Chapter 1

Risk Management
Risk (hazard or threat): This is what managers often mean when talking
about risk. It is referred to as a negative event or threat to the organization.
Managing risk in this context means using management techniques to
reduce the probability or impact of the negative event without undue cost.

The goal of risk management is to measure and assess risk, with the
ultimate goal of managing that risk. Risk management falls into the arena of
Project Planning. Over time, Over Budget, Environmental Impacts etc.
Specific standards and methods have been developed with respect to risk
management.

This Chapter discusses the various definitions of risks and its relationships
with uncertainty and its causes. The chapter also includes the risk
categorization and classification.

In the end the Risk management cycle will be covered in order to introduce
the risk management processes.
 Objectives

The objective of this chapter is to make the student to have a good

understanding in the following topics:

Definition of risk and its importance in construction projects,

Concepts of risk management process,
Processes of Risk Management
Various strategies of uncertainty reasoning in construction events
Risk Management Cycle
 Definition of Risk
A situation involving exposure to danger.
OR
Expose to danger, harm, or
loss OR

The possibility that something bad or unpleasant

(such as an injury or a loss) will happen.
 THREE TARGETS
IN CONSTRUCTION PROJECTS THE PRIMARY
TARGETS ARE

COST
TIME
QUALITY

WHICH ARE LIKELY TO BE SUBJECTED TO

RISK & UNCERTAINITY
 Uncertainty & Risk
Uncertainty: It can be described as the chance
of occurrence of some event where the
probability is not known. This means that
uncertainty relates to the occurrence of an
event about which, little is known, except the
fact that it may occur.

Risk: Being where the outcome of a event, or

each set of possible outcomes, can be
predicted on the basis of statistical probability.
 Uncertainty
Uncertainty is a subset of risk and involves situations
when no probability distribution can be established
for the risk variable. If the nature of a risk is unknown
or unpredictable it comes within the bounds of
uncertainty.

Events that are very rare also tend to be classified

as uncertainty. The key test is usually is that if the
risk is not insurable then it is uncertainty.

For a risk to be insurable requires data to compile

actuarial tables. This ensures that there is no
objective approach to dealing with uncertainty and
things will depend on prejudice or preconceptions.
Risk Categories / Types of Risks

Known Risks

Known

Unknown

Unknown Unknowns
 Risk Categories / Types of Risks
Known Risks : Which include minor variations in productivity and
swings in material costs.
These occur frequently and are inevitable in all construction
projects.

Known Unknown : These are the risks whose occurrence

is predictable or foreseeable. Either their probability of
occurrence (or) their likely effect is known.

Unknown Unknowns : These are events whose

probabilities of occurrence and effect are not foreseeable by
even the most experienced people.
 Definition of Risk Management

Risk Management is about understanding your

project and making a better decision with regard to

the management of your project.

Risk Management Decision Process

Monitor
Identif /
y Modify

Select/
Evaluat Select Implemen t
e
 THE RISK MANAGEMENT PROCESS

It is important to recognize the root cause of risks. Risks

can be frequently be avoided if their root causes are
identified and managed before the adverse consequence
occurs.
To achieve the above aims, it is suggested that a
systematic approach is followed.
- To identify the risk sources
- To quantify their effects
- To develop management responses to risk
- To provide for residual risk in project estimates
THIS 4 STAGES COMPRISE THE CORE OF THE PROCESS OF RISK MANAGEMENT
 The Risk Management Process

Step 1. Identify

Hazards Step 2.

Assess the Risks

Assess the Likelihood & Consequences
Classify the Risk

Step 3. Control the Risks

The hierarchy of risk control can be used as a
guide Step 4. Monitor / Review Control Measures
 Benefits of Risk Management

• Project issues are classified , understood from the

start.
• Decisions are supported by thorough analysis.
• The definition and structure of the project are
continually monitored.
• Clear understanding of specific risks associated with
a project.
• Build up of historical data to assist future risk
management procedures.
 Risk analysis and risk management in
construction

Risk analysis and risk management policies are

particularly difficult to apply in construction due to
the structure of the construction industry, the
nature of the product and its vulnerability to the
state of the economy.

The lack of effective strategies over the years has

manifested itself in, failure to keep within the cost
estimate, failure to complete on time, failure to
achieve the required quality and operational
standards.
 Risk Management Cycle
Risk management Cycle in construction is best viewed as 3
distinct stages:

• Risk identification: This involves the identification of the risks

that may be encountered on a project or process. This process
should lead to a schedule of potential risks liable to affect the out-
turn of the project, or to jeopardize the objectives of the project.

• Risk analysis: This in concerned with the assessment and

analysis of the risks identified. This involves the understanding of
the likelihood of occurrence and the possible impact of potential
risks.

• Risk response: This is concerned with the action taken in

response to risks identified and analysed.
 About Risk Manager

• Risk managers advise organizations on any potential risks

to the profitability or existence of the company. They
identify and assess threats, put plans in place for if things
go wrong and decide how to avoid, reduce or transfer
risks.

• Risk managers are responsible for managing the risk to

the organization, its employees, customers, reputation,
assets and interests of stakeholders. They may work in a
variety of sectors and may specialize in a number of areas
including enterprise risk, corporate governance,
regulatory and operational risk, business continuity,
information and security risk, technology risk, and market
and credit risk.
 Role of Risk Manager
• Planning, designing and implementing an overall risk management process for
the organization.
• Risk Assessment, which involves analyzing risks as well as identifying, describing
and estimating the risks affecting the business.
• Risk Evaluation, which involves comparing estimated risks with criteria established
by the organization such as costs, legal requirements and environmental factors,
and evaluating the organisation's previous handling of risks.
• Risk reporting in an appropriate way for different audiences, for example, to the
board of directors so they understand the most significant risks, to business
heads to ensure they are aware of risks relevant to their parts of the business
and to individuals to understand their accountability for individual risks.
• Carrying out processes such as purchasing insurance, implementing health and
safety measures and making business continuity plans to limit risks and prepare
for if things go wrong.
• Conducting audits of policy and compliance to standards, including liaison with
internal and external auditors.
• Providing support, education and training to staff to build risk awareness within
the organization.