Risk Management

Question 1

What is a risk in the context of a construction project?

Answer 1

A potential event that, should it occur, will affect the project outcome

Question 2

What is risk management?

Answer 2

A structured process for identifying and controlling risks throughout a construction project

Question 3

What are the basic principles of risk management?

Answer 3

Risks should be:
- IDENTIFIED
- ASSESSED (qualitatively and/or quantitatively)
- RESPONDED TO (avoid, reduce, transfer, share or retain –> risk allowance)
- MONITORED

Question 4

What are the benefits of risk management in construction?

Answer 4

• All construction projects involve risk
• Managing risks can help achieve client’s time, cost and quality targets
  
  • TIME: reduce programme risks
  • COST: cost plan risk allowances
  • QUALITY: reduce design risks
• Ensure risks are allocated to satisfy client’s risk appetite

Question 5

How can the client’s project team reduce design risk?

Answer 5

• Effective management of the risk register through risk workshops
• Transfer the risk in procurement (CDP in traditional or D&B)
• Buildability input from early contractor involvement
• Use a trusted and experienced design team

Question 6

Are you aware of any RICS guidance on risk management?

Answer 6

[Guidance Note] Management of risk, 1st edition

Question 7

What are the risk response/mitigation strategies in Management of risk 1st edition?

Answer 7

1. AVOID: eliminate the risk e.g. alternative design or project cancellation
2. REDUCE the probability of the risk occurring or its impact e.g. alternative design or different construction method
3. TRANSFER the risk to another party able to better control it, usually involves a premium to be paid e.g. to the contractor
4. SHARE: some of the risk is transferred to another party, while other elements of the risk are retained by the client
5. RETAIN: client retains the risk, appropriate risk allowance made in the cost plan (residual risk exposure)

Question 8

What is a risk management strategy?

Answer 8

A strategy outlining how risks will be handled on a project. This could include:
- how risks will be identified e.g. risk workshops, and their frequency
- how risks will be recorded and assessed (risk register)
- who’s responsible for recording identified risks
- who’s responsible for managing each risk (each risk has an owner who is best suited to manage it)
- the client’s risk appetite
- how risks are to be reported to the client e.g. via regular meetings or monthly reports

Question 9

Who should own a risk?

Answer 9

The person/organisation best suited to manage the risk

Depends on the procurement route but generally:
- architectural design risk = architect
- structural design risk = structural engineer
- cost risks = QS
- programme risk = contractor / PM

On a higher project level:
- client should manage their risks
- contractor should manage their risks

Question 10

How do you monitor and report risks?

Answer 10

• All risks are recorded and monitored throughout the project in the risk register
• Risks can be reported to the client via regular meetings or monthly reports (see risk management strategy)

Question 11

What is a risk register?

Answer 11

A schedule of all identified risks on a project

Question 12

What information would you find in a risk register?

Answer 12

Typically for each risk:
- ref nr
- description
- category (e.g. programme, design, planning etc)
- probability (1-5)
- impact (1-5)
- overall score (1-25) (probability * impact)
- risk status
- due date
- raised by
- risk owner
- open/closed

Question 13

What types of risk assessment/analysis are there?

Answer 13

Qualitative: assesses risks using descriptive terms such as ‘high probability’ and ‘low impact’

Quantitative: assesses risks by assigning values such as ‘probability of 65%’ or ‘impact of £2m’
- Expected Monetary Value (EMV) = probability * cost

Question 14

How do you go about creating a risk register for a new project?

Answer 14

Bring the project team together at a risk workshop:
- Identify all possible risks
- Qualitative risk assessment: assign ‘probability’ and ‘impact’ values to each risk to give an overall risk score, then rank them accordingly
- Quantitative risk assessment: cost the risks
- Allocate an ‘owner’ to each risk

Question 15

What is a risk workshop?

Answer 15

• A meeting between the project team to identify risks, discuss actions for already known risks
• Risk register is usually updated following a risk workshop

Question 16

What is risk allocation?

Answer 16

• Assigning a risk a “risk owner” who is then responsible for managing that risk
• Risks should be allocated to those best able to manage them
• This allocation should be clearly identified in the risk register under the ‘risk owner’ column

Question 17

How do you use the risk register (post-contract)?

Answer 17

• Monitor existing items in the register
• Update it throughout the project as new risks are identified or when newer information about a risk already recorded becomes available. Obtain additional risk allowance if necessary
• Any risks that haven’t materialised and are are no longer a risk are closed out. Associated risk allowance can be re-allocated or given back to client

Question 18

What is risk allowance?

Answer 18

An allowance made in a cost estimate to protect the client from any residual risk

Question 19

What are the main risk allowance categories in NRM1?

Answer 19

1. DESIGN DEVELOPMENT risk
   - An allowance for use during the design phase for risks associated with design development, changes in estimating data, third-party risks e.g. planning requirements or delays in tendering
2. CONSTRUCTION risk
   - An allowance for use during the construction phase for risks associated with site conditions e.g. access restrictions or existing buildings
3. EMPLOYER CHANGE risk
   - An allowance for use during the design and construction phases for risks associated with employer-driven changes e.g. change to scope of works, or quality/time requirements
4. EMPLOYER OTHER risk
   - An allowance for other employer risks e.g. early handover, acceleration or availability of funds

Question 20

How would you calculate risk allowance?

Answer 20

Depends on the project RIBA stage…

OoCE:
- Likely a %, e.g. based on a similar past project

Cost Plan:
- Compile risk register, cost the risks. Include costs associated with the residual risks
- Risk allowance = design development risk + construction risk + employer change risk + employer other risk

Question 21

What is Central limit theorem?

Answer 21

A mathematical technique used to provide a 90% confidence level for a project contingency fund

Question 22

What is a Monte Carlo simulation?

Answer 22

A computer-generated simulation used to model outcomes

Question 23

Why is a QS ideally suited to act as a risk manager?

Answer 23

• Risk is present in all projects and QSs make decisions which can have a major impact on risk
• The QS can quantify the impacts of risks in terms of cost and time

Question 24

What is the role of a QS in terms of risk management?

Answer 24

• The QS can quantify the impacts of risks in terms of cost and time
• Ensure risks are allocated to satisfy client’s risk appetite
• Ensure there’s adequate risk allowance in the cost plan to cover the residual risk (the risk retained by the client)

Question 25

What are the problems to the QS regarding cost control of piling?
Whose risk is the piling?

Answer 25

• Pile depths are never a certainty (risk)
• Procurement route determines who takes the risk