Risk Management

Question 1

What is an overview of Risk Management?

Answer 1

“Risk Management involves a set of procedures to mitigate risk.
There are 4 stages - IDENTIFY, ANALYSE, RESPOND, REVIEW
1) IDENTIFY - involves identifying & prioritising those uncertainties that may have an adverse effect on the project (workshops, experience, risk registers).
2) ANALYSE - involves assessing the impact of those identified risks and those most critical to the project in terms of time & cost (judgement, probability matrix, monte carlo, decision trees).
3) RESPOND - involves implementing effective strategy to mitigate the impact of each risk (accept - monitor, reduce - mitigation measures, transfer - insurance / contract, avoid - change design) - In order to effectively manage those risks that cannot ultimately be avoided it must be allocated to the party best able to manage it.
4) REVIEW - Regular reviews carried out & feedback to identify new risks & monitor existing risks upto completion”

Question 2

Define risk?

Answer 2

Exposure to an adverse event that may result in a positive or negative effect on the project objectives

Question 3

What is a risk register? Describe it’s format?

Answer 3

“Schedule of risks involved in a specific project. Typically include:

1) a description of the risk
2) owner
3) a risk grouping
4) a risk premium (total estimated cost)
5) A probability of occurrence (%)
6) Impact upon occurrence (£/wks)
7) risk factor (probability x impact)
8) action required
9) review date
10) status (open / closed)”

Question 4

3. How do you use the risk register?

Answer 4

• Continually monitor risk items identified in initial risk register and make it a working document to identify project risks for the remainder of the project.
• Assign levels of likelihood to each risk identified in an attempt to iron out the possibility

Question 5

4. What is Monte Carlo simulation?

Answer 5

• Monte carlo simulation is a form of probabilistic risk analysis (assesses the probability of achieving certain targets).
• Uses random sampling to assess variables that change simultaneously.
• The simulation is based on information generated by the project team who will identify a triangular distribution for each risk (optimistic / likely / pessimistic)

Question 6

9. What is a “Risk Event”?

Answer 6

• An event that can be predicted to at least some degree, generally based on historical data or experience and making a decision according to the probability of a particular event occurring.

Question 7

10. What is an uncertain/ unforeseen event?

Answer 7

• A random event that defies prediction

Question 8

11. Why is risk management needed in construction?

Answer 8

• Projects are typically complex, all have time, cost and quality targets which must be met.
• Risk is present in all projects and surveyors are routinely involved in making decisions which have a major impact on risk.
• Risk management cannot eliminate risk, but techniques can be used to reduce the impact of events that may cause failure to reach the desired targets.

Question 9

12. What is the purpose of risk management?

Answer 9

• Risk events can be managed, uncertain events cannot.
• Fundamental rule of risk is to reduce uncertainties to a minimum.
• Events have a likelihood of occurring (probability) and a consequence (impact)
• Impossible to manage uncertainties, usual way to manage them is to include programme float and/ or contingency.

Question 10

14. What approaches can you use to identify risks?

Answer 10

• Assumption analysis - High prob/ high impact, high prob/ low impact, low prob/ high impact, low prob/ low impact.
• Lists + brainstorming
• Delphi techniques (Design team, client, contractor individually identify risks prob/ impact in questionnaires, info collected and reported against)

Question 11

15. Can you give me some examples of risk in a construction project?

Answer 11

a. External risks: economic, legal, political
b. Financial risks: exchange rate, funding
c. Site risks: Restricted, occupied site, planning difficulties, access, environmental
d. Client risks: lack of experience, multi-headed client, likelihood of post contract changes.
e. Design risks: inappropriate consultant team, poor brief, incomplete design, co-ordination.
f. Selection of appropriate contractor: inadequate selection process
g. Construction and delivery risks: weather, constructability, H&S, availability of resources.

Question 12

16. What is a risk management strategy?

Answer 12

Provides a structured and coherent approach to identifying, assessing and managing risk

Question 13

17. What is Risk Allocation?

Answer 13

• Risks should be allocated to those best able to manage it, in a manner likely to optimise project performance.
• Financial allocation of risk should be done through the contract documents.

Question 14

18. How do you report/ monitor risks?

Answer 14

• Using a risk register: Risks are logged, tracked through the life of the project.
• Item: Threats/ Opportunities likelihood/ impact. Placed in a category e.g. client control, share.
• Needs regularly updating.

Question 15

19. What are the benefits of risk management?

Answer 15

a. Increased confidence in achieving project objectives and success
b. Suprises reduced cost/ time overruns
c. Team understands and recognises the use and composition of contingencies
d. Enable decision making to be made on an assessment of known variables available
e. Risk management workshops can facilitate team development and encourage communication.

Question 16

How would you measure risk?

Answer 16

Probability of occurring x the impact if it occurs (20% x £5,000) - Can be very subjective

Question 17

How did you allocate costs to the risk items?

Answer 17

• The costs were discussed with the project team & based on their experience an estimate value for time &/or cost was identified which would be the total cost likely to be incurred in the event the situation arose.
• An estimation was then made of the probability of the risk likely to occur.
• Probability was then multiplied by the cost to give a risk factor.
• This risk factor would then be included within the risk register & an action taken to monitor, avoid & reduce the impact of those risks with high probability & impact.

Question 18

What is Central Limit Theory?

Answer 18

• Probabilistic approach to risk analysis.

- Based on the fact that the variables will probably all relate to one normal distribution.

Question 19

What is Expected Monetary Value (EMV)?

Answer 19

• EMV brings probability & impact together.
• Possible outcomes weighted by expected probability of each occurring & combined to produce aggregate result.
• Can be used to assess the overall project outcome or calculate a sensitive rate within a tender (schedule of rates)

Question 20

How do you decide what level of contingency/risk allowance to use?

Answer 20

You must consider each project on their own merit and identify the key risks for that specific project and not just apply a previous benchmarked % (unless no project data available)

Add-On Percentage (Company Level):

• Provides a single value
• Absence of ‘Confidence Level’
• Unsuitable for unique or complex projects

Optimism Bias (Industry Standard):

• Provides single values for different ‘types’ of generic project
• High Confidence Level (Government Contracts in UK)

Risk Modelling:

• Provides a RANGE of values
• Client decides on final sum
• Provides a basis for informed decision making

Question 21

What is the difference between a qualitative risk analysis & a quantitative risk analysis?

Answer 21

Qualitative - Used when there is limited information about the risk allowing probability and impact to be defined accurately. Use a Risk Register to describe the risk in terms of quality (Risk description & probability & impact assessment - H/M/L).
Quantititative - Once defined in terms of quality, high risks can be prioritised & further assessment is required. Describes the risk in terms of quantity (Risk probability x impact - time & cost)”

Question 22

What happens during a risk workshop?

Answer 22

A project team will be formed prior to the WS & a facilitator appointed. WSF will brief the team by issuing appropriate information about the scheme & the purpose & objectives of the WS to allow preparation to occur prior to the WS.

1) Identify risk & generate risk register
2) Identify initial likelihood
3) Identify potential owner
4) Identify Actions - usually design related
5) Review date of risks/next meeting/workshop”

Question 23

How is risk apportioned on a Target Cost contract?

Answer 23

Reasonable apportionment of risk -
There is a balance between the contractors exposure to risk & incentive to share in the savings & make additional profit (PG Mechanism).
Similarly the contract provides a balance for the employer in terms of flexibility & out-turn cost certainty.

Question 24

What are the risk response/mitigation strategies?

Answer 24

a. Avoid: action needs to be taken to ensure risk does not occur. E.g. remove or alternative solution considered- different design, method
b. Reduce: If such a risk does occur the impact will be reduced as much as possible. Alternative solutions: need to ensure adequate man power and budget are dedicated to mitigating the risk.
c. Transfer: transfer the risk through sub-letting or insurance
d. Share: Usually achieved through the construction contract: exceptionally adverse weather EOT but not direct loss and/ or expense.
e. Retain: Noting and keeping the risk and controlling it. Must ensure dedicated man power and budget are dedicated to monitor and control it.

Question 25

What role does the QS play in Risk Management?

Answer 25

Part of the whole Cost Management Process: 1) Assisting in the cost management process & setting & managing contingency fund appropriately 2) Risk analysis will ensure accuracy of funds available & released when no longer required 3) Assist in decision making process by providing estimates with a degree of certainty & carry out simulations to determine level of risk 4) Provide advice when bidding for work on the level of risk & financial exposure to the company / understanding of market conditions & impact on the project & rates

Question 26

What are the Risk Analysis techniques?

Answer 26

Risk analysis sets out to achieve a better understanding of the risks identified & quantify their effects in terms of probability (likelihood of the risk occuring - %) & impact (effect if risk occurs - £/d). Methods available include: 1) Risk Premium - contingency fund 2) Subjective probability - persons confidence within a specific risk (Delphi Method - assessed by a number of professionals independently to avoid bias influencing others) 3) Decision Analysis - Risk exposure & attitude & assesses the alternative outcomes (Decision Trees) 4) Sensitivity Analysis - Ajustment of single input variable to determine acceptable parameters & identify those variables most sensitive to change 5) Monte Carlo Simulation - Assesses variables that change simultaneously. Uses triangular distribution & run 1000 times to ensure no bias & generates a probable contingency fund for the project. Other methods only based on one variable. 6) Intuition & Experience - Risks identified & impact on time & cost assessed through professional judgement

Question 27

Can risk be calculated? Do you know any method? How?

Answer 27

Risk can be calculated or provision made for, but cannot be calculated exactly otherwise it would not be classified as a risk. Risk involves the probability of something occurring & its potential impact in the event that it does occur. Risk can be assessed via a number of methods. the most simplistic method of calculating risk is via Quantitative Risk Assessment. A Risk Management Plan / Risk Register is developed by carrying out a workshop & peoples own intuition & professional judgement is used to identify risk & assess their impact in terms of cost & programme. Risk registers from previous projects are also a good starting point for identifying & analysing project risks.

Question 28

How is risk apportioned on the 4 main forms of procurement in terms of design and construction?

Answer 28

Traditional - Contractor responsible for time & cost. Client risk relates to design. D&B - Contractor retains time, cost & design risk. MC/CM - Time, cost & design risk generally remains with the Client