Management of Risk in Construction

1. Management of Risk in Construction By Professor Simon Burtonshaw-Gunn – licensed under the Creative Commons Attribution – Non-Commercial – Share Alike License http://creativecommons.org/licenses/by-nc-sa/2.5/

2. School of the Built Environment MSc Construction Management Risk Management in the Built Environment Presentation 1: Introduction to Risk Management Professor Simon Burtonshaw-Gunn

3. Introducing Construction Risk Management So to start, what are risks?

4. In life there are risks:

5. In life there are risks: - in driving a car

6. In life there are risks: - or even parking it

7. In life there are risks: - in flying a light aircraft

8. In life there are risks: - or in playing various sports

9. So too in business . . . .

10. So too in business . . . . although such risks are naturally associated with a financial risk compared to the market volatility and hence the ability to realistically provide expectations based upon a risk versus reward trade off. Whilst the management of corporate financial risk is undertaken through a very specialist risk discipline this presentation looks at the subject of risk management from a project, business or operational viewpoint where such risks can be internally or externally driven and may impact on the project’s objectives.

11. Risks and uncertainty occur in all construction projects and traditionally centre on the three project management constraints of • time, • quality and • cost • More recent authors also note that project managers need to meet or exceed “customer expectations and needs”.

12. Dennis Lock, in his book, on Project Management proposes that: “It is not surprising that projects, which metaphorically (and sometimes literally) break new ground, attract project risk. Project risks can be predictable or completely unforeseeable. They might be caused by the physical elements or they could be political, economic, commercial, technical or operational is origin. Freak events have been known to disrupt projects, such as the unexpected discovery of important archaeological remains or the decision by a few members of a rare protected species to establish their family home on what should have been the site of the project.”

13. The Natterjack Toad - Epidalea calamita Threatened by habitat loss and the scrubbing up of its open habitats (often caused by changes in management such as the reduction in grazing) and suffering from competition from the commoner amphibian species the Natterjack is threatened in Britain  Because it is so threatened the Natterjack is strictly protected by British and European law which makes it an offence to: • kill, injure or capture them; • disturb them in any way • damage or destroy their habitat • possess them or sell or trade them in any way.

14. So, what then is the purpose of Risk Management and what are the consequences of not doing it ?

15. The objectives of risk management are to ensure the rapid identification of risks within the business and to establish a clear process of assessment, action planning and reporting of the risks identified.

16. The objectives of risk management are to ensure the rapid identification of risks within the business and to establish a clear process of assessment, action planning and reporting of the risks identified. • It is important that focus and attention is given to the identification of opportunities as this will enable effective decision making to ensure that: • Business opportunities can be quickly assessed at an appropriate level in order to decide if and how it might proceed with such opportunities. • Threats to the project or other parts of the company’s operations can be eliminated or reduced to an acceptable level. • All decisions take account of contributing to sustainable shareholder value. • Key risks and the appropriate control measures are kept under regular review and reported

17. Why reduce risk?

18. Why reduce risk? • To ultimately reducethe likelihood of people/environment being exposed to a hazardand therefore harm • To make the company more efficient by reducing accidents and the cost associated with them, i.e. lost time, legal actions by either individuals or the Regulator, profits, share price, etc.. . . . See also next slide • The net benefit is that people feel safer in their work and therefore work more efficiently and productively

19. The accident iceberg . . . £1 • INSURED COSTS • Covering injury, ill health, damage. • UNINSURED COSTS • Product and material damage • Plant and building damage • Tool and equipment damage • Legal costs • Expenditure on emergency supplies • Clearing site • Production delays • Overtime working and temporary labour • Investigation time • Supervisors time diverted • Clerical effort • Fines and Reputation • Loss of expertise / experience What amount this ?? Source: UK Health & Safety Executive

20. The accident iceberg . . . £1 • INSURED COSTS • Covering injury, ill health, damage. • UNINSURED COSTS • Product and material damage • Plant and building damage • Tool and equipment damage • Legal costs • Expenditure on emergency supplies • Clearing site • Production delays • Overtime working and temporary labour • Investigation time • Supervisors time diverted • Clerical effort • Fines and Reputation • Loss of expertise / experience £8 - £36 Source: UK Health & Safety Executive

21. Risk ? Risks that can be insured Risks that can't be insured Risks that must be insured Contractor's or customer's risk Required by contract Required by law Management choice • Examples • Loss or damage to project property • Pecuniary loss through unforeseeable cause • Examples • Unreasonably high risk • Insurer unable to spread risk • Insured would stand to profit • Examples • Employer's liability for employees • Liability to third parties for motor accidents • Examples • Professional liability • Indemnity to customer against injury to persons Insurance and Risk in Project Management . Source: UK Health & Safety Executive From Project Management by Dennis Lock, Published by Gower, 2007

22. Indeed The Institute of Chartered Accounts report that: “They, (project staff) collectively, should have the necessary knowledge, skills, information and authority to establish, operate and monitor the system of internal control. This will require an understanding of the company, its objectives, the industries and markets in which it operates and the risks that it faces.” Internal Control, Guidance for Directors on the Combined Code on the Committee on Corporate Governance, The Institute of Chartered Accountants

23. Looking at Risk Management from the most senior level of the organization . . . . from December 2000 all London Stock Exchange listed companies have been required to comply fully with the Turnbull Report on Corporate Governance which notes that: “Risk management is essential for reducing the probability that corporate objectives are jeopardised by unforeseen events. All that the company is trying to achieve can be affected by risk exposure. They should be proactively managed” Implementing Turnbull, A Boardroom Briefing The Institute of Chartered Accountants

24. Given the importance of Corporate Governance and its relationship to being able to demonstrate responsible Risk Management many of the larger organizations in the UK have embed Risk Management as part of their corporate governance approach. Senior Management Accountabilities Control Framework Risk Framework Typical Corporate Governance Model General and Business Ethics Policies Behaviours

25. The balance between the organization’s ability to take risks for business purposes and that of risk management in the form of corporate governance and a management process illustrates the difficulty of balancing risk taking with risk management, in reality this two forces cause the project to osculate around the optimum approach. Risk Out of Control Taking - - “ “ fire fighting ” ” - - crisis management Theory Practice Over Control - - “ “ red tape ” ” - - loss of quality Risk Management

26. The right amount of control Risk Cost of risk occurring Unstructured Ill-defined Superficial Complex Unworkable Theoretical Optimum balance for risk control

27. The right amount of control Risk Cost of controlling risks Cost of risk occurring Unstructured Ill-defined Superficial Complex Unworkable Theoretical Optimum balance for risk control

28. The right amount of control Risk Total cost Cost of controlling risks Cost of risk occurring Unstructured Ill-defined Superficial Complex Unworkable Theoretical Optimum balance for risk control

29. By proactively addressing risks correctly the project should • cost less, • be completed more quickly, and • produce products more likely to meet the client’s requirements. • As such the test of an organization’s commitment to achieving effective Risk Management is the visible willingness to allocate budget or other resources to risk actions at each stage of the project – (see also later slides). • This implies that all the actions are on the senior management of the organization but responsibilities for Risk Management are far wider than this as both the Project Manager and Project Teams have direct project and governance responsibilities.

30. Project Project Quality Quality Risk Risk Requirements and Requirements and Standards Standards Time Time Cost Cost Time objectives Time objectives Cost Objectives Cost Objectives Restraints Restraints Restraints Restraints Integrating Risk Management with other Project Management Functions In focusing on typical construction projects, the topic of Risk Management can be seen to impact on its many facets of the project.

31. Life cycle and Life cycle and Ideas, directions Ideas, directions Expectations and Expectations and environment environment Data Exchange Feasibility Feasibility variables variables accuracy accuracy Project Project Information / Information / Scope Scope Management Management communication communication integration integration Human Human Project Project Quality Quality Resources Resources Risk Risk Requirements and Requirements and Availability Availability Standards Standards Productivity Productivity Contract Contract Time Time Cost Cost Management Management Time objectives Time objectives Cost Objectives Cost Objectives Services, Plant Services, Plant Restraints Restraints Restraints Restraints materials: materials: Performance Performance Integrating Risk Management with other Project Management Functions In focusing on typical construction projects, the topic of Risk Management can be seen to impact on its many facets of the project.

32. Integrating Risk Management with other Project Management Functions In construction, what are the relationships between the Prime Contractor and other management disciplines

33. • • Detail design Detail design • • Concept design Concept design • • Project Financing Project Financing Commercial Design • • Value Engineering Value Engineering • • Through Life Costing Through Life Costing Management Management • • Value Management Value Management • • Contract Management Contract Management Ops + Facility Management Ops + Facility Management Construction Management Construction Management • • Operation Operation • • Planning Planning • • Maintenance Maintenance • • Site Safety Site Safety • • Transfer Transfer • • On On - - site construction site construction Prime Prime Contractor Contractor Human Resource Issues Human Resource Issues Supply Chain Management Supply Chain Management • • Attitudes Attitudes • • Competition Competition • • Staffing Staffing • • Relationships Relationships • • Social / behaviour Social / behaviour • • Selection Process Selection Process • • Organization structure Organization structure • • Organization procedures Organization procedures Project Project Total Quality Total Quality • • Cost and Price issues Cost and Price issues • • Continuous Improvement Continuous Improvement Management Management Management Management • • Customer expectations Customer expectations • • Performance measurement Performance measurement • Risk Management Integrating Risk Management with other Project Management Functions

34. The British Standard on Project Management (EN BS 6079-3:2000) defines this as: “uncertainty inherent in plans and the possibility of something happening (ie a contingency) that can affect the prospect of achieving business or project goals.”

35. The British Standard on Project Management (EN BS 6079-3:2000) defines this as: “uncertainty inherent in plans and the possibility of something happening (ie a contingency) that can affect the prospect of achieving business or project goals.” In the Vocabulary of the Standard a further definition is also provided as a: “combination of the probability or frequency of occurrence of a defined threat or opportunity and the magnitude of the consequences of the occurrence.”

36. The British Standard on Project Management (EN BS 6079-3:2000) defines this as: “uncertainty inherent in plans and the possibility of something happening (ie a contingency) that can affect the prospect of achieving business or project goals.” In the Vocabulary of the Standard a further definition is also provided as a: “combination of the probability or frequency of occurrence of a defined threat or opportunity and the magnitude of the consequences of the occurrence.” “the process whereby responses to the risks are formulated, justified, planned, initiated, progressed, monitored, measured for success, reviewed, adjusted and (hopefully) closed” (The Association of Project Management 1997).

37. School of the Built Environment MSc Construction Management Risk Management in the Built Environment Presentation 1: Introduction to Risk Management Professor Simon Burtonshaw-Gunn