1

Introduction to Risk
and Components of
Risk
LECTURE # 2
ENGR. YASEEN MAHMOOD
M.SC. EARTHQUAKE ENGINEERING
RISK 2

 The concept of risk can be linked to uncertainties associated with events. Within the context of projects,
risk is commonly associated with an uncertain event or condition that, if it occurs, has a positive or a
negative effect on the objectives of a project.

 Risk originates from the Latin term risicum, which means the challenge presented by a barrier reef to a
sailor.

 Oxford Dictionary defines risk as the chance of hazard, bad consequence, loss, and so on, or risk can be
defined as the chance of a negative outcome.
RISK 3

 A systematic definition
of Risk
RISK ANALOGY 4

 SEISMIC RISK refers to the amount of damage to be expected with a certain probability in a fixed period time. It
is the composition of:

 Seismic RISK = Seismic HAZARD x VULNERABILITY x EXPOSURE

 Seismic hazard: greater the chances of earthquake in a region (seismic hazard) greater is seismic Risk. You cannot
reduce hazard.

 Vulnerability: If a structure is weak, it is more vulnerable to collapse, hence Risk is more. You can build strong
buildings to reduce risk.

 Exposure: exposure is the value of structures and its contents, lives and other valuables. If a building is occupied by
many people or there is important and expensive goods, the risk is more.
RISK ANALOGY 5

Nature Engineers Planners

RISK 6

 Risk, as the potential of losses for a system resulting from an uncertain exposure to a hazard or resulting
from an uncertain event, can be viewed as a multidimensional quantity that includes event occurrence
probability, event occurrence consequences.

 This pairing can be represented by the following equation:

Risk { ≡ (P1 ,C1 ), ( P2, C2), , ( Pi, Ci), , (Pn, Cn)}

 Pi is the occurrence probability of an outcome or event i

 Ci is the occurrence consequences or outcomes of the event i

RISK 7

 Risk results from an event or sequence of events referred to as a scenario. The event or scenario can be
viewed as a cause and, if it occurs, results in consequences with various severities. Sometimes these
events or scenarios are called risk factors.

 For example, an event or cause may be a shortage of personnel necessary to perform a task required to
complete a project. The event, in this case, of a personnel shortage for the task will have consequences in
regard to the project cost, schedule, and/or quality.
RISK 8

 Risk is associated with all projects and business ventures undertaken by individuals and organizations
regardless of size, nature, or time and place of execution and utilization.

 It varies from small projects to multibillion-dollar projects.

 Consequences of Risk?

 Risks are taken even though they could lead to devastating consequences because of potential benefits,
rewards, survival, or future return on investment.

 Risk taking is a characteristic of intelligent living species, as it involves decision making, which is viewed
as an expression of higher levels of intelligence.
What is Risk Management 9

 The process whereby decisions are made to accept a known or assessed risk and/or the implementation of actions to
reduce the consequences or probability of occurrence. (British Standard 4778, 1991)

 A project manager responsible for the delivery of a new office building identifies a permitting concern that could delay
the approval of her project.

 A structural engineer is assessing the quality of the data of a geotechnical report that was performed and fears that the
abutments of the bridge he is designing could experience differential settlement.

 A general contractor fears that the recent volatility in the price of steel could turn a profitable project into a money
loser.

 These risks are addressed will have a large impact on project outcomes.
What is Risk Management 10

 The practice of risk management can certainly play an important role in ensuring that the outcomes will
be positive ones.

 However, a lack of risk management will likely result in increases to a project’s cost and schedule.

 The objectives of project risk management are to increase the probability and impact of positive events
and decrease the probability and impact of negative events in the project.
What is Risk Management 11

Risk based
Estimate
 Why Risk Management 12

 The majority of construction projects experience cost and/or schedule overruns.

 A cost overrun is defined as the difference between the low bid and the actual incurred costs at the time of construction completion.

 This same study found that cost overruns were found in 86 percent of the 258 projects that were sampled. Further, actual costs were,
on average, 28 percent higher than estimated costs. The authors of the study concluded that the following factors were the primary
culprits in cost overruns:

1. Lack of proper risk analysis in developing estimates

2. Poorly defined scope at the time initial project budgets were developed

3. Larger public projects are prone to intentional underestimation due to political pressure (In other words, there was a deliberate
misrepresentation of project costs and/or schedule in order to further political agendas.)
 Understanding Risk 13

 In making a decision, an individual may deal with any one of the following possibilities:

a) ‘Pure risk’ where only negative deviations from the desired outcome are possible and therefore danger
of loss is predominant; or

b) ‘Speculative risk’ where both negative and positive deviations are possible and therefore there is a
danger of loss as well as a chance of gain; or

c) Only positive deviations are anticipated and therefore only a chance of gain exists. Such events do not
form part of the notion of risk.
 Understanding Risk 14
 Risk=Probability of the occurrence of a defined event ×
Consequences of the occurrence of that event

R=P×C

a) An undesirable event may have a number of different

causative factors, of which one or any combination could
lead to its occurrence. For example, if the undesirable event
is the collapse of a cofferdam at a construction site, such
collapse may have been caused as a result of bad ground
conditions, material failure, defective design, or a
combination of some or all of these factors. All these factors
could be referred to as hazards.
 Understanding Risk 15

b) An event can, therefore, be interpreted as a dormant

potential for gain or for inconvenience, loss, damage to
property, damage to the environment, moral damage, injury
or loss of life. To eventuate, it is triggered by a particular
incident, which may be referred to as a ‘triggering incident’.
A triggering incident is usually necessary for an event to
take place and materialize into a positive gain or a negative
undesirable consequence.

 For example, if the cofferdam was due to a defective section

in its wall, the triggering incident could be the imposition of
an additional loading beyond the limit sustainable by that
defective section.
 Understanding Risk 16

c) The event may result in different levels of magnitude of

consequence depending on the particular circumstances
and timing of the event itself.

 For example, the consequence of the collapse of the

cofferdam, a financial loss in the form of cost of repair to
the cofferdam, or it may extend to a critical delay in the
completion of the project, or it may go beyond the
financial loss and delay into personal injury and death.
 Understanding Risk 17

d) Expressing risk in a mathematical formula permits a

comparison of the magnitude of the various risks to
which a project is exposed. Such a comparative analysis
may then be used to decide whether to accept a
particular risk or take measures to eliminate it or, at
least, to mitigate its effect.

 Event > Triggering Incident > Desirable or

Undesirable Consequences > Assessment & Evaluation.
Understanding Risk 18

Items Numbers Units

The hazard of road accidents occurred 265,861 Times

The number of those killed as a result 6,614 Persons

The number of those seriously injured as a result 81,681 Persons

The number of those slightly injured as a result 259,766 Persons

The population for the year in question was 55,852,000 Persons

 The probability of any one person living in the United Kingdom being killed as a result of the hazard
of road accidents in the particular year was:

6,614 death per year / 55,852,000 persons = 1.18×10^–4 death per year. person
Understanding Risk 19

 The probability of serious and slight injury was 14.6×10^–4 and 46.5×10^–4 respectively.

 To highlight the meaning of risk in the above example, the severity of the effect of the hazard can be
given values along a scale of say 0 to 1000. Therefore, if slight injury is given a grading of 200, serious
injury 600 and death 1000, the risk of slight injury can be calculated as:

45.6 x 10^-4 x 200 = 0.93

 Similarly, the risk of serious injury and death can be calculated as 0.876 and 0.118, respectively.

0 200 400 600 800 1000

Understanding Risk 20

 Risk = Event × Probability of Occurrence, where the event is measured in terms of its intensity.

 Thus if the probability of occurrence of a catastrophic event is extremely low, the risk may still be
acceptable,

 whereas if the probability of a marginal event is extremely high, the risk may not be acceptable.
 Risk vs. Hazard 21

 A statistical analysis compiled in the United States for a particular area showed that, due to various hazards, the risk of
meeting with accidental death annually was given by the following figures:

Hazard Risk
Annual deaths as a result of car accidents 1:4,000
Annual deaths as a result of accidental falls 1:10,000
Annual deaths as a result of fires 1:27,000

 The magnitude of the hazard in all these different events is catastrophic and the same grade of severity applies, i.e. death.

 The risk is therefore dependent on the value of the probability and a comparative analysis can be made based on the value
of the probability of occurrence.
 Risk in construction 22

 Construction projects are sensitive to an extremely large matrix of hazards and thus to risks.

 This sensitivity is due to some of the inherent characteristics of construction projects, which are
summarized as follows:

 The time required to plan, investigate, design, construct and complete a construction project spans such a
lengthy period that it is often greater than the period of cyclical recurrence, known as the ‘return period’,
of many of the hazards to which such projects are exposed. For example, the hazard of rainfall has
usually a return period of one year depending on the time for the rainy season. Therefore, the risks
associated with rainfall on a particular project would have to be assessed and managed for the number of
years taken to complete it. Any reduction in the period of construction introduces its own risks.
 Risk in construction 23

 The number of people required to initiate, visualize, plan, finance, design, supply materials and plant,
construct, administer, supervise, commission and repair any defects in a construction project is
enormous. Such people usually come from different social classes and in international contracts, from
different countries and cultures.

 Many civil engineering projects are constructed in isolated regions of difficult terrain, sometimes
stretching over extensive areas and exposed to natural hazards of unpredictable intensity, frequency and
return period.
 Risk in construction 24

 The materials selected for use generally include a number of new products of unproved performance or
strength. Advanced and complex technology is also necessary in some construction projects.

 Extensive interaction is required between many of the firms involved in construction, including those
engaged as suppliers, manufacturers, subcontractors and contractors, each with its own different
commitments and goals.

 Construction projects are susceptible to risk cultivation by the parties themselves or by others associated
with them or advising them
Risk in construction 25
Risk in construction 26