An Issue in Engineering Project Managements- Managing Risks in Projects

Risk is inherent in the construction industry. The industry has maintained a poor reputation in dealing with the unfavourable impacts of risk for years. (Smith, et al., 2006) Webster’s dictionary defines risk as “the possibility of loss, injury, disadvantages, or destruction”. In the context of construction industry, it is possible that events, their consequences and dynamic interactions may occur or turn out differently than anticipated, which may be detrimental to the successful completion of a project. According to Glenn Shafer CII (1989), risk is the probability of an unfavourable event occurring. Hertz and Thomas (1983) defined it as uncertainty and the outcome of uncertainty.
Construction industry is one of the most risky and challenging businesses in the world. Risk, major or minor, is associated with each construction activity. Accumulatively, it results in the overall risk for the project (Al-Sobiei, et al., 2005). The uncertainties in construction are caused by the uniqueness of the project as well as the diversity of resources and activities, along with the impact of external factors (CII, 1989). These risks manifest themselves in terms of cost overruns, failure to meet deadlines and compromise on quality specifications. In the worst case scenario, these overruns are so high that they nullify the economic worth of the project (Smith, et al., 2006). The traditional way of dealing with risks in the construction industry has been either to ignore it or merely add a ten percent contingency amount to the estimated cost. Often, this attitude results in costly delays, litigation and maybe even bankruptcy (Hayes, 1986). Also, as these are based on intuition, they often result in the contractor either losing its competitive edge or the profits at the conclusion of the project (Mills, 2001).
Risk is a multi-facet concept. Each risk comprises of three elements: source, event, and effect. A single risk event may result from single or multiple sources, and may result in single or multiple effects. Risk implies that there are a number of outcomes for each event, which may be harmful or beneficial, and there is a probability of occurrence associated with each outcome. There are three types of risks, the known risk, known unknowns and unknown unknowns. Known risks include minor changes in productivity, procedures cost of material and equipment. Known unknowns are risks which are predictable, either in terms of their severity or occurrence. Unknown unknowns are those risks which cannot be anticipated at all, even by the most experienced professionals (Smith, et al., 2006).
Risk can adversely affect the efficiency, performance, cost and quality of a project. But risk is inherent to a construction project. It cannot be avoided. A realistic estimate of a project is the one which makes suitable allowance for all the possible risks and uncertainties. Risks do not randomly occur. There are root causes of each risk event which could be identified and managed to avoid risks. In order to achieve that, a systematic approach should be followed (Smith, et al., 2006); and that systematic approach is called risk management. Risk management is an important part of decision-making process. Risk in a project cannot be entirely removed but it can be reduced, transferred or retained effectively through a proper risk management framework (Burchett, 1999).
Risks are not always harmful for the project. At times, taking risks may lead to higher profit margins or innovative processes. Risk can be beneficial to a project as long as they are accounted for in the project plan. They can even be taken advantage of with proper risk management (Hayes, 1986; Godfrey, 1996).
Risk Management is a formal and orderly tool for managing the project risks effectively throughout the project life cycle to reduce the overruns and maximise the output. It attempts to recognise and manage potential and unforeseen threats that may occur at project implementation. The process of risk management does not aim to remove completely all risks from a project. Its objective is to develop an organised framework to assist decision makers to manage the risks, especially the critical ones, effectively and efficiently. It includes maximising the result of positive events and minimising the effects of adverse events (Flanagan & Norman, 1993).
There are number of ways researchers view risk management. Cooper and Chapman (1987) have defined risk management as a multiphase risk analysis which encompasses identification, evaluation, control and management of risks. According to Hertz and Thomas (1983) it is a rational cycle of steps consisting of risk identification, risk measurement, and risk evaluation and re-evaluation. Likewise, Hayes (1987) devised a risk management approach consisting of risk identification, risk analysis and risk response.
Risk management aids in identifying, assessing and categorising risks, focussing on the main risks, planning for mitigation measures which are preventive as well as reactive in nature, minimising the potential damages, managing the uncertain aspects of the project, clarifying and sanctifying the company role in risk management process and identifying the opportunities to improve project performance (Godfrey, 1996).
Even the most experienced of project managers cannot anticipate the extent of most of the unforeseen events as no two risks are alike. In terms of their probability of occurrence and severity of impact, each risk varies from project to project. As such, it is significant to identify risk sources for each project (Hayes, 1986; Godfrey, 1996).
Vagueness or ignorance about risk itself is a major risk in a construction project. It tends to amplify the overall cost of the project. It has been seen that if risks are dealt with in the initial stages of the project, the corresponding cost is much lesser (Mills, 2001). It has generally been agreed that the level of uncertainty is highest in the early phases of the project lifecycle. Decisions taken during that period of time produce the largest impact on the final budget and duration (Hayes, 1986; Godfrey, 1996). As mentioned, risk and uncertainty are inherent to a construction project. Risk management attempts to quantify the uncertainty as much as possible. In the absence of certainty, better and more efficient planning can be done by identifying the sources of risks, the extensiveness of those risks and their potential consequences (Bing, 1999).
Through management of construction risks, it is possible to revisit and evaluate the initial assumptions made in the planning phase, take decisions which are backed up by thorough analysis, focus the attention and efforts on best possible way of controlling risk and assess the cost benefit for such measures, monitor the description and structure of the project continually and build a historical data bank for assistance with future risk management procedures. The objectives of the project can be clarified and sensitive areas are identified. As risks are spotted earlier in the project, the need to have a general contingency plan to account for every eventuality is reduced. It should not be, however, thought that risk management is required only in the early stages. In order to complete a project effectively, risk management should be done throughout the project as new risks always present themselves as the project progress (Dawood, 1998; Smith, et al., 2006).
Risk management is a combination of identification of risk, assessment of risk in terms of impact and occurrence, devising proper and effective risk responses and monitoring the implementation process as well as any residual risk.
Risk identification has been defined as: “the process of systematically and continuously identifying, categorizing, and assessing the initial significance of risks associated with a construction project” (Gary & Caryn, 1999). A risk which is not identified cannot be mitigated (Bajaj, et al., 1997). Risk identification is perhaps the most difficult part of risk management (Williams, 1995). By identifying the source of the risk and its affecting components, the analysis and management of risk become simpler (Bajaj, et al., 1997). As risks are identified, contingency and control measures can be incorporated into the project plan and a realistic estimate of the final cost and duration can be achieved (Mills, 2001).
Once risks are identified, they should be quantified in terms of magnitude and frequency to understand the exact seriousness and significance of the risk in successful completion of the project (Williams, 1995). Quantification of risk is termed as risk assessment. Risk assessment is defined as “the technique that aims to identify and estimate risks impacted upon by a project based on severity and likelihood of occurrences” (Jannadi & Almishari, 2003).
Risk identification and risk analysis leads to the actual management of the risk, i.e. risk response. Risk Response is the proper selection and implementation of appropriate options for dealing with risks. When a risk event is identified, a decision must be made concerning the appropriate response for the specific event. The main purpose of response is to remove the impact as much as possible and to increase the level of control (Bajaj, et al., 1997). High levels of uncertainty associated with a project calls for more calculated response. Risk can be avoided, reduced, transferred or retained depending on the nature. The risk should be allocated to the party that possesses the required ability to deal with it (Mills, 2001).
The final stage of risk management is risk control. Risk control implies executing the risk response strategy, monitoring, triggering events, initiating contingency plans and watching for new risks.
Risk management can be proactive or reactive in nature. In a construction project, both approaches are used. In proactive approach all the potential risks or unforeseen events that might occur in a project are identified, short listed according to their probability of occurrence and frequency and then properly planned for their alternatives, so as to reduce the effect if any of the risk materialise. A reactive approach is not a systematic way of dealing with risks. In this approach there is no identification phase and so the project team is not aware of the critical problems that might be faced during construction. The risks are dealt with as they are encountered (Flanagan & Norman, 1993). The actual success of risk management is when risks are dealt with proactively.
Management of risk, in addition to project completion with budget and on time, enables more systematic and less subjective decision making. The robustness of the project can be compared to specific uncertainties and relative significant of each and every risk can become obvious. In terms of risk identification and consideration of various risk response options, a better, more comprehensive understanding of the project can be established (Mills, 2001). Risk Management aims at engendering pragmatic expectations and increases the control of the project. It catalyses the process of innovative thinking which otherwise would remain dormant.
Construction industry can never be free from risk owing to the uniqueness of its project, scarcity of resources, human input, external environment, etc. However, the presence of risk does not imply that it has to suffer on account of it. It is true that with increasing technology, changing economic conditions, introduction of new techniques and processes, the risks are increasing in the industry. Nevertheless, with a proper, aggressive and effective risk management process, not only can construction project minimise the harmful events but at times can also take advantage of it.