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Concept: Risk
What is Risk?
A “risk” is an uncertain event or condition that, if it occurs, has
a positive or negative effect on the business - at a project, GBU
or enterprise level.
Risks can be Threats or Opportunities
It’s the essence of business – must take risks to generate
returns
Importance of Risk Management
Every business is surrounded by risks, many of which
are identifiable and manageable
Differentiate between risks taken after careful judgment and
those taken unwittingly
The risk management framework must be robust enough to
cope with unexpected risks
How much risk is appropriate?
Risk management is an art as well as a
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 science

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 Risk Management Philosophy in a
Nutshell
 Identify and assess the risks of a proposed project
comprehensively, rigorously and honestly.
 Do not just focus on project execution risks – there are many
other risks that need to be managed (third party risk, political
risk, jurisdictional risks etc.)
 Do not just focus on contractual risks.
 Surface new or unusual risks early.
 Manage the risks of each project:
• Allocate and limit the risks in the prime contract
• Insure the risks that can be insured.
• Flow down appropriate risks to subs and suppliers.
• Build risk mitigation into the project execution plan.
• Price the residual risk (in contingency and fee) to balance
risk and reward.
 A Risk Management Process – Typical
Model Risk Analysis Process
A. Risk Identification
B. Risk Assessment/Evaluation

Risk Management Process

C. Risk Management Strategies

Avoid Assume Reduce/Exploit

•Informe d Assumption of •Through Exe cution,
• Av oid the Threat
Thre at Pe rformance,
Transfer/Share
• Fore go the Opportunity
•Ke e p the processes, planning
Opportunity

Decline Work
By Contract By Insurance
Funded Unfunded

(Priced Reserved) (Run the Risk)

Administrative Process
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 risk and effectiveness of mitigation
plans
A E. Claims M anagement
c F. Feedback: Learning
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 Importance of Managing the Risk vs.
Reward Relationship

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 The Risk vs. Reward Relationship
 Business is about taking risks:
• Intelligently and on an informed and evaluated basis
• Receiving adequate reward for the risks assumed (by
contract or otherwise)
• Developing a robust framework to cope with the unexpected
 Bechtel’s principal ways of managing risks are:
• Through engineering
• Our execution – e.g. our processes and procedures
around procurement, construction and management
• Fair contract terms
• Insurance

Using core competencies will enhance rewards in risk

taking.
Project and corporate overall success depends on
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 The Risk vs. Reward Relationship
effective risk management.

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Allocation and Alignment of risk

 Allocation of risk by
agreement

 Alignment of risk and

ability to control the
occurrence

 Alignment of risk and

ability to mitigate the
effects
 WEF Top Global Risks: 2011 - 2013
Probability

2011 2012 2013

Meteorological Severe Income disparity Severe Income disparity
Catastrophes
Hydrologicalcatastrophes Chronic fiscal Chronic: fiscalImbalances
Imbalances

Rising greenhouse gas

Corruption Rising greenhouse gas
emissions
emissions
Biodiversity loss Cyber attacks

Climatologicalcatastrophes

Impact

2011 2012 2013

Fiscal crises MaJor systemic:financial Major systemicflnandal
failure failure
Climatologicalcatastrophes

Geopoliticalconflict

Asset price collapse Chronic fiscal Diffusion of weapons of

Imbalances mass destruction
Extreme eneqy price Extreme volatility In Failure of climate change
volatility eneqy and apulture adaption
prices
 WEF Top Global Risks: 2011 - 2013
Probability

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 Global Risks - Categorisation

Market Reporting
dynamics risk Reputational
risk risk
Market Planning
R&D Monitoring risk
structure
Business risk risk risk
relations
Competitive k
Equipment Risk Interest rate
Risk risk
Forex Labor
risk Risk
Settlement Liability risk
risk Insurance risk
Counterparty risk risk

Market liquidity Capacity risk

risk

Cash/reserves
management risk
Coordination &
interface risk

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 Project vs Corporate Risk - Frequency
and Impact
Frequency

Losses

Severe Losses

Catastrophic Losses

Business
Facility/Project Line Enterprise

Cost Impact

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 Management of Risk During the Project
Life Cycle
Prospect
screening Identification
Partners
Prospect approval Subcontractors
Shaping the deal
Submission of proposal

Contract signed
T he
deal Risk flow
Engineering and construction commenced
dow n Risk
transfer
Other works/client changes
PERM Risk analysis
Execution methods
ES&H Financial management

Construction completed/signoff
Project close out
Warranties Insurance claims/financial
Latent liabilities recovery/ wrap-up

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 Corporate Risk Management Strategies
for Catastrophic Exposures

 Contractual Allocation

 Insurance

 Corporate Architecture?

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 Project Insurances
 Liability – CGL/TPL
 Builders Risk (CAR)
 W orker’s compensation
 Employer’s liability
 Construction equipment
 Professional liability/indemnity
 Contractors pollution liability
 Marine cargo
 Aircraft liability
 Marine liability
 Railroad protective
 Etc..
 OCIPs and CCIPs (Wrap Ups)
 Different terms, different meanings

 Typical structure vs wrap up

 Does it matter which party

arranges?

 W hat are the drivers for the

wrap up?

 Loss funds

 Contract issues – wrap up manuals

 Pricing. Coverage, Service Variables

Service (claims)

Insurance
Variables....

Coverage Price

Risk Management
November 1, 2012
and Insurance
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