Last week I published an article ‘Construction risk and the haunted house’. I mentioned that some contractors see risks everywhere, adding in contingencies for every possible event, while other contractors rush blindly into projects without seeing and allowing for risks that should easily have been foreseen.
I recommended contractors fully understand the project and conditions pertaining to it while pricing it, then prepare a schedule of all the potential risks and grade them as to the likeliness of the event happening and also rate the risk’s potential impact. Not all projects are alike and simply adding a standard contingency to your project schedule and project price may make your project too expensive for your customer, or result in you losing money when things go wrong.
In doing this we need to rely on our experience and understand how often a particular risk has eventuated.
In this article we’ll look at the risk schedule in a little more detail and how we can deal with risks.
Dealing with risks
Once we have our risk schedule we can decide how we should deal with the risks.
Evaluating the risk schedule
Once the risks have been dealt with as above it’s wise to review the schedule. Part of this evaluation is to understand whether dealing with the risks may have resulted in new risks and whether we have considered all of the impacts of the risk. It’s also pertinent to do a reality check. As a reader commented on my previous article; “is it likely that every risk you have on the schedule will eventuate on the project?” What does past experience tell us? It probably has never happened before that every risk we foresaw occurred! I always like to total the costs we have allowed for risk events occurring. The total number may put your price out of the client’s ball park. It’s therefore worth taking an educated guess based on past experience how many risk events are likely to occur on a project and then reduce your risk costs and contingency accordingly.
It’s also important to check that the risk hasn’t been allowed for elsewhere in our pricing and schedule. Furthermore, that we haven’t added risk on top of risk, or contingency on top of contingency.
One should also note that there are also systemic risks. These are risks which aren't project dependent, but are rather risks created by the contractor in the way they operate. These could include the lack or inappropriate use of systems (such as planning, costing, safety, quality control, invoicing, poor contract administration, etc), poor management techniques, employing the wrong people, etc. These risks should be dealt with independently of the project risks. Poor systems or poor people should not be an excuse to have an item on the risk schedule - they must be dealt with in the company.
Some risks are difficult to price
As previously mentioned there are many different risks. These may include; damage to the company’s reputation, clients not paying for completed work, serious accidents and injury, poor worker morale leading to resignations, etc. Sometimes it’s difficult to put a price to these risks, but, they still need to be evaluated and steps taken to prevent or mitigate serious damage.
But there’s more – the project benefit schedule
Every project has risks, but most also have potential benefits or up-sides. Contractors only focus on the negative and the down-sides. I normally prepare a benefit schedule and put a price to the potential benefits. I think if you have factored in a contingency or risk cost you should be able to off-set some of these costs with potential savings or additional profits created elsewhere on the project.
Now this might seem a risky strategy. But contracting is always going to be a risky business. It’s how you deal and manages these risks which are important. The contractor who only sees doom and gloom and prices every risk adding contingencies may never suffer a loss, but they may also never win a project.
Risk schedules are often done by estimators and then forgotten in the file somewhere. In some cases those negotiating the contract aren’t aware of the schedule. But tender negotiations may change the schedule; sometimes during the negotiations the customer makes changes or clarifies details which could reduce some risks and increase others.
Once the construction work is underway the risk and opportunity schedule should be regularly reviewed to see that mitigating actions are implemented and opportunities are seized.
Sometimes more information or changes could add additional risks or maybe lessen other risks. By regularly reviewing and updating the schedule action can be taken timeously to avoid a potential risk.
Sleeping in a dark empty house can result in your imagination running wild at every sound. By applying some rationality it’s possible to calm many of these fears by identifying the actual cause of the noise. Taking some simple precautions like installing extra security and ensuring the house is locked before you go to bed will go a long way to keeping intruders out. But how safe is safe? How much security do you have? Ultimately we all have to accept some risk.
So too in construction we need to understand the project, identify risks which are imagined, and deal only with those which are real, which are our risks, those which will have a major impact and are of a high risk of happening.
Sometimes how we handle risks is based on assumptions and guestimates. We have to rely on our past experiences, expert opinions of others and the information at hand to make rational decisions. But, by having a risk schedule and a plan in place to deal with the risks we can have confidence that we can manage the risks and our fears.
How do you allow for risks on your projects?
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The opinions expressed in the attached articles are those of the writer. It should be noted that projects are varied and different laws and restrictions apply which depend on the location of the contractor and the project. It's important that the reader uses the supplied information taking cognisance of their particular circumstances. The writer assumes no responsibility or liability for any loss of any kind arising from the reader using the information or advice contained herein.
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