Risk Assessment

One of the tasks to be performed during preconstruction services is risk assessment for the project. Many people think about risk in terms of financial issues such as insurance and bonding. Risks are not limited to finances, and can include any matter that adversely affects the project such as design deficiencies, construction deficiencies, material deficiencies, labor disputes, contract provisions (see Chapter 9), strikes, acts

The risk management process can be defined in the following manner:

1. Identify risks to the project.

2. Complete the risk assessment form.

3. Investigate the risk to the project.

4. If the risk is determined to be large, escalate the risk to upper management.

5. Continuously monitor the risk.

6. Assign an appropriate risk management mitigating action, or contingency plan.

7. Implement the appropriate risk management action at the proper time.

8. Bring closure to the risk item.

EXHIBIT 2-1

Summary of the risk management process.

Exhibit 2-2

Risk management flowchart.

Exhibit 2-2

Risk management flowchart.

of sabotage or terrorism, material shortages, personnel shortages, geotechnical problems, and governmental agency problems.

In order to properly manage the potential risks to the project, a risk management plan needs to be developed to formally identify, quantify, assess, and mitigate the risks during the execution of the project. The risk management planning process entails completing a number of actions to reduce the likelihood of occurrence and the severity of the impact of each risk. This process will enable the CM/GC to identify, document, review, and mitigate these risks, and any others that may arise in the ever-changing world in which we live and conduct business. An outline of a risk management plan for a construction project, which must be customized for each specific project, is shown in Exhibit 2-3.

A model used in the construction industry to manage risk is the construction risk management system (CRMS). This model provides an effective systematic framework for quantitatively identifying, evaluating, and responding to risks in construction projects. Risk management should be seen as managing risk proactively, rather than responding to risk events after they happen. Hence, the theme of risk management approach is to act instead of react to project risks. Many contractors think of risk management as insurance management, where the main objective is to find the optimal economic insurance coverage for the insurable risks. Risk management, if done properly, goes way beyond that and looks to scientifically and systematically approach the management of risks faced by contractors, and deal with both insurable and uninsurable risks by choosing the appropriate techniques for dealing with the risks to the project and the contractor. Contractors must evaluate their own risk tolerance and the degree of exposure to risk with which they are comfortable and can be exposed to financially. Remember that there should be a balance with all risks and rewards, and if one does not take prudent risks, there may not be the potential for reward.

Exhibit 2-3

Sample outline for a risk management plan.

Item

Included

1. Identify risks to the project, especially during the preconstruction planning.

2. Consider arranging for a risk workshop to assist in identifying project risks.

3. Fill out a risk assessment form.

4. Document the risk in the risk management log for proper tracking and administration.

5. Investigate the risk.

6. Quantify the risks, likelihood, and potential impact on the project.

7. Review the risk to determine its overall priority (low, medium, or high).

8. Take actions to resolve the low and medium risks.

9. Escalate high risks to upper management.

10. Describe the earliest indicator or trigger condition that might indicate that the risk is turning into a significant problem.

11. Continuously identify and update monthly the top ten risks to the project.

12. Review risks and approve the appropriate set of actions.

13. Where possible avoid, transfer, or mitigate risks.

14. The project manager will assign the actions to the members of the project team and oversee the implementation.

15. Members of the project team will implement approved actions with diligence and timeliness.

16. Advise the owner of any impact to the project's budget, schedule, and logistics.

17. Obtain approvals as may be required for any contractual costs that may be incurred.

Tools of Risk Management

The following is a list of tools used to manage risk for a construction project:

1. Contract language

2. Insurance

3. Administrative procedures

4. Operational procedures

5. Bonding and surety

6. Safety programs and loss prevention

7. Controlling claims and litigation

S. Risk management plan

9. Risk avoidance and mitigation

10. Risk transfer

Categories of Risk

Risks are sometimes broken down into three categories depending on their size and frequency as follows:

1. Small, reoccurring, routine risk. These risks taken together usually pose no significant financial impact and the costs associated with them are absorbed by the CM/GC or the project budget contingency and loss control procedures. An example of this might be stolen small tools from the project site.

2. Accidental risk. These are usually small in number, but large in cost, both individually and taken together. These are usually covered by insurance and loss control procedures. An example of this might be a pedestrian being struck by some construction material while walking by the site.

3. Catastrophic risk. These risks are usually small in number, but could have significant impact on the CM/GC and/or project, depending on the company's liquidity, retained earnings, profitability, and level and types of insurance coverage. An example of a catastrophic risk is a building catching fire during the construction process, or a tower crane collapsing during the construction process.

Project Management Made Easy

Project Management Made Easy

What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.

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