Importance of risk management in Project management and construction Industry

What is Risk?

Every human endeavour or action involves risk. In our daily life, one faces a variety of situations involving many unknown, unexpected, frequently undesirable and often unpredictable factors. These factors can be conveniently compiled under the category of risk (Hertz and Thomas, 1983). Custom software development companies in India have started giving importance to risk management and consider an important aspect of project management.

Risks in Construction Industry

Construction risks are generally perceived as events that influence project objectives of cost, quality and time. Some of the risks associated with the construction process are fairly predictable or readily identifiable; others may be totally unforeseen. Al-Bahar (1990) provides different categories of risks often encountered in construction projects are shown in Figure 1.

Figure 1. Types of risks in the construction industry (Al-Bahar, 1990)

Risk Management in Construction

Risk management may be defined as a process to control the level of risk and to mitigate its effects and impacts on overall project. It is a systematic and well-structured approach for identifying, evaluating and responding to risks encountered and identified in a project (Nummedal et al., 1996). In Figure 2, the risk management life cycle is shown. If maintained, this cycle yields a controlled risk environment (Baker et al., 1997).

In project management terms, the most serious effects or impacts of risk can be summarized as follows:

·         Cost deviations

·         Project timeline deviation

·         Quality deviation

The purpose of risk analysis and management is to help stakeholders to avoid these failures

(Thompson and Perry, 1992).

Process Management Process

Risk analysis helps in estimating potential impacts of risk and in making decisions regarding which risks to retain and which risks to transfer to other parties. Below is a systematic 6-steps approach of risk analysis proposed by Flanagan and Norman (1993).

STEP 1 - All the various options should be considered

STEP 2 - Consider the risk attitude of the decision-maker

STEP 3 - Consider what risks have been identified, which are controllable and what the impact is likely to be

STEP 4 - Measurement, quantitative and qualitative

STEP 5 - Interpretation of the results of the analysis and development of a strategy to deal with the risk

STEP 6  - Decide what risks to retain and what risks to allocate to other parties

Case Study

A construction project is selected to understand what kind of risks are encountered during the project development life cycle. Following risk management register explains complete risk management cycle that was used in this project. It also helps to understand how risks are managed and controlled during the project life cycle.

Risk Management Register

Risk Identification

Qualitative Risk Assessment

Risk Response Plan

Monitoring and Control

#

Risk Event

Effect

Threat or Opportunity

Primary Objective

Probability

Impact

Risk Matrix

Response Strategy

Response Actions

Responsibile   Entity

Interval or Milestone Check

1

Delay in approval and permissions

Delay in time

Threat

Time

Medium

Medium

Probability

VH

Accept

Attempt for approval to the Higher Authority

Government

H

M

X

L

VL

VL

L

M

H

VH

Impact

2

ROW Acquisition Risk

Delay in time

Threat

Time

Medium

High

Probability

VH

Transfer

Consultation/ concurrence

Government

H

M

X

L

VL

VL

L

M

H

VH

Impact

3

Risk in Traffic Diversion works

Delay in time

Threat

Time

High

High

Probability

VH

Mitigate

Traffic diversion plans Alternatives

Government

H

X

M

L

VL

VL

L

M

H

VH

Impact

4

Risk in Utility shifting works

Cost Increase

Threat

Cost

Medium

Medium

Probability

VH

Mitigate

Prior Notice before commencing work for Utility shifting

H

M

X

L

VL

VL

L

M

H

VH

Impact

5

Risk in Excavation works

Cost Increase

Threat

Time

Low

Medium

Probability

VH

Contractor

H

M

L

x

VL

VL

L

M

H

VH

Impact

6

Political Risks

Cost Increase

Threat

Scope

Low

Medium/High

Probability

VH

Mitigate

Accept/Transfer

Government

H

M

L

x

VL

VL

L

M

H

VH

Impact

7

Testing Commissioning of materials

Cost

Threat

Quality

Low

Medium

Probability

VH

H

M

L

x

VL

VL

L

M

H

VH

Impact

8

Geo-technical Risks

Cost Increase

Threat

Cost

Medium

Medium

Probability

VH

Accept

H

M

x

L

VL

VL

L

M

H

VH

Impact

9

Technical uncertainities

Delay in time

Threat

Time

Medium

High

Probability

VH

Mitigate

Contractor

H

x

M

L

VL

VL

L

M

H

VH

Impact

10

Major / Minor Accidents during Execution

Threat

Cost

Low

Medium

Probability

VH

Mitigate

Precautive Safety Measures

Contractor

H

M

L

x

VL

VL

L

M

H

VH

Impact

11

Site Communication

Threat

Cost

Low

Low

Probability

VH

H

M

L

x

VL

VL

L

M

H

VH

Impact

12

Force Majeure Risks like Flood, Rain, Earthquake etc.

Cost/Time

Threat

Cost

Low

High

Probability

VH

Contractor

H

M

L

x

VL

VL

L

M

H

VH

Impact

13

Labor Agitation and Strikes

Threat

Cost

Low

Medium

Probability

VH

Mitigate

Project Manager

H

M

L

x

VL

VL

L

M

H

VH

Impact

 

Conclusion

No Construction Project is Risk free. Risk can be managed, minimized, shared, transferred or accepted. It cannot be ignored. Risk management is an integral part of project management and it helps to achieve project objectives and targets. There are some limitations of risk management. If Risks are improperly assessed or prioritized, time can be wasted in managing risks. Spending too much time assessing and managing unlikely risks can divert focus of resources to unnecessary things. Unlikely events do occur, it may be better to simply retain the risk and deal with the result if the loss does in fact occur. Software companies in India consider risk management as an integral  part of project development life cycle and gives due importance to ensure timely, qualitative and within budget project delivery.