety also need consideration such as falling from heights, fire hazard, electric shock, crane failure, the collapse of excavated area etc.
Tools & Techniques for Risk Identification
The project team is a great source of risk identification and hence they must be kept in the loop. Some of the tools and techniques to identify construction risks are as follows-
- Expert Judgement
- Root Cause Analysis
- SWOT Analysis
- Brainstorming and Interviews
Records for Construction Risk Identification
The risk register is updated with the identified risks along with the risk owners and the potential risk treatments. The project scope and risk management objectives define the details to be filled in the register.
The risk report summarises the individual risk sources and the overall risk sources. The causes of each risk are also enlisted along with the potential threats and opportunities.
Technique 3: Analysis of Risks
The risk analysis is broadly divided into qualitative and quantitative.
Qualitative Risk Analysis
“Qualitative Risk Analysis is the process of prioritizing individual project risks for further analysis or action by assessing their probability of occurrence and impact as well as other characteristics”-PMBOK Clause 11.3PMBOK 6th Edition, Clause 11.3
The qualitative risk analysis highlights the high impact high probability risks. The timely treatment of the higher impact risks can be formulated and implemented to minimise the loss or maximise the profits. The low impact low probability risks can be handled at low priority.
A matrix can be defined to analyse the impact and the probability of the risk.
For the qualitative risk analysis, the documents like assumptions log, project charter, risk management plan etc. are used in addition to the expert judgement, interviews, meetings, checklists etc. and the observations are recorded in the risk register. Moreover, the assumption log, lessons learned register, issue log and risk reports are updated.
Quantitative Risk Analysis
Quantitative risk analysis is the process of quantifying the qualitative risk analysis. The risks analysed by the qualitative method are assigned with the numbers by using the suitable tools.
The various tools that are used for quantitative risk analysis are-
- Cost Risk Simulation
- Schedule Risk Simulation
- Sensitivity Risk Analysis
- Decision Tree Analysis
- Influence Diagram
The variation from the targeted cost, time, and scope due to various sources of risks are determined in the quantitative risk analysis. This way the risks that pose higher numerical risks are attended at top priority. The risk responses that were calculated earlier are also corrected and applied.
Technique 4: Evaluation of Risks
The results of qualitative and quantitative risk analysis prioritise the order of the treatment. However, it may happen that some risks need not be attended to. The treatment of the risks might be within acceptable limits. The limits are the same as defined in the risk management objectives.
Every project is unique in nature and has unique risks associated with it. The risk acceptance of each project is also different. The risk appetite and the resilience of the project define the limit of risk tolerances. Each of the identified risks is evaluated against this limit and decided if it needs to be addressed or not.
The evaluation of the risks helps in reducing the burden on the project team. Moreover, the reduction in risk exposure also optimises resource allocation.
Technique 5: Treatment of Risks
Risk treatment is the process of selecting the options, developing strategies, using tools & techniques to minimise the negative impact and maximise the positive impacts. The treatment should also be cost-efficient, time-saving and shouldn’t affect the scope more than the acceptable limits.
It is the duty of the project manager to choose the appropriate risk treatment method. All the stakeholders should also agree to the selected risk treatment method.
The negative risks are threat to the project while the positive risks are the opportunities.
Construction Threat Treatment with Examples
- Avoid: The objective that is prone to the risk is modified such as to eliminate the risk. If the L1 bidder has defaulted recently in some other project or in a bad financial condition, it is better to avoid that bidder.
- Reduce: The risk is treated to reduce its’ probability or impact or both. The incorporation of a third party to recheck the design and drawing to avoid the rework.
- Escalate: The risk is escalated to the higher management and treated at the organisation level rather than the project level. The work permits from authorities should be obtained from a higher level and not a project level.
- Transfer: The risk is transferred to the vendor. The equipment delivery and unloading at the site are put into the vendor’s scope. This helps in transferring the transportation damage and mishandling risk to the vendor.
- Accept: Some risks are accepted considering the project resilience. No active action is taken for the risk. However, regular checks should be done to ascertain the change in the nature of risk.
Construction Opportunity Treatment with Examples
- Escalate: When the opportunity is beyond the scope of the project, it is escalated to the organisational level. The relaxation in statutory approvals needs to be enjoyed through the organisational level.
- Exploit: The attempt to realise the high priority opportunity. The usage of drones to conduct surveys to expedite the work and save time for construction work.
- Share: The transferring of partial opportunity to the third party. The formation of joint ventures with other company so that both the companies can deploy their core strengths to complete the project.
- Enhance: The increase in impact or probability of occurrence. The deployment of additional resources to complete the activity earlier.
- Accept: The opportunity is accepted but no active action is taken. This is done for the low impact opportunities.
The risk register is a critical document in risk management. It contains all the crucial information required for the risk management.
The important heads of risk register are as follows-
- Description of Risk
- Description of Impact
- Risk Evaluation
- Risk Category
- Likelihood (Low/Medium/High)
- Impact (Low/Medium/High)
- Risk Assessment
- Risk Owner
- Management Plan
- Action By
The risks in construction occur mainly due to the inability to manage the contract, contractor’s performance, change in circumstances, and the stakeholder relationship. These areas need to be probed thoroughly at the initiation phase of the project. A better understanding of risks will help in efficient risk treatment and ensures smooth project execution.
Construction risk management is a vast and dynamic field. The smallest actions can create the biggest impact hence impacting the business. A construction team with a proper risk management plan will ensure success. The team needs to be properly connected through communication channels for efficient risk treatment.
The strict implementation of the above-listed techniques will make the project a sure shot success. In addition, the claims are reduced, safety is improved, margins are maximised, and the reputation of the firms increase due to timely and on-budget completion of the project.
Read more about the risk analysis and management in construction here.