Risks are pervasive throughout construction projects and need to be properly managed. This document discusses: 1) Various types of risks that occur during different phases of the project life cycle from planning to construction. 2) How the selection of a project delivery system, such as design-bid-build or design-build, can impact risks related to costs, schedule and control. 3) Qualitative and quantitative risk analysis methods that can be used to identify, prioritize and evaluate risks, such as cause-and-effect diagrams and decision analysis.

1. 1
Exploration of Risks and Risk
Management in Construction
Project Delivery
Edgar P. Small, Ph.D.
Associate Professor
Coordinator – Construction
Management Program

2. Background
•Construction is increasingly complex and
fraught with risks
• Safety
• Monetary
• Quality
• Time
• Security
• Equipment
• Relationship

3. Workshop Description
• Risks are pervasive throughout the construction process and
throughout a traditional project life-cycle. Risks occur in the early
phases of life-cycle due to uncertainties with respect to project
definition, with respect to client desires and with respect to project
feasibility. As the life-cycle progresses, project definition
uncertainties are mitigated with clarity provided through the
production of plans and specifications. New risks, however, are
introduced through the bidding and tendering process and within
procurement and construction. What are the drivers which
instantiate these risks? How are the risks quantified? How can
the risks be mitigated. These and other questions are addressed
through this session with the goal of conveying knowledge,
understanding and practical tools for management of risks for
project participants.

4. Our Goal Today is to Investigate Risk
and Risk Management Alternatives
•What types of risk occur through the project
life-cycle and why do these risks occur?
•How can these risks be quantified?
•How can these risks be mitigated?

5. Our Outline
•How do you define risk?
•Quantitative vs Qualitative Risk
•Construction: Background Considerations
• Project life-cycles, Organization for Project
Delivery, Contractual Options
•Risk Analysis for Construction Operations
• Where does risk fit? PM-BOK recommendations
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6. Definitions: What Is Risk?
• (Exposure to) the possibility of loss, injury, or other adverse or
unwelcome circumstance; a chance or situation involving such a
possibility. [Oxford English Dictionary]
• Side note: Etymology of risk originally from Arabic? ‫رزق‬
• Risk is an uncertain event or condition that, if it occurs, has an
effect on at least one [project] objective..
• The probability of something happening multiplied by the resulting
cost or benefit if it does.
• The probability or threat of quantifiable damage, injury, liability,
loss, or any other negative occurrence that is caused by external
or internal vulnerabilities, and that may be avoided through
preemptive action.
• Numerous discipline-specific definitions
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7. Two Different Ways to Look at Risk
• Qualitative
• High, Medium, Low
• Red, Yellow, Green
• Quantitative
• Based on calculated
value
We look at risk in order to ascertain whether a
mitigation action should be undertaken

8. Construction and Risk:
Developing the Background

9. Why are We Looking At This?
•What are we looking at?
• Construction is the 3rd largest industry in DXB
• Great diversity of materials, sectors, techniques
• Parties involved:
• Owners
• Design Firms
• Contractors
• Consultants

10. Construction is Unique
• Process of combining and assembling components to
create a physical improvement
• Project-based over a defined life-cycle
• Prototype Nature (all projects are different)
• Intricate – Numerous technologies and materials
• Expensive & time-Consuming
• Resource Driven
• Risky

11. Project Life Cycle
Begins with the Idea/Need
Concludes with Disposal of Facility
Numerous ways of looking at a project
life-cycle but they always start with the
idea and end disposal

12. Project Life-Cycle
(From the Owners Perspective)
1. Market Demands/Perceived Needs
• Defines Project Requirements
• This is where the owner comes up with the idea
2. Conceptual Planning/Feasibility Studies
 Defines project scope, size, etc.
 Evaluate whether the project makes sense
3. Preliminary Design & Engineering
 Defines the configuration, materials
 Finalizing the type-selection process.

13. Project Life-Cycle
(From the Owners Perspective)
4. Detailed Design & Engineering
 Details determined. Plans & Specs generated.
 Finalizes the details
5. Procurement & Construction
 Materials acquired, facility built
 Limited opportunity for impacting final costs
6. Startup & Turnover
 Punch-list items addressed, contract concluded
 May be significant for complex projects.

14. Project Life-Cycle
(From the Owners Perspective)
7. Operation of Facility
 Periodic maintenance
 Life-cycle impacts should be considered when
making the decision early in the life-cycle
8. Disposal
 Demolition or conversion.
 This is the salvage values.

15. Project Delivery Structures
•Organization of the Project Participants to Define
Responsibilities and Working Relationships
•“Comprehensive process of assigning
contractual responsibilities for designing and
constructing.”
• Traditional (Design-Bid-Build)
• Owner-Builder
• Turn-Key (Design-Build and Permutations)
• Construction Management
15

16. Traditional Organization
General
Contractor
Architect/
Engineer
Subcontractor
OWNERConceptual, Preliminary,
Design, Construction
Oversight
Procurement,
Construction, Startup
No Contractual
Relationship
- Separate Designer
- Single GC w/ Numerous Subs

17. Turnkey: Design/Build
11/5/2015
ECVL 420 - Construction Engineering and Management 17
Contractor
Forces
Design
Subcontractors
Design/Build
ContractorConceptual, Preliminary,
Design, Construction
Oversight
Procurement,
Construction, Startup
OWNER
Single firm responsible
for all design and
construction.

18. Professional CM
ECVL 420 - Construction Engineering and Management 18
Construction
Manager
Architect/
Engineer
OWNER
Conceptual, Preliminary,
Design
Design Input/Oversight,
Procurement,
Construction, Startup
Independent
Contractors

19. Look at Time? Does the Selection of the
Project Delivery System Introduce Risk?

20. Risk Depends on the Constraints
If there are no time constraints,
there are no risks.
The more pressing the time
constraint, the more critical it is
to save time.
What about costs?
- Traditional has the lowest cost
- Design-Build has the highest cost
How does this translate to cost risks?

21. What Sources of Risk Exist?
• i.e. How does selection of the project delivery system affect the
risks and what types of risks are increased/decreased.
• Quantitative Risk: Probability of an effect multiplied by the impact
• Qualitative Risk: What is the potential of a significant impact
• What are the objectives of a project?
• Success!
• Now, what is success?

22. Parties Involved at Different Phases
• Depends on the form of project delivery offered.
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How does the ability
to influence costs
and the expenditure
of costs impact risk?

23. Economic/Cost Risks and Contractual
Forms of Payment
• Cost risks are prevalent for owners and contractors
• Cost risks are a function of the type of payment structures
• Lump-sum / Stipulated Sum
• Unit-price / Re-measured
• Cost-Plus (with various permutations)

24. Lump Sum (Stipulated Sum)
• Contractor quotes one price, which covers all the work and
services that are covered by the contract.
• Price quoted is the guaranteed price for the work specified.
• Advantage: owner knows what he must pay up front.
• Price determined based on complete, detailed plans and
specifications.
• Flexibility for contractual change is limited.
• Potential for increased costs and disagreements in change order
negotiation.
Cost Risk: Owner Consultant Contractor

25. Unit Price Contracts
• Structured to permit flexibility to accommodate variations in actual
material/work amounts/quantities
• Project is broken down into work items that are correlated and
measured by physical measurements
• CY of concrete or excavation, # of doors, SF of slab, etc
• All work items for payment are predefined as are estimated quantities
(useful for bidding and evaluation)
• Budget determined based on bid quantities
• Actual payments based on quantities placed
Cost Risk: Owner Consultant Contractor

26. Cost Plus Arrangements
• Cost + Percentage
• Lucrative but subject to abuse.
• Little incentive for contractor to be efficient/economical
• Larger the job, higher the fee.
• Seldom used
• Cost + Fixed Fee
• Cost + Fixed Fee + Profit Sharing Clause
• Cost + Sliding Fee
• Cost + with Guaranteed Maximum Price
Cost Risk: Owner Consultant Contractor

27. Let’s Look at This Qualitatively
Contract Form Owner: Risk of
Going Over Budget
Contractor: Risk of
Losing Profit
Lump-Sum Low High
Re-measured Moderate Low
Cost-Plus High Low
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28. So …
• We have decisions that are made through the project life-cycle
• Decisions incorporate risks that are seldom qualitatively or
quantitatively evaluated at the early stages
• Selection of the project delivery system and the form of contract
directly impact ultimate success
• These decisions incur minimal direct costs but have large
impact on the final costs, time, quality, and ultimate success
• Risks should be evaluated and/or considered when making these
decisions.
• ARE THEY?
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29. Move On to Consider Construction:
The Most Costly Phase
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30. Assume Traditional DBB Structure
• Plan is complete and Contract Documents Available for Bid
• Bid process is established.
• Contractor prepares an estimate for bidding
• Estimated performed based on knowledge, skills and abilities of estimating team
and data collected/available on productivity, costs, practices, etc.
• Bid development includes significant cost risks, competitive risks, predictive risks
• For successful bidder, plan and schedule must be developed to
deliver project on-time, within budget at the prescribed quality
• Schedule includes time and cost-associated risks
• Delivery of the project includes numerous other risks
• Safety, environmental, market, property, security risks, etc.
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31. Best Practices Demand Proactive Risk
Management
• Consider PMI – PMBOK
Recommendations
11.1 Plan Risk Management
11.2 Identify Risks
11.3 Perform Qualitative Risk
Analysis
11.4 Perform Quantitative Risk
Analysis
11.5 Plan Risk Responses
11.6 Control Risks

32. Balance Against Company “Appetite”
•Balance your Risk Strategy Against
Organizational Risk Considerations
• Risk appetite – the degree of uncertainty an entity is
willing to take in anticipation of a reward.
• Risk tolerance – the degree, amount or volume of risk
that an organization will withstand.
• Risk threshold – measure the level of uncertainty or
impact at which a stakeholder may have a specific
interest. Below that risk threshold, the organization
accepts the risk, above it does not tolerate it.
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Commitment should be
made to address risk
proactively for success.

33. 11.1 Plan Risk Management
• 11.1Plan Risk Management – The process of defining how to
conduct risk management activities for a project

34. Plan Risk Management
• Careful and explicit planning enhances the probability of success
for other risk management processes.
• Planning is also important to provide sufficient resources and time
for risk management activities and to establish an agreed-upon
basis for evaluating risks.
• Should begin when a project is conceived and should be
completed early during project planning.
• For the contractor in the traditional structure, where is the project
conceived? When should this be done? (before or after getting the job)

35. 11.2 Identify Risks
• 11.2Identify Risks – The process of determining which risks
may affect the project and documenting their characteristics.

36. Where are the risks for our project?
• Cost risks:
• Schedule Risks:
• Quality Risks:
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37. Identify Risk (cont)
• Risk identification activities may include: project manager, team
members, risk management team, customers, subject matter
experts, other stakeholders, etc.
• Identifying risks is an iterative process, because new risks may
evolve or become known as the project progresses through its
life-cycle.
• Frequency of iteration and participation may vary by situation.
• Many tools: SWOT analysis, expert elicitation, cause & effect
diagrams, process flow charts, influence diagrams, checklists,
etc.

38. Cause and Effect Diagrams
• Problem statement at head is the starting point and then the
problem is traced back to actionable root causes.
• Problem statement typically describe the problem as a gap to be
closed or an objective to be achieves.
• Causes of found by looking at the project and examining/asking why
until an actionable root cause is identified or reasonable possibilities
of each fishbone exhausted.
• Useful in linking the undesirable effects seen as special variations to
the assignable cause upon which the project teams should
implement corrective actions to eliminate the special variation
detected in a control chart.

39. Cause and Effect Diagrams
(Fishbone Diagrams)

40. Flowcharts (Process Maps)
• Display the sequence of steps and the branching possibilities that exist for
a process that transforms one or more inputs into one or more outputs.
• Show the activities, decision points, branching loops, parallel paths, and
the overall order of processing by mapping the operational details of
procedures that exist within a horizontal chain of a SIPOC model.
• May be useful in understanding and estimating the cost of a process (i.e.
impacts) by using the workflow branching logic and associated relative
frequencies to estimate expected monetary value.

41. SIPOC Model w/ Operational Processes

42. Affinity Diagrams
• Similar to a mind-mapping technique as they are used to
generate ideas that can be linked to form organized patterns
of thought about a problem.

43. Process Decision Program Charts
(PDPC)
• Used to understand a goal in relation to the steps for getting to
the goal. Helps to see the intermediate steps that could derail
achievement of the goal (which are hazards)

44. Interrelationship Digraphs
• Adaption of relationship
diagrams. Provide a
process for creative
problem solving with
complex, intertwined
logical relationships for up
to 50 relevant items.
• Can be developed from
data in other charts
(fishbone, affinity, tree)

45. Tree Diagrams (Systematic Diagrams)
• Represent decomposition hierarchies. (WBS, RBS, OBS)
• Useful for understanding parent-child relationships
• Can be presented either horizontally or vertically
• Very useful for establishing expected values.

46. Matrix Diagrams
• Diagram seeks to show the
strength of relationships
between factors, causes and
objectives that exist between
the rows and columns.

47. Checksheets (Tally Sheets)
• May also be used as a checklist when collecting data.
• Used to organize facts that will facilitate the effective collection
of useful data about a potential quality problem.
Think about how
this could be
implemented for
control / risk
mitigation

48. Pareto Diagrams
• Column chart used to
identify the vital few
sources that are
responsible for causing
most of a problems
effects.
• Frequencies correlated
with cumulative
percentages.
This will come naturally if you are
capturing and maintaining a continual
process improvement program with data

49. Histograms
• Special form of a bar chart and are used to describe the
central tendency, dispersion, and shape of a statistical
distribution. Doesn’t consider influence of time.
Natural probability
distribution

50. Control Charts
• Used to determine whether a process is stable and whether
there is predictable performance
For risk
analysis,
historical
information
will be
invaluable

51. Scatter Diagrams (Correlation Charts)
• Seek to explain the change in the dependent variable (Y) in
relation to a change in the independent variable (X).
Relationships generally modeled through regression.
From
historical
information

52. Assessment of Tools
• Many of these tools have application elsewhere in project
management (especially in control)
• Serve as the basis for generating data that can help you make
better decisions; therefore, capture this data.
• Adapt the information for risk and couple with the control
function to ensure constant diligence and continuing
improvement.
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PLUS, You cannot move to quantitative
risk analysis without having data.

53. 11.3 Perform Qualitative Risk Analysis
• 11.3Perform Qualitative Risk Analysis – The process of
prioritizing risks for further analysis or action by assessing and
combining their probability of occurrence and impact.

54. Qualitative Risk Analysis
• Assess the priority of identified risks using relative probability or
likelihood of occurrence, the corresponding impact on project
objectives if the risks occur, as well as other factors, such as
time frame for response and the organizations risk tolerance
associated with the project constraints of cost, schedule, scope
and quality.
• Establishing definitions of the levels of probability and impact
helps to remove bias in the analysis.
• Rapid and cost-effective means of establishing priorities and
provides the foundation for Quantitative Risk Analysis.

55. Example

56. 11.4 Perform Quantitative Risk
Analysis
• 11.4Perform Quantitative Risk Analysis – The process of
numerically analyzing the affect of identified risks on overall
project objectives.

57. Quantitative Risk Analysis
• Follows similar process to qualitative risk analysis.
• Difference is in the specific approach and outputs.
Makes use of
many techniques
discussed plus
SWOT analysis

58. Decision Analysis - Expected Value
Can be used for
decision support of
mitigation activities

59. Sensitivity Analysis

60. Modeling and Simulation

61. 11.5 Plan Risk Responses
• 11.5Plan Risk Responses – The process of developing options
and actions to enhance opportunities and to reduce threats to
project objectives.

62. 11.6 Control Risks
• 11.6Control Risks – The process of implementing risk response
plans, tracking identified risks, monitoring residual risks,
identifying new risks, and evaluating risk process effectiveness
throughout the project.

63. RECAP: Project Risk Management
• 11.1Plan Risk Management
• 11.2Identify Risks
• 11.3Perform Qualitative Risk Analysis
• 11.4Perform Quantitative Risk Analysis
• 11.5Plan Risk Responses
• 11.6Control Risks
So, What Do You Think? How Do These
Relate To Your Project? How About Your
Day-to-Day Work Activities? Where do
these occur?

64. Wrap up

65. Did we accomplish our goals?
• We touched on the subject but there is SO MUCH MORE!!!
• Where do you go from here:
• Continual, life-long learning
• Pursuing of graduate education (MSCM)

66. The Masters of Science in
Construction Management
• 30 Credit Program (10 classes)
• Modeled after the of US programs.
• MOHE accredited/SACS accredited
• Scholarship programs are available
• 50 percent merit based scholarship
• Matching scholarship for company contributions (up to 25%)

67. TO APPLY
• Application can be submitted online
• http://www.aud.edu/Admissions/grad.asp
• For More Information:
Dr. Edgar P. Small
Associate Professor
MSCM Coordinator
E-mail: esmall@aud.edu
Tel: (04) 3183 447
For admissions questions: Sara Sleem (ssleem@aud.edu)
Tel: (04) 3183 172

68. THANK YOU
Are there any questions
or comments before we
conclude?
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