Managing Project Risk in Engineering and Construction Primer

Stanford University November 27, 2006 Todd Rowland

Topics for Discussion

Why manage risk?

How is risk managed at the enterprise level?

When does active risk management begin at the project level? What actions can be taken to manage risk at the project level?

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Why Manage Risk?

All value is added to the engineering and construction process by managing risk Two broad categories of risk
Fortuitous Commercial/Technical

Managing commercial and technical risk is what engineers and contractors do best
Design Cost Schedule Quality Subcontractor performance

Some engineers & contractors also manage fortuitous risk well and increase their margins Risk is managed at both the enterprise level and the project level
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Managing Risk at the Enterprise Level

Risk Appetite
How much risk is an enterprise willing or capable to accept or retain
Business Controls Balance Sheet Retain and manage Transfer

Risk Tolerance

What to do with Risk

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Risk Transfer
Insurance Property

Fixed Property Builders Risk Equipment Workers Compensation General Liability Professional Liability D&O

Casualty

Contracts

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Risk Retention and Risk Finance

Commercial & Technical Risk
Generally un-insurable

Fortuitous Risk
Deductibles

Self Insured Retentions Captives Risk Purchasing Groups

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Risk Management at the Project Level

Begins when the RFP is received

Evaluate Contract and Tech Specs

Insurance required? Balanced contract? Is Project Delivery System appropriate? Is schedule achievable Is the job doable, technically

Does the project fit the enterprise risk appetite? Bid Decision
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Initial Actions at the Project Level

Evaluate and Understand Accept the risk
Price it Pass it down Self-Insure it

Refuse to accept the risk

Contract it away Walk away

Transfer the risk

Your insurance Someone elses insurance

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Risk Management During Project Execution

Control the project
Technical controls systems Earned values cost controls
Resource loaded schedule Peer review Execution controls Safety and health Work planning Micro-scheduling

Know and Understand your Best Risk Management Tool

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The Best Risk Management Tool

The Contract
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The Contract
Defines the risk in the project
Establishes cost criteria Establishes performance criteria

Allocates the risk to the appropriate party Provides a mechanism to re-allocate and compensate for un-foreseen/un-expected risk Provides a mechanism for a third party to decide on

allocation when the primary parties disagree

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