Mitigation of Risk in Construction Smart Market Report - 2011

SmartMarket Report
Mitigation
of Risk in
Construction:
Strategies for Reducing Risk
and Maximizing Profitability
Premiere Partners:
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SmartMarket Report
McGraw-Hill Construction Mitigation of Risk

in Construction:
President Strategies for Reducing Risk
Keith Fox and Maximizing Profitability
Vice President, Product Development SmartMarket Report About McGraw-Hill
Kathryn E. Cassino Executive Editor Construction
Harvey M. Bernstein, F.ASCE, LEED AP McGraw-Hill Construction
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Editorial Director
Research & Analytics/
Industry Insights & Alliances Michele A. Russo, LEED AP Companies, connects people,
projects and products across the
Vice President, Industry Managing Editor
design and construction industry,
Insights & Alliances Donna Laquidara-Carr, LEED AP
Harvey M. Bernstein, F.ASCE, LEED AP serving owners, architects,
Director, engineers, general contractors,
Senior Director, Research & Analytics Design & Production
subcontractors, building product
Burleigh Morton William Taylor
manufacturers, suppliers, dealers,
Director, Green Content & Art Director/Production Manager distributors, and adjacent markets.
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SmartMarket Report
Introduction
C
• Project process approvals
onstruction, like all industries
• Safety
Mitigation of Risk in Construction: Strategies for Reducing Risk and Maximizing Profitability
today, is looking to improve

• Site Conditions
business efficiencies. However,
it faces unique challenges due These top-of-mind responses are encour-
to the complexity of construction projects. aging because they suggest that much of
These complexities create greater risks for the risk facing construction industry firms
inefficiencies than those faced by other are all factors under a firm’s direct control—
industries. We believe that providing reinforcing that mitigation strategies can Harvey M. Bernstein
research into construction risk mitigation directly have a positive impact. F.ASCE, LEED AP
is particularly critical in order to help the The top-line recommendations that Vice President
Industry Insights & Alliances
industry become more successful in emerge from the research findings offer McGraw-Hill Construction
overcoming its challenges. practical solutions that we hope the indus-
This study examines the opinions of try will find helpful as they seek to avoid risk
the industry at large—and of leaders in and improve their bottom-line performance:
risk mitigation—to provide insights on the • Address risk early in the project to
impact of risk on the construction indus- reap its full benefits.
try and the strategies used by owners, • Communicate with other team
architectural and engineering firms and members throughout the project.
contractors to mitigate the risks they face • Implement a rigorous risk assessment
in order to improve their bottom lines and and mitigation process.
increase project productivity. • Embed risk management into your Michele A. Russo, LEED AP
We chose to focus the research on firm’s culture. Director, Green Content &
the infrastructure sector because of the • Engage in activities that reduce the Research Communications
McGraw-Hill Construction
number of large and complex projects and likelihood of litigation.
the challenges they pose. We found in the • Build a strong project team and
expert in-depth interviews (see page 19) assess the value of more formal
and high-profile, large building project collaboration, such as integrated
case studies (see pages 32 and 45) that design.
many of the key findings are applicable to
Ultimately, our results demonstrate that
other sectors when dealing with projects of
good project management must include
similar scope.
good risk management.
The research identified the following
We are excited to release the findings
unprompted factors as the most significant
on this important topic, and we would like Donna Laquidara-Carr,
risks facing the industry: Ph.D., LEED AP
to thank our premier partners, Navigant
• Changes in schedule/ scope creep Manager, Industry Insights &
Consulting Inc. and Pepper Hamilton LLP for Research Communications
• Budget/cost overruns
helping bring it to the industry. McGraw Hill Construction
Harvey M. Bernstein, F.ASCE, as a visiting Professor with the SmartMarket Report series on to MHC’s SmartMarket Reports,
LEED AP, has been a leader in University of Reading’s School of key construction industry trends. examining critical construction
the engineering and construction Construction Management and Previously, she served as Execu- industry trends including BIM,
industry for over 30 years. Cur- Engineering in England. Bernstein tive Director of the Clean Beaches public-private partnerships and
rently, he has lead responsibility for has an M.B.A. from Loyola College, Council and Deputy Director of green building. Prior to starting
MHC’s market research group as an M.S. in engineering from Princ- the National Pollution Prevention this position in 2008, she worked for
well as MHC’s thought leadership eton University and a B.S. in civil Roundtable. She has authored nearly 20 years with MHC’s Dodge
initiatives in areas such as green engineering from the New Jersey several articles and is a frequent division where she gained insight
building, BIM, interoperability, Institute of Technology. speaker on green building trends. into the construction news indus-
innovation and global construc- Russo has a B.S. in chemical engi- try. From 2005–2008, she served
tion markets. Previously, Bernstein Michele A. Russo, LEED AP, has neering from Cornell University as Editorial Training and Policy
served as the President and CEO been working in environmental and a Masters of Public Policy from Manager, responsible for educating
of the Civil Engineering Research policy and communications for 17 Harvard University. over 250 reporters on key trends
Foundation. He currently serves years. She currently is responsible in the industry. Donna has a Ph.D.
as a member of the Princeton for helping direct the green content Donna Laquidara-Carr, Ph.D., from Tulane University, an M.A.
University Civil and Environmental across MHC’s portfolio of products LEED AP, currently provides edito- from Boston University and a B.A.
Engineering Advisory Council and and services and directing MHC’s rial direction, analysis and content from Middlebury College.
McGraw-Hill Construction 1 www.construction.com SmartMarket Report

SmartMarket Report
table of
contents
4 Executive Summary
4 Executive Summary
6 Recommendations
7 Data
8 Impact of Risk on Infrastructure Projects
8 Time Overruns on Infrastructure Projects
9 Budget Overruns on Infrastructure Projects
10 Change Orders for Infrastructure Projects
11 Disputes Occurring with Infrastructure Projects
14 Severity of Specific Risks on Construction Projects

14 Greatest Risks to Successful Projects (Top of Mind)
15 Seriousness of Specific Risks
17 Top Risks for Public and Private Projects
18 sidebar Risk Management in the Energy Sector
24 Adoption of Risk Assessment and Mitigation Procedures

24 Formal Risk Assessment Procedures in Firms
Front Cover: © Joseph A. Blum; Opposite page: Left: Courtesy of Silverstein Properties. Right: Courtesy of Utah Department of Transportation
24 Formal Risk Mitigation Procedures in Firms

25 Awareness and Adoption of Risk Evaluation Strategies
26 Stages at Which Firms Evaluate Risk
27 Awareness and Adoption of Risk Mitigation Strategies
28 Awareness and Adoption of Tools and Technologies for Risk Assessment and Mitigation
29 sidebar Increasing Safety in a Tough Economy
30 Use of External Advisory Groups or Consultants to Help Manage Risk
31 Percentage of Contingency Set at Bid Time by Owners
31 Variation of Contingency by Contract Type According to Owners
35 Triggers, Obstacles and Influencers for Investment in Risk Management Practices

35 Triggers for the Adoption of Risk Management Practices
36 Obstacles to the Adoption of Risk Management Practices
39 Departments Involved in Risk Management
39 Key Influencers for Investment in Risk Assessment and Mitigation
40 sidebar Risk Management in the Health Care Sector
41 sidebar Risk Management for Global Construction
42 Impact of New Practices and Technologies on Risk

42 Impact of BIM on Construction Project Risk
42 Impact of Public-Private Partnerships on Construction Project Risk
43 Impact of Using Integrated Teams on Construction Project Risk
44 sidebar Using Collaboration and Integrated Design to Reduce Risk
SmartMarket Report McGraw-Hill Construction 2 www.construction.com

Front Cover:
Workers construct the Bay Bridge
connecting San Francisco and Oakland.
This page:
Left: Rendering of the Manhattan skyline
with the World Trade Center towers.
Right: Concrete paving on the I-15
Corridor reconstruction project in Utah.
contents
47 Litigation
47 Common Causes of Claims and Disputes on Infrastructure Projects
48 Approaches for Settling Claims and Disputes for Infrastructure Projects
49 sidebar Trends in Insurance
50 sidebar Using Design-Build to Manage Risk
51 sidebar Reducing the Risks of Sustainability
19 Data Sidebar: Opinions of Risk Experts—Risk Mitigation

Factors and Approaches Based on In-Depth Interviews
Case Studies
12 Managing Risk on Innovative Infrastructure Projects: Two Lessons Learned
32 Creating an Effective and Flexible Team to Counter Risk:
Pentagon Renovation Wedges 2–5, Arlington, Virginia
37 Using Effective Risk Management to Increase Competitiveness:
I-15 Corridor Reconstruction, Utah County, Utah
45 Managing Risk Through Effective Coordination: World Trade Center 2,3, and 4, New York, New York
52 Methodology
53 Resources

Executive Summary
Good risk management is a business imperative in construction.

The high number of delays, budget overruns and claims experienced in infrastructure construction demonstrates
the critical need for wider adoption of rigorous risk mitigation procedures. Even in a survey group consisting only of
firms that work on very large infrastructure projects, risk assessment is used more frequently than most risk mitiga-
tion strategies. Strategies to mitigate risk, such as using BIM and having integrated teams, offer an opportunity for the
construction industry to increase efficiency and profitability. See page 6 for these and other strategy recommendations.
Impact of Risks on the ing that among those firms, there is a need for stronger
Infrastructure Industry risk management practices.
Unmitigated risks lead to schedule delays, cost overruns, The data also demonstrate the potential for greater effi-
and in the worst case scenarios, disputes and claims. All ciency and profit in the construction industry that could be
three are experienced by over three quarters of owners, achieved through better management of the factors that
A/E firms and construction firms that do large infrastruc- result in delays, cost overruns, disputes and claims.
ture projects in the U.S. of $100 million and over.
Biggest Construction Risks
■■Firms experience delays on nearly one quarter (24%)
When asked an open-ended question about the single
of their total projects. A few firms report a very high
greatest risk to a successful project, top-of-mind reported
percentage of delayed projects, increasing the average
answers include:
level compared to the median level of 15% for the group
as a whole. Design/Project Changes and Scope Creep
■■
■■Nearly one fifth (19%) of their projects are over budget, Budget/Cost Overruns
■■
and the overrun averages 14% of the total project cost.

Project Process Approvals
■■
■■11% of their projects experience disputes, with an

Safety
■■
average claim of over $3 million. As with delays, a few
firms report a very high percentage of disputes across Site Conditions
■■
their project portfolios, increasing the average level

These responses demonstrate that the industry perceives
compared to the median level of disputes at 2%. A few
its own processes, procedures and relationships as the
large claims also impact the average of total claims.
greatest risks to a project, rather than external factors like
The disparity between the average and the median the economy or labor markets. The positive implications
results demonstrates that some firms experience a much of this result is that the industry has the ability to control
greater risk of delays and disputes than others, suggest- risks itself.
Impact of Risks on Large Infrastructure Projects

Source: McGraw-Hill Construction, 2011
Average Percentage of
Percentage of Respondents Projects Impacted Average Impact
Impacts Who Experienced Impact
Average Median Average Median
Delayed Completion 84% 24% 15% 17% 15%
Over Budget 86% 19% 15% 14% 10%
Disputes and Claims 76% 11% 2% $3,095,882 $400,000

Executive Summary continued
When asked to rank the seriousness of specific risks, New Technologies and Practices Help
the largest percentage of respondents indicated that Decrease Project Risk

those risks impacting their bottom line, such as changes Bim
in schedule and cost or financial risks, are considered the 71% of respondents state that BIM helps decrease project
most serious. risk. Using BIM can encourage teams to undertake a more
However, one quarter to one third also consider detailed and extensive design process. It can also reduce
specific risks related to performance to be highly serious. clashes, thus avoiding costly delays and improvised
This supports a larger trend reflected throughout the solutions on the job site. Most experts believe that BIM’s
findings of the study that the relationship a firm has with greatest value is its ability to help integrated teams work
others working on its projects is a critical risk factor that more effectively.
must be fully addressed for a project to be successful.
Public-private partnerships (PPP)
Adoption of Risk Assessment and 54% find that PPPs decrease project risk. When used to
Mitigation Procedures build new projects, PPPs can help address the funding
While the reported risk strategy adoption level is shortfalls currently faced in U.S. infrastructure. Having
relatively high for risk assessment and mitigation proce- the entity responsible for construction also be the
dures, far fewer believe that there is wide adoption across entity responsible for operation and maintenance is
their profession. 62% believe that half the firms in their one important way that taking a PPP approach to new
field or less have formal risk assessment procedures. construction reduces risk. This practice encourages an
Mitigation adoption is even lower with 43% reporting that asset lifecycle approach to costing rather than a purely
one quarter or less of the firms in their field have formal project-related one, thus reducing the impact of many
risk mitigation procedures. performance-related risks.
The industry reports in this study that the cost benefits
of risk mitigation will drive adoption. 80% report that the Integrated teams
need for greater project profitability will encourage adop- 77% find that using integrated teams reduces
tion, and 77% believe that the increasing cost of litigation project risk. Integrated teams have been demonstrated
will have a significant impact. Other factors that will drive to reduce risk by engaging all major players in the
risk mitigation adoption include internal champions for design phase, offering better communication between
risk mitigation, information about successful risk strat- players, encouraging firms to take a project-focused
egies, the demand for transparency and more widely rather than firm-focused approach, and increasing
available tools and technologies. shared liability.
Percentage of Firms with Formal Risk Assessment and

Mitigation Procedures (Estimated by Respondents)
ASSESSMENT MITIGATION
More than 75% 18%

29% 51%-75%
36%
26%-50% 43%
1%-25% 21%
9%
26% 18%

Recommendations
Effective risk management involves a commitment to risk throughout

the firm and across the entire design and construction process.
Address Risk team, from early in the requires altering the priorities for the project.
Management predesign process through traditional mind set as well • Create contract
Early in the construction. Issues as investing in a different documents with
Project to Reap Its that emerge need to be evaluation process for clearly and reasonably
Full Benefits acknowledged quickly, and projects. This may include apportioned risks.
While risk management an internal communication greater transparency and • Try to have those most
needs to be an ongoing plan must be in place for greater collaboration familiar with issues
process, engaging in risk escalating risks that cannot than before. The most be actively engaged in
assessment as early as be managed by the project effective way to ensure resolving them.
possible is critical in order team directly. that a firm performs risk • Have a plan in place for
to maximize its benefits. management consistently the resolution of issues
Early risk assessment Implement a is for its leaders to prioritize that cannot be solved at
increases the opportunity Rigorous Risk and actively engage in risk the project team level.
for innovative solutions Assessment and management procedures—
that are also less costly. Mitigation Process and for everyone involved
Assess the Value
In addition, early risk beyond Simple in their projects to consider
of More Formal
identification can lead to Checklists risk in their decisions and
better estimation of the to communicate about
Collaboration on
Good risk management
cost of risk in the project involves more than risk effectively. Thus, the
Projects.
An integrated design
budget, whether through creating a simple checklist. approach to risk must
process is not yet widely
contingencies, contractual The leading firms be a fundamental part of
adopted in the industry,
clauses or insurance. conduct extensive risk a firm’s culture, not the
but it is widely recognized
assessment procedures responsibility of a small
to reduce risk. When
Communicate as soon as they become team of experts. Players
performed effectively, this
with Other involved in a project. can encourage this through
process incorporates many
Team Members While initial mitigation vendor and contractor
of the recommendations
throughout the efforts may be high- requirements.
already covered. It seeks
Project Lifecycle level, a rigorous process
the input of all players
Without accurate, timely will get progressively Engage in early in the project design
and complete information more detailed as a project Activities that process, allowing analysis
about projects, the best proceeds and new risks Reduce the of potential risks to occur.
risk management team and emerge. Regular meetings Likelihood of Since integrated teams
tools cannot accurately among all members of Litigation focus on the success of
assess risks or gauge the a project team, within Some factors to reduce the
the project rather than
appropriate response. the firm and beyond, are likelihood of litigation:
the impact on individual
The key to effective necessary to track those • Perform due diligence
firms and share liability
mitigation is information, changes and update the on potential clients,
for problems that occur,
and the complexity of mitigation plan. partners and project
communication is typically
most construction projects team members to learn
more open and transparent.
means that information Embed Risk how litigious they have
The shared liability and
is constantly changing. Management been in the past.
focus on project success
Information needs to be into Your Firm’s • Ensure all stakeholders
also helps reduce the risk
provided by all relevant Culture clearly understand
of litigation. n
stakeholders to the project Rigorous risk management the scope of work and

Data:Introduction
Section Hed1

M
ore than ever, managing construction risk effectively has
Mitigation of Risk in Construction: Strategies for Reducing Risk and Maximizing Profitability data
become a business imperative in the construction industry. Con- Note about

struction has always been a high-risk industry, and the cost of the Data
risks that are not effectively mitigated are felt in project delays, The data in this report
cost overruns, litigation and claims, which takes their toll on an industry with are based on tele-
traditionally small profit margins. Conversely, good risk management offers phone interviews
the opportunity to increase efficiency and profitability in the construction with 35 firms that
industry. each worked on an
infrastructure project
Small profit margins have been further reduced by the ongoing impacts
valued at $100 million
of the recession, which continue to be felt across the construction industry. or greater started in
McGraw-Hill Construction’s Dodge database of construction projects shows the last five years.
that, in 2011, the overall construction market is down 44% from its height in
2006, with a relatively consistent reduction in projects since the start of the The analysis and some
downturn in 2008. charts include break-
The infrastructure segment, at first, was spared these dramatic drops in downs by player type.
These sample sizes
part due to the stimulus, which actually led to a 2% growth in infrastructure
are smaller than the
starts in 2010. The sector was also aided in the early part of the downturn by
more robust size of
the fact that public monies committed to construction work did not dry up the full survey sample.
immediately at the start of the recession, unlike the freeze in capital for the Given that small size,
private sector. these data should be
Currently, a slow, gradual recovery is forecasted for the construction indus- interpreted as indic-
try as a whole. However, McGraw-Hill Construction’s economists forecast ative of trends versus
industry-wide opinion
a decline in infrastructure activity in both 2011 and 2012. Political gridlock in
for that player.
Congress and the 2012 elections have lead to significant uncertainty as to
levels of infrastructure spending in the near future. For more information
Given the relatively low level of activity predicted for the immediate future and the full methodol-
across construction as a whole, firms need to maximize their economic viabil- ogy, go to page 52.
ity. Many in the industry recognize that controlling risks is an important way to
stay competitive in a difficult business environment.
The data in this report reveal the opinions on risk in construction of owners,
architect and engineering (A/E) firms, and construction firms that work on
large infrastructure projects. The infrastructure segment provides an inter-
esting lens through which to view risk because of the multitude of factors that
can impact projects, often spanning over great distances and time. However,
despite this perspective, many of the risks addressed in these data results are
ones facing the construction industry as a whole. This is borne out in two of
the project case studies that feature building projects (see pages 32 and 45).
They reveal that not only are the concerns about risk similar, but so are the
approaches to mitigate them.
One key conclusion emerging from the findings in this report is that risk in
construction fundamentally results from who a firm works with and the way
those firms conduct their work. As a whole the report reinforces the idea that
good project management must involve good risk management, including
mitigation considerations.

Data:Impact of Risk
on Infrastructure Projects
Time Overruns on Infrastructure Projects
Projects With Time Overruns Variation by Player

84% report that they had at least one infrastructure Owners

project that experienced a time overrun. Half of the A smaller percentage of owners (11%) experience no delays
total respondents, however, experienced delays in as compared to A/E firms (18%) or construction firms (17%).
20% of their projects or less, while close to a third In part, this may reflect what respondents consider to be
(34%) reported experiencing delays on over 50% of all a delay. Owners may be more likely to consider additional
their infrastructure projects. time authorized in a change order as a time overrun as
The average percentage of projects reported delayed compared to an engineer or contractor.
was 24%, but the median percentage was much lower at Time overruns can have serious repercussions for infra-
15%. This differential demonstrates that some firms are structure owners. A recent survey of owners reports that
more prone to time overruns. The wide variation between they consider delays to be the greatest negative outcome
the average and the median also suggests that delays are for a project.1 Not only can delays increase the project cost,
not necessarily endemic to infrastructure projects across but the delay in use of that infrastructure can have serious
the industry, but rather depend on the management political and/or business consequences.
of those projects. This finding indicates the significant
impact that management and planning strategies can A/E Firms
have on reducing time delays. The delays experienced by A/E firms are less variable than
those of the other players, with the average (24%) and the
Length of Time Overrun median (20%) percentage of delayed projects roughly the
For the projects that reported time overruns, the same. They also are the only group that does not report
average length of the delay was 17% of the total delays longer than 20% of the project schedule. The
project schedule. Unlike the number of projects reduced role A/E firms play in the later phases on some
experiencing delays, the length of the delay has a projects may decrease the severity of their concern.
much narrower range, with 20% reporting projects
running more than 20% over the schedule, and the Construction Firms
remainder divided nearly evenly between those Contractors have the widest variation between the average
reporting 11%–20% (38%) and those reporting 10% percentage of projects with delays (20%) and the median (7%),
or less (42%). suggesting a wide range among firms of the likelihood of delays.
However, they also have the lowest average of delayed projects.
In contrast to the owners, they may not view increased schedules
Beyond the Bellcurve: FMI/CMAA Ninth Annual Survey of Owners.2008. pg 4.
1
authorized in change orders as schedule overruns.
Percentage of Infrastructure Projects Average Time Overrun (Among Those

that Did Not Complete on Time Whose Projects Did Not Complete on Time)
Source: McGraw-Hill Construction, 2011 Source: McGraw-Hill Construction, 2011
38%
16%
21% 21% 20%
None
17%
1%-20%
21%-50% 13%
More than 50% 4%
50%
Less More
than 1% 1%-10% 11%-15% 16%-20% than 20%
Average 24% Median 15% Average 17% Median 15%

Impact of Risk on Infrastructure Projects continued
Budget Overruns on Infrastructure Projects
Projects with Budget Overruns Construction Firms

86% of those surveyed report that at least some of The percentage of projects over budget and the budget
their projects did not complete on budget. The average overruns reported by construction firms are more widely
percentage of their projects that ran over budget is 19%, disparate than those of owners or A/E firms.
which is lower than the percentage of projects that did
Percentage of Projects
■■
not complete on schedule (see page 8). This suggests
While the average percentage of projects experiencing
that some project budgets include contingencies
budget overruns for construction firms is the same as for
that anticipate some of the costs associated with not
other groups (19%), the median is significantly lower (8%).
completing on time.
Contractors are divided between two extremes:
The percentage of projects with budget overruns is
• 70% report 20% or less of their projects have budget
relatively consistent, with the median of 15% close to the
overruns—far more than the other two players report
average of 19%. Far fewer respondents report that the
(in the low to mid 50th percentile range).
majority of their projects experience budget overruns.
• They are also the only player group to report more than
80% of their projects completing over budget.
Average Budget Overrun
The average budget overrun is 14% of the total project ■■Average Budget Overrun
cost. When considered as a percentage of the work of Contractors experience a much wider differential than
these respondents, whose largest infrastructure projects other players between the average amount of overrun—
range from $100 million to over $1 billion, the implication 18% of the total project budget—and the median of 10%.
is that millions of dollars are at stake in these overruns. While the percentage who report a low budget overrun
of 1%–10% is consistent with the other players, 12%
Variation by Player report budget overruns of 25% or more on average (the
All of the players report a median of 10% of the total only player to report this level of overrun). Therefore, the
project cost for the budget overruns they have experi- average is influenced by this small group.
enced, and A/E firms and owners are strikingly close in
One factor that could contribute to contractors providing
their average reported budget overruns, at 12% and 11%,
more extreme answers than other player groups is the
respectively.
low profit margins contractors typically have on the proj-
This consistency among player groups suggests that
ects they build. With a current industry norm for profit
the way projects are interpreted to be over budget is
margins of less than 3%, even minor budget overruns
subject to much less variation than the definition of being
have very high impact on this segment.
over schedule.
Percentage of Infrastructure Projects Percentage of Budget Overrun

Completed Over Budget (For Those Who Report Not Meeting Budget)
45%
10%
14% 30%
None
17%
1%-20%
21%-50% 15%
More than 50% 10%
59%
1%-4% 5%-9% 10%-14% 15% or More
Average 19% Median 15% Average 14% Median 10%

Change Orders for Infrastructure Projects

Average Percentage of Change Orders on Projects
All of the firms surveyed report at least some change (By Percentage of Respondents)
orders on their projects, with an overall average Source: McGraw-Hill Construction, 2011
percentage of change orders of 15%.

The fact that all of the respondents report some 7%
change orders on their projects demonstrates that
11%
they are a necessary part of the construction process.
1%-20%
However, many industry analysts use them to benchmark
21%-50%
the need for productivity and efficiency improvements
61%-80%
in construction. 82%
Change orders can also be seen as a significant risk
factor for owners. In fact, some owners have expressed
concern that in the highly competitive bid environment
fostered by the recession, contractors may need to under-
bid projects to secure work, and change orders can be Average 15% Median 10%
used to help make up the losses inherent in the bids. (See
page 19 for in-depth interviews with risk management
experts for more information.)
Another significant risk factor that emerged in the
in-depth interviews is the increasing tendency to attempt
to shorten a project’s schedule by starting construction
However, the remaining 11% report a 61%–80% average,
before design is complete. Many contractors attribute
the industry-wide growth in change orders to incomplete GRI_Q6i_Q6f
a striking increase. This jump leads the average percent-
age of change orders for A/E firms to be 15%.
design and the lack of a public owner’s final decisions
This suggests that the practices of some firms may
about design details before construction begins. The
be contributing to an unusually high percentage of
impact of these factors is also visible in the sharp increase
change orders. Shortened design schedules and starting
in the number of submittals during construction required
construction with incomplete documents are often
by the contract documents.
cited as factors that increase the risk of change orders
One of the benefits of using building information
during construction.
modeling software (BIM) is the reduction of change
orders. In McGraw-Hill Construction’s Business Value of
Construction Firms
BIM SmartMarket Report (2009), 54% of the construction
At 19%, construction firms report the highest average
industry professionals surveyed considered the reduc-
percentage of change orders. They have a slightly higher
tion of changes during construction a high-value benefit
percentage in the upper ranges than the other players:
of using BIM. In addition, 71% of the respondents in this
• 73% report an average percentage of 1%–20%
survey believe BIM decreases construction project risk.
change orders.
(See page 42 for more information.)
• 18% report an average percentage of 21%–40%
change orders.
Variation by Player • 9% report an average percentage of 61%–80%
Owners
change orders.
88% of owners report a 1%–20% average of change
orders on their infrastructure projects. All the rest report One of the owners who participated in the in-depth
a 21%–40% average of change orders. These figures interviews with risk management experts observed
make owners the lowest reporters of change orders that some contractors issue many change orders per
overall, with an average of 9%. project and others issue fewer in similar circumstances.
Therefore, the average reported percentage of change
A/E Firms orders may merely be a reflection of the different
Like owners, the vast majority of A/E firms (89%) report approaches that contractors use in considering change
an average of 1%–20% of change orders on their projects. orders rather than an industry-wide problem.

Disputes Occurring with Infrastructure Projects
Infrastructure Projects with Disputes Given the prevalence of claims and their impact, it is
76% report that some of their infrastructure projects not a surprise that 71% of respondents believe that the
have been involved in a dispute. The average percent- increased cost of litigation has a high impact as a trigger
age of projects with disputes is 11%, but the median for the adoption of good risk management practices.
percentage is only 2%. Therefore, a few firms reporting a (See page 35 for more information on triggers for risk
high level of disputes—12% with more than 25% of their management investments.)
projects engaged in disputes—are drawing the overall
average up. Variation by Player
These results correspond with the findings of Owners
the in-depth interviews (see page 19). Both owners Owners are the most consistent player when it comes
and contractors express concern about dealing with to the percentage of projects involved in a dispute. The
organizations that are highly litigious. One best practice average percentage of disputes for them is 5%, and none
is to investigate the history of potential partners for of the owners surveyed were involved in disputes on
this characteristic before agreeing to work together on more than 25% of their projects. They also report the
a project. lowest average claim, $1.1 million.
Average Size of a Claim A/E Firms

The average claim (or loss) was slightly over $3 million. The average percentage of A/E firms’ infrastructure proj-
The median is only $400,000, but nearly half (41%) of ects involved in disputes is 8%. A small percentage (9%)
respondents were involved in disputes with claims of report that more than 25% of their projects experience
$1 million or more. This reveals that while the majority disputes. Their claims average around $3 million, consis-
of claims are relatively small compared to the total tent with the overall findings.
project value, a sizable number are also large and
potentially damaging. Construction Firms
One important consideration when measuring the A few contractors have many of their projects involved in
impact of disputes on the construction industry is that disputes, leading to an average of 19%, despite a median
the claims are only a portion of the cost. The legal fees, level of just 2%. This is due to the fact that 8% report
lost time, distraction of key personnel and dampening engaging in disputes for over 50% of their projects and
impact on innovation represent additional costs that another 8% engage in disputes for over 75% of their work.
may be much larger and more difficult to measure This result appears to confirm that some firms are prone
directly. to litigation.
Percentage of Infrastructure Projects Average Size of Claim

with Disputes (Among Those Who Report a Loss)
41%
3% 3%
29%
None 6%
6% 24%
1%-10%
11%-25%
12% 12%
26%-50%
51%-75% 6%
58%
76%-100%
$1- $50,001- $100,001- $250,001- More than

$50,000 $100,000 $250,000 $500,000 $1 million
Average 11% Median 2% Average $3,095,882 Median $400,000

y
ud
st
se Managing Risk on
Innovative Infrastructure Projects
ca
Two Lessons Learned

Tampa Bay Seawater DeSalination Plant, Florida
San Francisco/Oakland Bay Bridge SAS Span, California
A
ll large-scale infrastruc- the specified productivity levels, and construction and operation of the
ture projects involve it failed a critical acceptance test. plant put the risk on the contractor
risk, but those that push The protracted legal battles and instead of the utility, a factor that
the envelope pose even search for a remediation solution led proved critical during the significant
greater challenges, whether they to a delay of three years before the litigation than ensued when the
employ technologies and designs not plant was fully operational. The cost plant was not functioning properly.
typically used in the United States or of the project also inflated to $148 However, Herd noted, it kept the
have a level of scope and complex- million, and the water produced by utility from being an active partner
ity exceeding most other projects. the plant increased from the origi- in monitoring the treatment process,
Two projects undertaken in the last nal estimate of $2.02 per thousand and held them “at arm’s length”
decade offer lessons about key gallons to $3.38, due to increasing due to the process’s proprietary
steps to understand and potentially equipment costs and inflation.2 nature. He prefers the remediation
mitigate risk when undertaking large- The main problem with the initial design-build contract, which gave
scale, innovative infrastructure. design was insufficient pretreatment, the utility greater control. He states,
These lessons are critical because, due in part to lack of recognition of “Now we own the plant, and with our
as one risk experts observes, “The unique local conditions. A bigger ownership, we have access to what is
reality is that you might take some issue, though, was that, despite the going on with it.” Proper contractual
risks now, and it might show up with fact that desalination is a relatively distribution of risks and roles, thus,
quality issues and defects in three new technology in the U.S., the proved to be another significant
or five years after the time the risk original design and construction factor that made a difference in
was taken.” (See page 19 for more approach did not include ways to remediating the project.4
information on the expert interviews actively identify problems as they
conducted.) occurred. In fact, the low production SAS Span on the
levels in the plant after it opened Bay Bridge
Tampa Bay Water were due in part to a domino effect The biggest challenge a project
Desalination Plant when a problem with one filter faces can be getting its stakehold-
Because it was one of the first major would go undetected, causing ers to agree. Without a shared vision
desalination plants in the country, issues that led to shutting down among stakeholders—and a good
ENR magazine described this proj- the entire system. process for aligning stakeholder
ect as a “bellwether for the future of The remediation team took a very interest—large, high-profile public
desalination in the United States.”1 different approach. They included projects can get mired in delays.
The problems they faced and the pilot testing of every element in the After the Loma Prieta Earthquake
ways those problems were remedi- desalination system. Pilot testing is seriously damaged the Bay Bridge
ated demonstrate that, when dealing not a norm for most treatment plants in California in 1989, a temporary fix
with a new technology, it is critical in the U.S., but the complexity of a was in place in two months. But more
to verify performance at each step desalination plant makes it a neces- than 20 years later, the permanent
and with each component in the proj- sity, reported Ken Herd, director of replacement is still
ect. In addition, the remediation strat- operations and facilities for Tampa under construction.
egy demonstrated the importance of Bay Water to ENR editors.3 Instru- One of the most controversial ele-
keeping the project’s ultimate owner/ mentation was also added through- ments, and one that added signifi-
operator fully engaged. out the process that identified cantly to the length of the project,
When construction completed on problems in the individual systems. was the eastern portion of the bridge.
the seawater desalination plant in the The instrumentation allows prob- In addition to the bridge needing to
spring of 2003, the project was con- lems to be addressed before they be able to withstand another signif-
sidered to be delivered on time and impact other systems, keeping the icant seismic event, activists, espe-
on budget at $110 million. However, plant as a whole on line. cially on the Oakland side, began
the project was functioning below The original contract for the to demand that the east side of the
continued

y
ud
Two Lessons Learned
st
ed
se
Tampa Bay Seawater DeSalination Plant, Florida
u
n
ca
ti
n
co
San Francisco/Oakland Bay Bridge SAS Span, California
bridge be as aesthetically pleasing as of steel during that time period or the The project took nearly another
the west side.5 complexity of constructing an SAS two years to be reissued for
The political battle that ensued bridge. Thomas Warne, head of a bidding, and when it came back in
added substantial delays to review group appointed by Governor March 2006, the official estimate
the project. Steve Heminger, Schwarzenegger to study the Bay was $1.45 billion, more in line with
executive director of the Bay Area’s Bridge project, stated to ENR editors the complexity of the project and
Metropolitan Transportation in 2004 that there were only 20 SAS the high price of steel. Part of that
Commission, described the difficulty bridges in the world, and he cited delay was due to the decision to
of dealing with stakeholders in a 2009 the “lack of experience in building increase the bridge tolls to pay
interview with PBS NewsHour. “We [one],” along with the difficulty in for the higher construction cost.10
fought about the design of the bridge, manufacturing the components, Two bids rather than one were
we fought about whether the bridge as significant risk factors for this received, and both were close to
should have a bicycle or pedestrian project.8 Only one bid was received the new estimate. A joint venture
path, we fought about where the from that initial offering, and at $1.4 of American Bridge and Fluor was
bridge should go, we fought about billion it was significantly higher than selected to complete the project.
whether there ought to be train tracks the original estimated cost. Amid a Construction began in May 2006.
on the new bridge … What was great deal of political controversy At this point, the project is
originally a limited objective, and uncertainty over how the still on target to achieve a late
which was to build a new span that project would proceed, the bid was 2013 opening, seven years after
would be seismically strong, grew eventually rejected. construction started. n
into a monstrosity where every
interest group under the sun tried to
glom onto the project and achieve SAS span of the Bay Bridge
under construction.
their objective.”6
As the former mayor of Oakland,
Willie Brown, pointed out, the issue
of satisfying stakeholders did not
only apply to those activists arguing
for the bridge’s aesthetic appeal.
He points out that any state bridge
project needs to get a series of
different interests in line, including
those of the governor, the state
legislature and Caltrans, in addition
to the communities actually linked
by the bridge.7
The challenges posed by the
site, the need for strong seismic
performance and the demand
for compelling aesthetics led to
the adoption of self-anchored
suspension span (SAS) bridge
technology. The project was initially 1
Judy, Scott. “Tampa Bay Water Plant Nearly Ready for Restart.” ENR. 4 October 2006. http://enr.construction.com/news/environment/
put out to bid in spring 2004, with an archives/061004.asp.; 2 Schexnayder, C.J. “Tampa Bay Water’s Troubled Desal Plant Passes Tests, at Last.” ENR. 20 December 2007. http://enr.
construction.com/news/environment/archives/071220.asp.; 3 Judy, Scott. “Tampa Bay Water Plant Nearly Ready for Restart.” ENR. 4 October
official cost estimate of $780 million. 2006. http://enr.construction.com/news/environment/archives/061004.asp.; 4 Ibid.; 5 “Politics, Engineering Intersect Over Bay Bridge.” PBS News-
Courtesy of Caltrans
Hour, aired 29 September 2009. http://www.pbs.org/newshour/bb/transportation/july-dec09/bridge_09-29.html.; 6 Ibid.; 7 Ibid.; 8 Rosta, Paul, Rubin,
However, many felt that this estimate Debra K., Powers, Mary B. “California Scraps Sole Bid for Signature Span.” ENR. 11 October 2004. http://enr.construction.com/news/transportation/
archives/041011-1.asp.; 9 Long, J.T. “This Time, Controversial Bay Area Span Brings in 2 Bids.” ENR. 3 April 2006. http://enr.construction.com/news/
did not reflect the rapidly rising cost transportation/archives/060403d.asp.

Data:Severity of Specific Risks
on Construction Projects
Greatest Risks to Successful Projects (Top of Mind)

Greatest Risks to Successful Projects
Five factors were identified by over 10% of respondents (Top of Mind)
when asked what they considered to be the greatest Source: McGraw-Hill Construction, 2011
risks to a successful project. Since these choices were

Design / Project Changes and Scope Creep
unprompted, the answers reveal as much about how
17%
respondents view risks as what concerns them most.
The majority of these reported factors are elements Budget / Cost Overruns
under the control of the project team. This suggests 14%
that when the respondents consider risk, they primarily
Project Approval Process
consider things that they can impact or mitigate.
11%
Design/Project Changes and Scope Creep
Safety
The most popular answer overall was also the most
11%
popular answer among the owners, with over one quarter
(27%) identifying this as the greatest risk to project Site Conditions
success. Owners ultimately are bound to a budget for 11%
most projects, and major changes can kill a project or
Scheduling
create damaging delays if they get out of hand. They can
9%
also be exacerbated by the input of multiple stakeholders
for large-scale public infrastructure projects. (See page Utilities
12 for an example of a public project experienced major 6%
delays as a result of this issue.)
One key way to address design changes and scope
creep is to engage in active, open communication to
Safety
ensure that stakeholders and project team members
Safety is of nearly equal concern to owners (18%) and
share the same vision and priorities for the project.
construction firms (17%), but is not considered top-of-
Budget/Cost Overruns mind as a key risk by design firms (0%). Safety omissions
Significantly more A/E firms (25%) raised this issue than can lead to litigation for owners and contractors, and
owners (18%), and no contractors offered it as a concern. high-profile accidents can be damaging to their ability to
do work in the future. Strict government regulation on
The cost estimate an A/E firm provides is often a
■■
this issue also make this risk prominent for these
critical measure used by owners to gauge its perfor-
two groups.
mance, and overruns could impact its ability to secure
future work. However, depending on their role post- Site Conditions
design, they may have little control over cost increases 25% of A/E firms and 8% of construction firms consider
incurred later in the process. site conditions a major risk, but that factor was not
mentioned by any owners. This may seem surprising
A construction firm, on the other hand, often will be
■■
since the owner is typically liable for cost overruns and
able to pass the majority of the burden for cost over-
delays due to site conditions. However, the owner also
runs onto the owner.
has the greatest control over the degree to which this
Project Approval Process risk is taken into consideration. Contractors and design
This issue is also identified by more A/E firms (25%) as firms, on the other hand, typically cannot do any major
compared to construction firms (8%) or owners (0%). site investigations before agreeing to undertake a project.
Their involvement in pre-planning and early design can Despite the owner’s liability on this issue, unexpected site
put A/E firms at risk of committing resources to a project conditions can have major impacts on schedule, which
that never makes it through the approval process, making can affect the allocation of labor and other resources for
it difficult for design firms to gauge their work pipeline A/E and construction firms and, in turn, impact their other
and staff appropriately. projects and commitments.

SRI_Q2
Severity of Specific Risks on Construction Projects continued
Seriousness of Specific Risks
Most Serious Risks to Project Success

Risks that directly impact a project’s bottom line

are identified by respondents as the most serious.
More than one third and just under one half of respon- Bottom Line Risks
dents rate changes in schedule, changes in cost and
Changes in Schedule
financial risks as seriously impacting the success of a
construction project. 49%
Changes in Cost
Bottom Line Risks 43%
The emphasis on bottom line risks suggests that firms
Financial Risk
that do major infrastructure projects think of risk primar-
ily as a business consideration that directly impacts 37%
profitability. This implies that, in general, demonstrated
positive impacts on productivity and profitability will be Performance Risks
the best argument for advancing investment in risk miti-
Contractual Risk
gation. It is important to note, though, that some risks
31%
carry more weight with specific players than others.
Not Achieving Required Quality
Changes in Schedule
26%
All players recognize the seriousness of changes in
schedule. Schedule changes impact a larger percent- Not Meeting Client Expectations
age of infrastructure projects for respondents than cost 26%
changes or disputes (see page 8).
Technical/Design/Engineering Issues
For A/E firms and contractors, schedule changes
■■
23%
also may affect the ability to devote resources to
other projects.
For the owners surveyed, 86% of whom are in the

■■
public sector, the political ramifications of delays

could be damaging.
Financial Risks
Changes in Costs Financial risks include factors such as inflation, devalua-
A much higher percentage of design firms (67%) consider tion and slow economic growth. Owners (45%) and A/E
the risk of cost changes very serious as compared firms (50%) are equally concerned about financial risk,
to construction firms (25%) or owners (36%). This is but contractors (17%) do not seem as concerned, proba-
consistent with the results of the top-of-mind question bly because the liability for these risks typically rests with
(see page 14). the owner.
While A/E firms do not experience more cost overruns
■■For a project that extends over a period of several
as compared to other player types (see page 9), their
years, the negative impacts on an owner’s budget
relationships with their clients may be impacted,
can be difficult to anticipate or plan for. This has been
potentially affecting their ability to secure future work.
particularly true during the economic turmoil that has
In the current economic climate, with infrastructure
ensued since 2008.
facing severe funding limits, A/E firms may be feeling
increased pressure to improve the client relationships for ■■For A/E firms, financial risks may be a factor in the
competitive reasons. larger issue of changes in cost.

Severity of Specific Risks on Construction Projects
Seriousness of Specific Risks continued
Performance Risks
engineering or other construction issues demonstrate

Players in the construction industry rely on each other to
the need for all members of a project team to communi-
deliver a successful project, but the adversarial nature
cate clearly about the performance expectations for the
that characterizes much of the industry can sometimes
project.
prevent a collaborative approach. Therefore, it is not
surprising that the performance of other members of a
project team is a critical risk identified repeatedly in the
Risks of High Importance to One
research, including the in-depth interviews with experts
Player Segment
While not selected by as many respondents as the previ-
and the case studies. And it impacts all players.
ous two categories, several external risks outside the
The use of integrated teams has shown promise
control of the project team are considered highly serious
as a best practice to help minimize this risk, which
by over 10% of the respondents. For many of these cate-
this study confirms—77% report that using integrated
gories, though, one player segment is far more concerned
teams reduces risk. A team approach can ensure that all
than the others about the impact of the risk.
members are aligned in the vision, goals and priorities of
the project, which can address many of the performance Owners
risks discussed below. 27% are highly concerned about risks due to politics and
the political environment. Given the large percentage of
Contractual Risk
public owners in the survey, the decline in state and local
Owners consider this a more serious risk than other
budgets makes public infrastructure more dependent
player groups, with 55% rating it as a high risk—more
on federal funding. The federal government’s inability to
than double the percentage of design firms (25%) or
put together key funding initiatives and the threat of cuts
contractors (17%). This suggests that for owners in
to existing sources of funds make many owners highly
particular, formulating contracts that reduce their liability
vulnerable to the current political environment.
is a high priority.
A/E Firms
25% express concern about payment/credit risk.
More than double the percentage of owners (45%) are
The issues around the economy and funding levels
concerned about this risk as compared to A/E firms (17%)
for infrastructure impact the viability of proposed
or construction firms (17%). The quality of a construction
projects moving forward for A/E firms. This concern
asset, once built, is very difficult to improve, and quality
may represent a bellwether for construction firms since
issues can shorten the life of the asset or make it less
concerns about projects currently in design may translate
safe for users. Owners may have some legal redress for
into construction concerns in the next couple of years.
subpar quality, but that typically cannot fully compensate
them for the problems and losses incurred by this issue. Construction Firms
25% find meeting sustainability goals to be a serious
Not Meeting Client Expectations
risk. The recent emphasis on the performance of green
Both A/E firms (33%) and contractors (25%) see
buildings after construction may have contractors
not meeting client expectations as a serious risk.
concerned about their liability in this performance.
Relationships with past clients play an important role in
procuring new work. Even in a public bid context, a firm’s
reputation can impact its selection and the work it is
Other Risks
Large-impact but rare risks, such as natural disasters
considered eligible to do.
and terrorism, are considered less serious than the risks
Technical, Design, Engineering or Other firms think they are more likely to face on a recurring
Construction Issues basis. Also, with the current levels of high unemployment
All of the player segments see this issue as impor- in the construction industry, it is not surprising that few
tant—17% of A/E firms, 25% of construction firms and are concerned about labor risks. This risk may become
27% of owners rank this as a serious concern. As with the more urgent, however, when the economy recovers and
previous two issues, concerns about technical, design, construction work increases.

Severity of Specific Risks on Construction Projects continued
Top Risks for Public and Private Projects

Top Risks for Private and Public Projects
Public and private projects have different risk profiles. Source: McGraw-Hill Construction, 2011
While the bottom line risks of greatest importance to

Public
the respondents—schedule changes, cost changes and
Private
financial risks—weigh heavily in both categories, other
risks are considered more important for one of the two Changes in Schedules
sectors. 49%
Payment/Credit Risk 44%

31% of respondents regard this as one of the top three Changes in Costs
risks for private-sector projects, but only 9% regard it 43%
as a critical risk for public work. Since 2008, financing 38%
for private-sector projects has been consistently difficult
Financial Risks
to obtain. Many projects that have advanced on the
expectation of financing have been forced to stop, 29%
sometimes in mid-design or mid-construction. 34%
Technical/Design/Engineering/Other Payment/Credit Risk

Construction Issues 9%
51% consider this the top risks in the public sector— 31%
significantly higher than the 28% who consider it a Contractual Risk
risk for the private sector. This is even higher than any
31%
of the bottom-line risks, such as changes in schedules
28%
and costs.
One factor that may contribute to this finding is the Technical/Design/Engineering Issues
lack of flexibility available to firms that work in the public 51%
sector to resolve issues with their clients compared to 28%
the private sector. This lack of flexibility could lead to
Not Meeting Owner/Client Expectations
increased concerns about the risks that may occur when
14%
technical, design or construction issues arise.
25%
Not Meeting Owner/Client Expectations
25% consider this a high risk in the private sector,
compared to just 14% in the public sector. The public 14%
sector often has clearly defined goals and agendas for 19%
projects. While some caution that these requirements Political Environment
and regulations need to be thoroughly understood, a 31%
firm that invests in that effort can see consistencies of
9%
approach across public projects.
Private sector goals, on the other hand, are typically
less consistently defined from project to project, and they Political Environment
may be more influenced by the person leading the project More than three times as many respondents view the
than in the public sector. Firms must actively ensure political environment as a risk for public projects as
that they understand the vision and priorities of the compared to private ones. The current state of funding
owner/client for each project, even those they have done for projects, especially infrastructure projects, may
business with in the past. be causing an increased concern about this risk. The
increasingly fiscally conservative environment at the
federal level, along with the ongoing challenge of gaining
bipartisan support for infrastructure funding in Congress,
may make this difference more prominent than it has
typically been in the past.

Sidebar: Energy Sector
Risk Management in the Energy Sector

In order to determine how risk is viewed across different industry
sectors, McGraw-Hill Construction conducted a separate small survey of
players working on energy projects to contrast against the infrastructure

findings in the main study. Though there are some differences in the most
serious risks facing players in these sectors, the mitigation strategies
used are similar. This comparison affirms that risk mitigation is a core
component of good project management, no matter the sector.
M
cGraw-Hill Construc- • Energy: 31% Changes in Schedules: Somewhat
■■
tion conducted a • Infrastructure 43% similar response rates demon-

survey among a small strate the importance of schedules
sample of owners, con- Partner Risk: Public energy proj-
■■ in both sectors.
tractors and designers who work ects involve partnerships with private • Energy: 38%
in the energy sector. Although the firms, which are still relatively rare in • Infrastructure: 44%
survey group is not large enough to the infrastructure sector.
Risk of Not Meeting Owner/Client
■■
be statistically significant, it provides • Energy: 31%
Expectations: As with design
a good snapshot of attitudes and • Infrastructure 3%
issues, more technically demand-
trends about risk management in the
Political Risk: Both energy and
■■ ing projects in energy would
sector (see methodology on page 52).
infrastructure projects face uncer- impact the severity of this risk.
tain government funding. • Energy: 38%
Severity of Specific Risks • Energy: 31% • Infrastructure: 25%
When the top risks for public and
• Infrastructure: 31%
private projects are compared,
certain risks carry far more weight for
Risk Management
energy projects than for infrastruc-
High Private-Sector Risks Strategies
(Top risk factors cited as important
ture projects.
by respondents in the energy sector) Assessment
All respondents in the energy sector
Public-Sector Risks Technical/Design/Engineering
■■
use checklists, forms and/or risk reg-
(Top risk factors cited as important Issues: More technically demand-
isters, compared to only 77% of infra-
by respondents in the energy sector) ing projects in the energy sector
structure respondents. This suggests
may account for the higher number
Technical/Design/Engineering
■■ that the energy sector may have a
reporting this as an important risk.
Issues: This factor is as important relatively standardized approach
• Energy: 44%
in the public energy sector as it is in to assessing risk as compared to
infrastructure. infrastructure, especially since
• Energy: 50% Financial Risks: The energy market
■■ expert input (internal and external)
• Infrastructure: 51% in the private sector is typically far and formal brainstorming assess-
more volatile than the infrastruc- ment measures are far more widely
Labor Risks: Energy work requires
■■
ture market in the private sector. adopted in infrastructure.
more specialized labor, making
• Energy: 44%
workforce availability more of a
• Infrastructure: 34% Mitigation
concern.
Nearly all mitigation strategies have
• Energy: 44% Labor Risks: The need for special-
■■
roughly the same adoption level
• Infrastructure: 6% ized labor makes this more
in both sectors. This supports the
important for energy projects.
Changes in Cost: Public infrastruc-
■■ notion that strong risk management
• Energy: 38%
ture projects are usually publicly is good project management. n
funded, which may create bigger
hurdles with cost increases.

Data Sidebar:Opinions of Risk Experts
Risk Mitigation Factors and Approaches
Based on In-Depth Interviews
Interviews with 15 experts on risk management from some of the largest

owners, engineering and contracting firms, and construction firms in the
U.S. reveal that successful risk mitigation requires early engagement, a

culture committed to reducing risk and well-defined, transparent and
collaborative relationships among the project’s key stakeholders.
Cumulatively, the responses reveal report that as few as 20% and as Factors that make projects
best practices for managing risk. many as 90% of projects across the less likely to finish on time
Respondents were asked a series of industry achieve on-schedule and and on budget
questions on the following topics: on-budget completion. • Third-party influences, including
• Impact of Risk on Project Budget Despite that lack of agreement, multiple stakeholders, political
and Schedule there was consensus about the fac- interest and utilities
• Factors that Impact the Types of tors that differentiate projects that • Concerns about labor availability
Risks Encountered complete on time and on budget due to market changes, especially
• Risk Assessment and Mitigation from those that do not. on a long-term project
Procedures One expert notes that a key strategy
• Litigation Factors that make projects for achieving an on-time, on-budget
more likely to finish on time project is a collaborative relationship
Impact of Risk on Project and on budget between all the players involved.
Schedule and Budget • Adequate up-front planning Issues will inevitably arise as the
When gauging the risk inherent in • Clear scope of work and shared project proceeds, and “without
a construction project, the most expectations between firms and complete collaboration, there is not
commonly recognized measures clients a unified approach to solving the
are the ability to finish on time and • Realistic scheduling: Over- issues,” he says.
on budget. optimism was cited by a few as a
While these measures of risk problem that needs to be avoided.
seem relatively straightforward, • Contract documents that clearly
Most Important
several expert respondents question define risks and responsibilities
Risk Factors
exactly what being “on time” and for each partner: One contractor
• A shared vision and a clear
“on budget” entails. When asked to notes, “70% of whether a project
scope of work
estimate the percentage of projects will make the anticipated budget,
• The financial viability and
that typically complete on time and schedule and quality is determined
reputation of the firms you are
on budget, one contractor insisted by the time the ink is put on the
dealing with; those with litigious
that the figure depends on “whether contract.”
tendencies should be avoided
you acknowledge properly handled • Familiarity with the work and the
• The ability of firms to deliver the
extensions to changes that arose other players involved
quality of work required in the
in the course of the project.” Even Together, these responses reveal that
time allotted for construction
a relatively clear-cut measure of learning as much as possible and as
• Contractors: Subcontractors
risk demonstrates the challenge of early as possible about the project,
and owners, especially in the
measuring the impact of mitigation the roles of each player and the
public sector, who have some
efforts on the industry and inherent risks is crucial to minimizing
sophistication and experience in
determining their effectiveness. project risk.
the type of work undertaken
Given the challenge of even
• Owners: Designers and
defining “on time” and “on budget,”
contractors who have some
it is not surprising that estimates
sophistication and experience in
for the percentage of projects
the type of work undertaken
completing on time and on budget
vary widely among the experts, who
continued

Opinions of Risk Experts continued
Factors That Impact engineering and construction firm • Flexibility in Resolving Issues:
the Type of Risks states that for his multinational com- Private owners also can more
Encountered pany, public and private work are in easily resolve issues that arise
A common conclusion is that the two separate business units because during construction directly
relationship with the other firms their risk profiles are so different. with the firms they hire as
involved in the project, including • Flexibility in Types of Contracts: compared to their public-sector
partners, clients, design firms and Several experts note that the counterparts. One respondent
construction firms, is more impor- private sector has more flexibility from a construction firm notes
tant in determining the level of proj- in terms of how to apportion risk that the work they obtain in the
ect risk than project type or size. in its contracts. One respondent private sector typically comes
Several respondents emphasize that from an engineering and from an already strong relationship
risks vary dramatically from project construction firm finds the private between their firm and that client,
to project, while others report that sector can negotiate reasonable and that relationship allows them
certain risks typically emerge as criti- contract terms more easily than to work directly with the client
cal across projects. However, project “the bureaucrats” in the public when problems appear.
type as a whole was not considered a sector. However, another sees • Faster Decisions: The level of risk
key determinant of risk. this flexibility as a disadvantage, faced by contractors is reduced
One aspect that many felt made with less consistency in the by the ability of project owners in
a difference in the risks they faced private sector in how provisions the private sector to make quick
is whether the project is public or of the contract are applied. Also, decisions, which owners in the
private. one contractor reports that the public sector typically cannot
federal government has evolved do. One expert noted that public
Risks of Public versus project decision makers are
from a low bid emphasis to “real
Private Projects appointed or elected officials,
value purchases” that allow them
Nearly all the experts interviewed which slows their ability to make
to focus on assembling the most
report facing very different risks critical decisions.
qualified team, moving the public
based on whether the owner of the • Payment Risk: Several
sector a little closer to the private
project is in the public or private respondents note greater
sector in terms of flexibility in
sector. In fact, one executive from an concerns about project funding
contracting firms.
and the ability of private-sector
owners to pay compared to public-
Risks Typically Considered by Contractors sector owners. In addition, one
at the Go/No Go Stage expert describes how large-scale
• Project Funding: Concerns about an owner’s ability to pay have private projects may be funded
become more prominent during the economic downturn. While this risk by a consortium, which raises the
has largely been confined to the private sector in the past, at least one issue of an increased number of
firm cited concerns about some public agencies as well. stakeholders to satisfy, as well
• Contractual Agreement: Many express concern about how the as increasing the risk of payment
contract documents apportion risk. Being asked to assume risks they issues. This risk may not be
believe belong with the owner will lead some firms to decide not to confined to the private sector. For
pursue a project. one construction firm, the concern
• Internal Resources: Some measure how the project will tax their over the ability of municipalities to
internal resources and whether they can staff the project sufficiently. pay has also begun to rise, making
• Labor Issues: Availability of labor is a very common risk factor. For it necessary to confirm that “the
union contractors performing public projects, having a relationship with funds are properly designated
the regional union organizations was considered important in terms of and set aside in the appropriate
mitigating this risk. budget” before committing to a
public project.
continued

• Requirements and Restrictions: • Unforeseen Site Conditions: lifecycle. One large public owner
A thorough knowledge of all In addition to unexpected soil points out that risk evolves through
requirements, such as bonding, conditions, unforeseen site the project stages from more gen-
errors and omissions insurance, conditions can include the eral considerations to ones that are
and mandated green standards, discovery of hazardous materials better defined. Another describes
is critical to minimize risk when or an old cemetery. For most how their process for evaluating
dealing with the public sector, contractors, this issue can only be the feasibility of their projects mir-
especially the federal government. mitigated through strong contract rors the evolution of risk through the
One contractor explains that lack documents which place this risk project lifecycle as they first con-
of experience with a government with the owner. sider the business perspective, then
owner can lead to very costly review the environmental and politi-
omissions. cal risks, then assess the design risks
Risk Assessment and and finally evaluate the construction
Difficult Risks to
Mitigation Procedures risks. A large private owner affirms
Rigorous risk assessment and mit-
Quantify that after early consideration of many
igation procedures typically begin
Despite their best efforts to capture risk factors, they “convert [their]
early in the project lifecycle and
the risks with the biggest impacts, assumptions to reality” as the project
often involve metrics for tracking
which a few referred to as the progresses, and as a result, the risk
performance against risks.
“known unknowns,” the “unknown posed by their work lessens as the
Most of the experts have rigorous
unknowns” can create a major project advances.
risk assessment and mitigation pro-
impact on the project as it moves for- Contractors also place value on
cedures in place in their compa-
ward. Several experts point out that early risk assessment, although
nies. Some of the largest firms state
keeping as many elements as pos- those who largely work on compet-
that their organization takes a scal-
sible from falling into this category itively bid infrastructure projects
able approach to tackling the issue
is critical to risk mitigation. As one caution that, until they determine
of risk, in which the degree of effort
states: “The only thing you can do is that they are likely to win a bid, they
and time invested in risk assessment
minimize [the unknown unknowns] cannot devote significant resources
is determined by the size and com-
through a robust estimating and risk to risk analysis. Bidding or submit-
plexity of the project. One describes
review process.” ting proposals is a resource-inten-
how they only conduct a full quanti-
Despite that goal, several fac- sive activity, and many contractors
tative analysis involving simulations
tors can lead to the creation of more state that determining their chance of
and forecasting on the most com-
unknown unknowns: winning the bid takes priority. How-
plex projects, but that they still eval-
• Incomplete Design: One factor ever, they also report their need to
uate the probability and impact of
that can exacerbate the risk of price risk effectively in the bid pro-
typical risks on their simpler projects.
unknown unknowns is to expect cess. Contractors, even more than
The limits to scalability, however, are
the GC or CM to begin a project owners, report that their approach to
pointed out by one respondent from
when design has not been risk changes through the lifecycle of
an engineering and construction
completed. the project.
firm, who states, “A $3 million job
• The Economy: While certain
could create a $10 million liability.” Risk Assessment at the
fluctuations can be anticipated, the
Go/No Go Stage
recent decline has led to increased Risk management by
Most firms adopt a formal review
concerns about the impact of the Project stage
process at this stage using a list of
economy, including uncertain The owners, public and private,
typical, known risks to evaluate the
project funding, market cycles describe the majority of their risk
specific challenges the new proj-
during long-term construction assessment occurring during the first
ect poses. These risk registers can
projects possibly leading to go/no go decision point. They then
include well over one hundred risks
unexpected inflation, labor track those risks and how they per-
to be evaluated, but these risks are
shortages and reduced margins. form through the rest of the project
continued

can reflect issues with the origi-

Factors that increase the risk of litigation nal estimates as much as an indica-
• Firms prone to litigious behavior: This factor was cited the most by tion of actual issues with the project.
respondents. Owners typically report trying to avoid contractors with a Another reports that in addition to
litigious reputation, and contractors report evaluating owners based on tracking their own performance, they
their history of litigation. Selecting the right team is a critical strategy for benchmark that performance against
avoiding litigation. other agencies.
• An unclear defined scope of work: Related issues include ambiguous
project or contract documents. Performance Metrics
• Lack of familiarity with other team members: This can lead to Beyond Cost and Schedule
misunderstandings. One contractor compared this to “getting married Owners
after dating someone for a week.” • Decision latency: The delay before
• Insufficient project funding a decision is made can be a useful
• Ownership structure with multiple partners metric when examined both by
• Certain project types: Bridges have less schedule flexibility than other how long the delays are and by
infrastructure types. Litigation of condominium projects is also more how frequently delays occur
common than in other general building types. • Change orders across multiple
contracts
Contractors/Engineering and
not equal in importance. One firm the key to successful risk assess-
Construction Firms
reports that at the end of their pro- ment and mitigation is to engage
• Safety
cess, typically about a dozen risks are in regular reviews of the project to
• Labor utilization and productivity
identified as significant. Methods of assess the mitigation of risks previ-
• Cash management (net cash
evaluating these risks vary among ously identified and the appearance
compared to gross profit)
the respondents—some use a more of new, unexpected risks. Nearly all
• Profitability
free-form evaluation by the project the firms that engage in this activ-
• Comparison of self-performed
team while others use formal tools ity report doing it at least quarterly.
work to subcontracted work
that assign a score to each risk. In addition to performing these risk
• Materials used
For some, this assessment list is assessments, one describes doing
drawn, at least in part, from their gap analyses on a regular basis that
experiences with previous projects. assess profit recognition and how
Litigation
There is general agreement that the
One engineering and construction much reserve is released on a regu-
best approach to litigation is avoid-
firm describes how their completed lar basis.
ing it if possible.
projects are evaluated and risk fac- For some of the respondents,
The respondents agree that litigation
tors are drawn from that evaluation senior management remains
has a large impact on the construction
to form a “watch list for risk predic- engaged throughout the lifecycle
industry. The most common theme to
tors.” Most describe how mitigation of the project. One engineering and
emerge, however, is that most respon-
strategies are provided for all of the construction firm has their CEO, CFO
dents avoid allowing issues that arise
most serious risks, and these formal and chief legal officers do a deep dive
on their projects to get to the point of
documents are often reviewed, on risk on all of their major projects
claims and disputes. A few observe
not just by the project team, but by twice a year, where they devote more
that once an issue devolves that far,
other functions within their com- than a day to examining how risk is
they can lose control and/or face high
pany, including senior management, being managed on the project.
costs. One contractor states that litiga-
finance, and, in some cases, legal.
Metrics tion “ties up our resources, our people,
Risk Assessment After Nearly all those interviewed track and it is a no-win situation” for any of
project is in progress costs and schedules. However, one the parties involved. A public owner
Once the original risk assessment public owner cautions that compar- agrees that early resolution of issues
is completed and a project begins, ing these to the original estimates
continued

to resolve potential disputes is “key it becomes difficult to accurately mea- contractor compared their efforts to
to keeping project costs down.” Only sure potential and actual impacts of raise risk awareness in the field to
those whose work is primarily publicly risks. Construction projects involve their efforts to encourage a culture
bid projects seem to accept litigation merging many different requirements of safety in their organization. Others
as a normal part of doing business. for labor and materials, and this level emphasize the need to engage man-
Another reason mentioned by a of complexity and interdependence of agement at the highest level in order
major design firm to avoid litiga- different elements requires risk analy- to ensure that risk assessment is pri-
tion is the negative impact it can sis to delve into the details. oritized in their approach.
have on a firm’s reputation, poten-
Communication, Collaboration
tially decreasing its chances of gain-
Transparency and While strong communication is
ing new business on top of the losses
Accurate Reporting important to help mitigate risk, it
involved directly in the case.
Communication underlies many functions best when joined with a
of the strategies discussed by the collaborative approach to the project.
Strategies for Reducing the
respondents, including communica- Contractors involved in joint ventures
Likelihood of Litigation
tion between different departments, note the benefit of having the partner’s
• Use a team approach, whether
formalized review procedures, estimation of the risks involved before
derived from greater collaboration,
and clear lines of communication taking on the project and sharing of the
or a formal design-build or
between all the major players on the risk profile once the project has been
integrated project delivery contract.
project to help resolve issues before won. Successful collaboration shifts
• Create contract documents with
they turn into disputes. the focus of the definition of success
clearly and reasonably apportioned
A key part of that communication from the original firm to the project as a
risks.
is a transparent assessment of true whole. It has the added benefit of also
• Conduct a constructability review
conditions and concerns on a proj- reducing the risk of litigation because,
on project documents before
ect. This means ensuring all parties as one owner put it, “What are you
bidding a project.
involved in the project recognize that going to litigate about when you are
• Conduct a quantitative risk analysis
reporting issues as quickly, fully and all on the same team? You don’t sue
early.
honestly as possible allows the entire your own partners.” Several note that
• Resolve problems “at the
team to help address them. Commu- industry trends, such as design-build
lowest level possible.” When an
nication is a critical tool to minimize approaches in infrastructure projects
issue arises, the most effective
the impacts of risks on a project, but and integrated project delivery in
approach is to have those with the
fully transparent communication is general building, are helping the
greatest familiarity resolve them.
difficult to achieve unless prioritizing industry to mitigate the risks inherent
• For issues that cannot be resolved
risk mitigation has been incorporated in construction.
at the lowest level, have a plan in
into the culture of the firm.
place for the resolution process.
Methodology
Incorporating Risk
15 in-depth interviews were
Strategies and Best Management into the
conducted by telephone in
Practices for Mitigating Culture of the Firm
September 2011 with leading
Construction Risk Several experts emphasized that risk
experts on risk mitigation from
A few broad strategies and best assessment and mitigation cannot
the following firm types:
practices emerged about how to be overlaid onto an existing project
• 6 engineering and
best mitigate risk in construction. team. Even in those firms that have
construction firms
separate positions devoted to analyz-
Level of Detail • 3 construction firms
ing risk, everyone—from workers in
One owner reported the need to • 1 construction consultant
the field to the highest level of man-
“separate each risk into its compo- • 1 design firm
agement—must consider risk as a
nent pieces at a level that is action- • 4 owners
regular part of their job function. One
able.” If analysis stays at a high level,

Data:Adoption of Risk Assessment
and Mitigation Procedures
Formal Risk Assessment Procedures in Firms

Percentage of Firms with Formal
When reporting how they perceive the level of risk RISK ASSESSMENT Procedures
assessment adoption within their own groups, the (Estimated by Respondents)

respondents show no agreement on the level of adop- Source: McGraw-Hill Construction, 2011
tion overall. In fact, there is even distribution among

those who perceive low, medium and high levels of
adoption. However, when examined by player type,
important differences emerge. More than 75% 29%
51%-75% 36%
Owners
26%-50%
Owners are split between low and high levels of adop-
1%-25% 9%
tion, with an average adoption level of 58%—the highest
of any player. 26%
Exactly half believe 50% or less of owners have
■■
adopted formal risk assessment procedures. ■■The remainder are relatively evenly split between the lowest
level (25%) and the two upper levels (17% each).
The other half report adoption by more than 75% of
■■
firms. Construction firms

Average adoption is 38%—the lowest of any player group,
A/E Firms
with a split between low and high levels.
Average adoption is 44%, spread across the spectrum.
■■58% report low levels of 1%–25% of firms.
At the mid-point, 42% believe that 26%–50% of firms
■■
have formal assessment procedures. ■■Yet one quarter report levels of 75% or more.
Formal Risk Mitigation Procedures in Firms

Percentage of Firms with Formal
Risk mitigation is not perceived to be widely adopted in RISK MITIGATION Procedures
the construction industry—43% believe that one quarter (Estimated by Respondents)
or less of the firms in their field use formal procedures. Source: McGraw-Hill Construction, 2011
Owners
Owners are almost evenly divided between those who
think most owners are not doing formal risk mitiga- 18%
More than 75%
tion and those who think that more than half are, with an
51%-75% 43%
average perceived adoption level of 40%.
26%-50% 21%
Exactly half (50%) believe one quarter or less of owners
■■
1%-25%
have formal risk mitigation procedures.
18%
On the other extreme, 40% of firms believe more than
■■
50% of firms have mitigation procedures.
A/E Firms Construction Firms

Perception of adoption is relatively evenly distributed Construction firms report the lowest levels of adoption.
across the spectrum for A/E firms, indicating no agree- Their reported average of only 35% is influenced by the
ment on overall use of formal mitigation procedures. half that believe that only 1%–25% have adopted such
Average adoption is 46%. procedures.

Adoption of Risk Assessment and Mitigation Procedures continued
Awareness and Adoption of Risk Evaluation Strategies
Awareness and Adoption of

While the respondents had a mixed response to adoption
RISK EVALUATION Strategies
of risk assessment procedures for the industry at large, Source: McGraw-Hill Construction, 2011
their own levels of awareness and adoption of specific Aware of

strategies is very high. Over three quarters have used all Uses / Will Use
of the strategies included in the survey.
One factor that may account for this disparity is that all Formal Brainstorming with Team
respondents for the survey have been involved in at least 97%
one infrastructure project valued at $100 million or more. 96%
Over one third (37%) of the respondents had projects
valued at $1 billion or more. In order to be competitive on Expert Input - Internal
high-value projects, a more rigorous approach to risk is 91%
essential. This investment in risk evaluation is reinforced 91%
by the 91% of respondents that report having experts on
risk assessment in their firms. Expert Input - External
89%
Variations by Player 82%
Owners
All of the owners surveyed indicate that they are aware Use of Checklists/Forms/Risk Registers
of, are using and will use formal brainstorming with their 83%
team. In addition, all of the owners are aware of and using 77%
expert input from external sources. However, a slightly
lower percentage (91%) plan to use external resources in
the future. This drop could be due to a few factors, includ- Assess_Q9a_Q9b_Q9c
ing budgetary concerns and increasing internal expertise.
A/E Firms
A lower percentage of these firms indicate that they are
aware of external resources for risk management as
compared to the other players. The percentage of those
aware of these resources (75%) was the same percentage
as those using them now or planning to use them in the
next three years. This suggests that greater awareness of
the resources available could encourage greater use of
outside resources for this segment.
Construction Firms
All of the construction firms used input from inter-
nal experts and plan to do so in the future. For external
resources, however, while their awareness was high
(92%), only 75% are using or plan to use these resources.
These firms also indicated two other strategies in addi-
tion to the list presented them:
Using partners’ risk assessments

■■
Gaining third-party reviews

■■
These strategies were also mentioned by participants in

the in-depth interviews (see page 19).

Stages at Which Firms Evaluate Risk

Stages at Which Firms Evaluate Risk
Risk evaluation by A/E firms is concentrated in the pre-
design and design phases, while risk evaluation by

construction firms is concentrated in the bidding/nego- Owners Construction Firms A/E Firms
tiating and construction phases. This finding conforms
with the typical level of firm involvement in a traditional 100% 100%
design-bid-build project. It also confirms that these firms 92% 91% 92%
do pay strict attention to evaluating risk before commit- 83%
ting to a project. 73% 73%
Risk evaluation for owners is far more concentrated 64%
58%
in design than in the pre-design, bidding or construction 50%
phases. This suggests that owners rely on information 42%
provided during the design stages for much of their risk
evaluation. It also may reflect the owners’ typical practice
of holding contractors contractually responsible for much
of the risk once construction is underway.
The use of integrated teams is one strategy that might Bidding/
alter the stage at which players become involved in risk Pre-Design Design Negotiating Construction
evaluation. By its nature, an integrated team brings all
players into the project at the outset, which could lead to
design decisions that reduce risk and less expensive miti-
Trig_Q4
gation strategies.

Awareness and Adoption of Risk Mitigation Strategies
Awareness and Adoption of

The awareness and adoption levels of risk mitigation RISK MITIGATION Strategies
strategies are also very high among all respondents. Source: McGraw-Hill Construction, 2011
Over 90% of respondents (on average) are familiar

■■ Aware of
with contingency planning and developing a plan Uses
to manage risk and will use these strategies in the Will Use
next three years. For these high-level adopters,
planning their strategy is the most consistently Contingency Planning
adopted approach. 97%
86%
Over three quarters are currently doing risk prioriti-
■■
91%
zation and holding regular risk meetings with the full
project team. These levels will stay essentially the Develop Plan to Manage Risk
same in the next three years. 97%
Risk prioritization is critical to assess what resources to 86%
devote to mitigation. Regular risk meetings of the full
94%
project team demonstrate a strong commitment by the
firm to prioritizing risk overall. Regular Risk Meetings with Full Project Team
91%
The areas with the greatest gap between awareness
■■
80%
and use are tracking risk metrics across projects and
using special teams, indicating a lack of industry 77%
agreement about these approaches. Tracking Risk Metrics Across Projects
• Risk metrics across projects: Even among firms with 80%
relatively sophisticated approaches to risk, the metrics 63%
used to measure risk performance often only apply to
66%
specific projects.
• Using special teams: Some argue that risk Risk Prioritization
management is best handled within the project teams 80%
while others believe having staff devoted to risk 77%
mitigation improves their outcomes. Also, creation 80%
of special teams requires additional resources to be
Special Teams to Monitor/Mitigate Risk Throughout Project Lifecycle
dedicated to risk. Given the current economy, firms
may avoid strategies that require up-front investment. 66%
49%
Variation by Player 54%
Owners
becomes critical during construction, so the high level
A lower percentage of owners have adopted several
of activity by construction firms is consistent with their
mitigation strategies compared to other players. This
role on projects.
contrasts with their strong levels of adoption of risk
assessment and suggests that some owners may choose
to put the responsibility on other team members.
Variation by Firm Size
A higher percentage of companies with an annual
Construction firms Assess_Q10a_Q10b_Q10c
revenue over $500 million report adopting several risk
In contrast, construction firms have a high level of mitigation strategies as compared to companies with
adoption across nearly all mitigation strategies. They revenues under $500 million. Companies with higher
have the highest adoption levels for developing a plan revenues are more likely to be involved in large, complex
to mitigate risk and holding regular risk meetings with projects, creating a greater need for a wide range of risk
full project teams. While risk assessment takes priority mitigation strategies. Additionally, they may have more
for them in the pre-construction phases, risk mitigation resources to dedicate to risk mitigation approaches.

Awareness and Adoption of Tools and Technologies

for Risk Assessment and Mitigation
Awareness and Adoption of Tools for

Despite the high levels of risk assessment and mitigation Risk Assessment and Mitigation
strategy adoption, only a medium level of tool adop- Source: McGraw-Hill Construction, 2011
tion is reported by the industry. The most commonly

Aware of
used tool is off-the-shelf software, but it is used by 55% of
Uses/Will Use
respondents—significantly less than most strategies for
risk assessment or mitigation (see pages 25 and 27). 17% Statistical Modeling (such as Monte Carlo Simulation)
report using no tools at all. 66%
In the in-depth interviews, a few experts observed that
52%
the experience and knowledge of the risk assessment and
mitigation team is much more important than the tools Off-The-Shelf Software
they use (see page 19). 51%
Statistical Modeling 55%
Even firms that employ statistical modeling typically do
so only on the largest and most complex projects. There- Proprietary Software Developed Internally
fore, the adoption levels reported by this group—all of 23%
whom have worked on large, complex infrastructure proj- 26%
ects—may not reflect the overall adoption in the industry.
Monte Carlo simulation is a common approach to None
statistical modeling because it allows for uncertainty in 17%
the inputs and can present a range of probabilities rather 17%
than a deterministic picture. This is critical in risk assess-
ment, in which risks need to be judged based on their
likely probability as well as their likely impacts. Monte
Carlo simulations allow for a large series of probable
scenarios to be analyzed in order to better understand
risk in complex situations.
Assess_Q11a_Q11b_Q11c
Off-The-Shelf Software Variation by Player
The kinds of off-the-shelf software used include A/E Firms
programs specifically designed for risk analysis and In all categories, A/E firms are the biggest adopters of
more general project management software. the tools. In fact, almost three quarters report using
statistical modeling tools, although that figure drops
closer to two thirds when they consider the future. Again,
this may be influenced by the size and complexity of the
projects they anticipate working on in the next three
years, in addition to their response to the effectiveness
of the tools themselves.
Construction firms
Only a small percentage of contractors (20%) report using
or planning to use statistical modeling tools. Since these
tools are typically used for risk assessment during the
pre-design and design phases, this low level of adoption
is likely due to greater contractor involvement in the late
design and construction phases of projects.

Sidebar: Safety
Increasing Safety in a Tough Economy

“Doing more with less” is a familiar mantra today. Contractors, in particular,
are trying to address safety concerns in the face of a difficult economy and
increased government enforcement. In order to truly make their job sites

safer, they are involving the subcontractors they hire in their safety efforts.
M
ost reputable Safety Staff about theirs,” he says. “That’s not
contractors promote Another key concern in the construc- the approach we take anymore.
safety as a core tion risk management arena is the We’re working on educating them
value, but in a down role of safety staff. Paul Becker, con- more. They could do something to
economy, that mission can be struction practice leader at Willis, impact anyone on the job site.”
challenged. Risk management and North America, says he is uneasy McCarthy’s requirements in its
safety professionals see concern in about the trend among some con- subcontract agreements include
the industry about how to maintain tractors to give quality control and task hazard analysis. The company
safety in a business environment quality assurance duties to safety also requires regular reporting of its
where staff is expected to do more staff. In addition to helping stretch subcontractors’ incident rates.
with less. dollars, the trend reflects efforts to “A lot of subcontractors aren’t
address increasing concerns about used to this level of scrutiny, but
Doing More with Less construction defects. when they are finished with our jobs
Billy Miller, risk engineering chief “We see it more and more,” he and they see how it reduces their
construction officer at Zurich, says says. “Contractors want to better workers’ compensation, they are
the number one issue discussed address quality control and quality happy to adopt it,” he says.
with clients is how to cover more assurance, but the problem is that
exposure with fewer people. these are not QC guys—they are fun- Government
In some cases, contractors may be damentally life and safety people. Enforcement
using fewer laborers or tradespeople Their backgrounds and training have At the same time that some contrac-
to complete tasks than in the past. always been about worker safety, tors are trying to stay on top of safety
“We see people asking things like, proper controls and crisis manage- through a tough market, government
‘How many laborers do you need ment. If you ask them to do QA/QC, enforcement of safety has changed.
to move material from one spot to they often have to be retrained. Scott Trethewey, executive vice
another?’ and ‘Can you get by with They are stretched.” president of risk management and
less and still be safe?’” he says. finance at Moss & Associates,
“Maybe you can work with suppliers Subcontractors notes that under the Obama
about how to stage materials better In light of those issues, some administration, the Occupational
to help employees manage them. contractors are focusing more Safety and Health Administration
How you man jobs is coming under intensely on subcontractor safety. (OSHA) has changed its approach to
more scrutiny, and that feeds into Gary Amsinger, vice president safety enforcement.
safety concerns.” of safety at McCarthy Building, “They have moved from a
In response, Miller says, customers says the company has changed collaborative approach to an
are asking carriers for more services its safety practices considerably enforcement approach,” he says,
to help them train staff on these and introduced new guidelines for noting that OSHA has allowed
issues. “In some cases, they have subcontractors five years ago. During several of its cooperative Voluntary
fewer people than they need to figure the economic downturn, he says, Protection Programs to expire.
out how to solve these problems,” the company has put even more “OSHA is in the business of
he adds. emphasis on those policies. enforcement. The penalties for
“Years ago, when you [as a con- violations have escalated. They have
tractor] hired a sub, you worried gone on the offensive at a time when
about your guys and they worried people are already stretched.” n

Use of External Advisory Groups or Consultants

to Help Manage Risk
54% of the firms surveyed engaged an external advisory Construction Firms

group or consultant to manage risk for an infrastructure Contractors are most likely to engage external help,
project in the last five years. External experts can provide with 67% affirming that they have done so. The project
a wide range of services for a project, including perform- stage at which they are least likely to seek outside help is
ing independent risk estimates, helping engage and bidding/negotiating (25%)—significantly less than during
coordinate multiple stakeholders, and providing critical pre-design/design (38%) or during construction and post-
insight and knowledge to support a firm that is venturing construction (50%).
into a type of construction or geographical area in which Given the importance of the bidding/negotiating
it lacks experience. stage to these players, this result is surprising and may
The in-depth interviews with risk experts reveal that, be attributed to the concern about investing in risk
for the most part, firms hire external advisors to help assessment or mitigation until they have been awarded
manage risk on a project-by-project basis, rather than as a the project.
regular course of action (see page 19).
Cost Savings
Variation by Player 71% of the firms who engaged an external advisory
Owners group or consultant found that doing so resulted in cost
At 45%, owners report the lowest rate of using outside savings. The average cost savings they experienced is
expertise compared to other players. When they do 5% of the total project cost. Given the size of the projects
engage advisors or consultants, they most often do so in undertaken by the respondents to this survey, this trans-
the design and bidding/negotiating phases of the project. lates into millions of dollars in savings for all of those who
These findings confirm the general trend that owners report cost saving benefits.
are more concerned about assessment in the early stages
of a project than mitigation throughout the rest of the
project lifecycle.
A/E Firms
Half the A/E firms report hiring an external advisory
group to help manage risk. Nearly all who seek outside
expertise do so in the pre-design stages, although
they have relatively high rates for using external firms
throughout the construction life cycle. Reported use level
by project stage include:
• Pre-Design—83%
• Design—67%
• Bidding/Negotiating—50%
• Construction—50%
• Throughout the Project Lifecycle—33%
• Post-Construction—17%

Percentage of Contingency Set at Bid Time by Owners

Percentage of Contingency Set at Bid Time
The owners surveyed set an average contingency of (According to Owners)
9% when their projects are released for bids. However, Source: McGraw-Hill Construction, 2011
even with a very limited sample size, these results indi-

cate that the contingency set by owners is not consistent.
18% report that they do not set a contingency at all, and 18% 18%
another 18% report setting a contingency of 20%–25%. None
No respondents report set aside a contingency of more 1%-9%
than 25%. 10%-19%
Familiarity with the type of work proposed or the 36% 28%
20%-25%
firms involved in bidding, as well as past experiences in
general, may impact the level of contingency an owner
deems necessary. Contingencies serve as a way to pay
for risk, and this variation among the small group of
owners demonstrates that their appetite for paying for
the risks inherent in their projects varies.
Asses_Q8a
Variation of Contingency by Contract Type

According to Owners
Nearly all of the owners (91%) report that they vary Design-Build
their contingency by contract type. The contract type Respondents report an average contingency of 16% for
influences the amount of risk borne by the owner, and design-build projects. Design-build projects can reduce
it also can encourage practices that minimize risk like risk by providing the contractor with flexibility. They can
collaboration. also reduce owner liability. For an example of a project
in which a design-build approach significantly reduced
Design-Bid-Build
risk, see the case study on the Pentagon renovation on
Respondents report an average contingency of 20%
page 32.
for design-bid-build projects. Traditional design-bid-
build can result in an adversarial relationship between Construction Manager at-Risk
the key players on the project, reducing vital communi- Respondents report an average contingency of 7% for
cation about risks and the willingness to work with other construction manager at-risk projects. Construction
stakeholders to mitigate them. It also leaves the owner manager at-risk contracts typically have a guaranteed
more contractually exposed to risk than a design-build or maximum price, which pushes the risk of cost over-
construction manager at-risk approach. runs onto the construction manager rather than the
owner. This pricing approach may lessen the need for a
contingency.

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Flexible Team to Counter Risk

Pentagon Renovation Wedges 2–5
Arlington, Virginia
T
he initial schedule for the
renovation of the Pentagon

Wedges 2 through 5
was 12 years. However,
from the moment the design-build
contract was awarded to Hensel
Phelps two days after September 11,
2001, the project schedule, budget
and scope of work were thrown
into chaos. Despite that and other
significant challenges, the project
was eventually completed 14 months
ahead of schedule and $100 million
under budget. These successes
are due to the way that the project
team was selected, incentivized and
engaged throughout the project, a
strategy developed from the start to
help deal with risk.
Decision to Use
Design-Build
Diana Hoag, the contracting officer
and deputy project manager for
Wedges 2 through 5, states that,
until PENREN undertook this project, Grand staircase after the renovation
“the organization had never done
direct experience with construction. they were under budget, and
design-build.”
In his efforts to understand how customer satisfaction was through
The approach to the project was
to proceed, he realized that in the roof.” With those successes to
initiated by Lee Evey, the program
construction, cost and schedule guide them, they prepared a Request
manager who originally joined the
overruns are considered the norm. For Proposal (RFP) for Wedges 2
project for the Wedge 1 renovation.
He also faulted traditional contracts through 5 as one large design-build
He explains why he wanted a new
with too much attention on what contract.
Hensel Phelps Construction Company, Courtesy Design-Build Institute of America
approach for Wedges 2 through 5:
goes wrong and too little attention on
“When I came into the program,
there was several hundred million
how to award strong performance. Writing the Right
dollars of work being done in the
With these issues in mind, he Contract
decided to take a different approach Evey determined that contracts
basement and mezzanine areas.
to contracting the remainder of “are not a resolution for risk” in
The projects were all behind
the project. construction projects. Instead,
schedule and way over budget. The
Hoag explains that before he believed the most important
customers, in the areas we were
selecting a design-build approach for element is to “hire a good team, set
beginning to turn over, hated what
over $1 billion of work, she and Evey up a system to reward teams if they
we were providing to them. Congress
beta-tested the approach on two achieve your goals ... and express
was threatening to cancel the
smaller projects within their program your goals clearly and simply.”
program for poor performance.”
portfolio. “In both cases, the results Instead of creating typical
Evey came into the program with
were overwhelmingly positive: the bid documents totalling several
a background in acquisitions but no
projects were ahead of schedule, thousand pages as they had for
continued

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the first Wedge, the owner’s team

put together a 16-page RFP. Evey

explains, “Instead of giving all these
elaborate design drawings, specs
and standards that tried to foreordain
the future, we just communicated
what our requirements were.”
John Saul, the operations
manager for Hensel Phelps
Construction Co., the design-build
firm that eventually won the contract,
called the RFP “pretty unique ...
It was built around establishing
a relationship and processes. It
was really simple.” He states that Corridor after the renovation
the contract they were eventually
consistently achieving strong marks development and production of
awarded “gave us a lot of latitude to
in the subjective measures covered weapons systems. She applied that
be innovative.”
in the award fee. Also, the owner experience by developing a risk
Much of that flexibility came
would share in the burden of any assessment for the owner’s project
from the structure of the contract.
cost overruns if the rest of the team.
As Hoag states, “We used a very
contractor performance was In addition to having the owner’s
performance-based contract to give
consistently strong. team assess the risk involved in
the design-builder enough flexibility
Hoag explains the benefits of this Wedges 2 through 5, she also put
to deal with risks that materialize and
approach: “As opposed to a low-bid together a second risk assessment
unexpected events.” That flexibility
competition that results in a lump based on the input of firms identified
was accompanied by two incentives
sum contract where [the contractor] as likely bidders on the RFP, using
designed to encourage the design-
is basically out to protect themselves a computer system that allowed
builder to make its decisions with the
from losing money on the first day them to give input anonymously.
best interest of the project in mind.
that they begin the project, we used a Hoag reports that the result of these
First, the contract included an award
sharing arrangement that we thought risk assessments was to “create a
fee that allowed the design-builder
more equitably allocated the risks of statement of objectives, based on
a profit margin of up to 10% if it met
the project; we were willing to share where we thought the most risks
the goals outlined in the documents
in the overruns as well as underruns. were with the project. Then we
Hensel Phelps Construction Company, Courtesy Design-Build Institute of America
consistently. Hoag describes
We set up a very generous potential used those objectives to guide the
the purpose of this section as
profit, but we told them overtly, if you way that we selected the evaluation
incentivizing “subjective behaviors”
want to maximize, you have to align factors for the competition.”
because the design-builder would
your goals with ours.” The selection process also
be judged on how well it achieved
included an unconventional
the goals of customer satisfaction,
safety, quality, cost avoidance and
Incorporating Risk approach to evaluating the best team
schedule management.
Management into the for the job, especially the proposed
In addition to the award fee, the
Contractor Selection project manager. Typically, an RFP
contract documents included an
Process will describe the characteristics of a
When Hoag joined the Pentagon good candidate for that role. Instead,
additional cost incentive, whereby
renovation team, she brought Evey explains, the RFP described
the design-build team could share
a history of rigorous risk the characteristics of the project and
in the cost savings they were able to
management from her previous asked the firms competing for the
achieve, as long as they also were
work in procurement around the project to explain why their choice
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of a project manager was the ideal overlapping phases. This approach made them “highly incentivized to
person to meet those requirements. created immense programming make the right decisions that were
He reports, “Interestingly, project challenges, which Hensel Phelps in the best interest of the job.”
managers were proposed that tackled by taking ownership of all Other strategies employed by
in some cases we would never programming aspects before the Hensel Phelps to manage risk
have seen,” and he believes that work began. “We had a million included surveying tenants after
the candidates identified were a square feet under construction at any they moved into the space so that
“significant factor for consideration one time,” says Saul, “and our job they could increase customer
in the award.” was to build that space to the needs satisfaction on later parts of
In the end, the ability to take of the tenants but at the same time the job. In fact, one benefit they
advantage of the flexibility offered remain invisible” to avoid disrupting derived from being engaged in the
by the contract to innovate was a the work at the Pentagon during the full 10-year contract was the ability
major factor in the final contractor construction period. to learn lessons as the project
selection. Hoag describes how they For him, one critical strategy was advanced. Saul affirms, “We
cautioned the bidders that “this for Hensel Phelps to get actively built Wedge 5 faster than any of
contract is supposed to go for 10 involved in redistributing the the others because of all the
years; nobody can predict what it is tenants while spaces were under lessons learned.“ n
going to be like next year.” With the construction. He explains that for
selection of Hensel Phelps, she was every half million square feet they
confident that they had found “a worked on, “there could be 4,000
Project Facts
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design-build partner that could roll people that needed to be relocated.”
at
and Figures
s
with the punches.” In order to maintain their aggressive
schedule, they devoted time and Owner
PENREN / Washington
Risk Management resources to make sure they could
Headquarter Services
through the account for the relocation of all the
Construction Process current occupants before starting a Design-Build Firm
Hensel Phelps Construction Co.
When the airplane struck the new section.
Pentagon two days before the During construction, the reviews Architect
Shalom Baranes Associates
contract was awarded, it turned created because of the award fee
out that flexibility was critical. Not incentives proved highly valuable. Design/Build Contractors
only was there new work because Evey argues that the monthly reviews Electrical: M.C. Dean
of the damage, but soon Congress were critical to keep the owner team Mechanical: Southland
requested that the project be highly engaged. Saul states that Fire Protection:
accelerated to 10 years rather than what really impressed him was “that National Fire Protection
the original 12. Hoag describes the they didn’t just grade us. They would Interior Designer
experience as chaotic: “Instead say that these are our strengths, Studio Architecture
of starting off on this very well- weaknesses and recommendations Sustainability Consultant
planned and very methodically for improvement ... You got constant Heller & Metzger
placed contract, we immediately feedback from the customer on how Total Square Feet
started thinking about how we they felt you were managing the 4,500,0000
could change it.” project, and based on that, we would Project Cost
Saul explains that Hensel Phelps make course corrections.” He credits $1,667,000,000
had originally planned to do one the combination of the flexibility Construction Start Date
wedge at a time, but to make the allowed by the contract with the September 14, 2001
reduced project schedule and steady owner feedback as key to the Completion Date
increased scope of work viable, project’s success in managing risk, February 11, 2011
they resequenced the job to be 17 stating that the award fee system

Data:Triggers, ObstaclesTrig_Q3b
and Influencers
for Investment in Risk Management Practices
Triggers for the Adoption of Risk Management Practices

Triggers for Risk Mitigation Adoption
There is no single factor in the marketplace currently
driving the adoption of risk management practices. Two

thirds of the respondents indicate that all eight triggers Some Impact
listed in the survey have at least some impact on a firm’s Large Impact
investment in risk mitigation. Need for Greater Project Profitability in a Down Economy
Construction risk is highly complex, influenced by
34% 46% 80%
internal and external factors, practices and contracts. It
impacts project cost, schedule and quality, as well as firm Increased Litigation Cost
reputation. Therefore, it is not surprising that firms would 6% 71% 77%
be influenced in their adoption of risk management prac-
Internal Champion for Risk Management
tices by a broad range of triggers.
31% 43% 74%
The trigger that has the greatest overall impact and the
trigger that has the most significant impact both demon- More Widely Available Information on Successful Risk Strategies
strate the importance of controlling costs. 40% 34% 74%
Largest Overall Impact: Need for Greater Project
■■ Demand for Greater Transparency on High Value Projects
Profitability in a Down Economy (80%) 29% 43% 72%
• With projects becoming increasingly competitive, many
Greater Availability of Risk Management Tools and Technologies
firms need to shave their profit margins to win work and
can no longer afford to pay for risk through insurance or 37% 34% 71%
higher costs rather than by investing in mitigation. Greater Availability of Risk Management Experts
• This factor is considered to have more impact by 26% 43% 69%
A/E and construction firms than it is by owners.
Increased Concerns About Different Types of Risks Versus the Past
Most Significant Impact: Increased Litigation Cost
■■
37% 29% 66%
(71%)
• Litigation is expensive for all parties involved, from the
time it costs the project teams to the impact on a firm’s
reputation.
• This is considered a key driver by all three player
groups.
Variation by Player
Owners
Owners are most influenced by external pressures greater availability of tools and technologies for risk
and availability of risk mitigation expertise. Two of the management. This suggest that A/E firms think the indus-
most influential drivers for owners are greater avail- try sees the need for risk management but that more
ability of experts/consultants/personnel that specialize knowledge and better internal practices to encourage
in risk management, and demand for transparency on greater adoption are required.
high-value projects. Owners feel that public pressure
for greater transparency is driving their adoption of risk Construction Firms
management, and they feel they need greater expertise Construction firms are influenced most by pressure to
to manage this challenge. adopt risk management practices. They report that exter-
nal pressure and internal firm leadership would have the
A/E Firms most impact on the industry adopting higher levels of
A/E firms are most influenced by internal factors. Impor- risk mitigation strategies. The largest percentage of them
tant triggers for A/E firms include more availability of select the need for an internal champion and the demand
experts/consultants/personnel that specialize in risk for greater transparency as having a high impact on risk
management, presence of an internal champion, and management adoption in the industry.

Triggers, Obstacles and Influencers for
Investment in Risk Management Practices TRIG_Q3a1
continued
Obstacles to the Adoption of Risk Management Practices

Obstacles to Risk Mitigation Adoption
The top four obstacles reported by over 70% of respon- Source: McGraw-Hill Construction, 2011
dents reflect two major impediments to greater risk

Some Impact
management in the construction industry—insufficient
Large Impact
information and the perceived economic viability of
investment in mitigation. Lack of Cooperation/Information Flow Between Partners and Clients
37% 40% 77%
Insufficient Information
Lack of Knowledge About Risk Mitigation Strategies
There are two types of knowledge necessary to
mitigate risk—what risks you face and what you can 31% 43% 74%
do about them. Greater Competition Among Bidders
■■Lack of Information between Partners and Clients 17% 54% 71%
Risk assessment and mitigation is impossible without Lack of Awareness about the Cost of Risk
accurate, complete and timely information, even if that 31% 40% 71%
information reveals mistakes or flaws in the project
management by the team or the client. Cooperation Lack of Construction Industry Investment in Risk Management
is also important to gain sufficient knowledge and 23% 43% 66%
flexibility to mitigate risks. Excluding Risk Factors That Challenge Project Viability
■■Lack of Knowledge about Risk Mitigation Strategies 29% 37% 66%
Even among the respondents to this survey who,
Firm/Client Culture Does Not Embrace Risk Management
due to their involvement with high-value infrastruc-
29% 31% 60%
ture projects, have a relatively robust approach to risk
management, risk assessment strategies are more Lack of Established Industry Risk Management Standards
widely adopted than risk mitigation ones. The industry 20% 34% 54%
still needs greater knowledge and expertise about how
to manage risk.
Lack of Awareness about the Cost of Risk
■■
■■Lack of Awareness about the Cost of Risk
Lack of full awareness of the costs of risks inadequately
In many ways, paying for risk is common practice,
mitigated prevents some firms from recognizing the
such as through insurance and contingencies. It is not
business case for investing in risk mitigation.
necessarily common practice to view those costs as a
business impact of risk. Also, without metrics gauging
the impact of risk across projects, it is difficult to
Variation By Player
A/E Firms
determine the exact cost a firm faces from its
The top risks for A/E firms all reflect concerns about
exposure to risk.
sufficient knowledge—Lack of awareness about the
cost of risk (58%), lack of established industry standards
Perceived Economic Viability for evaluating and managing risks (50%) and lack of
Unless risk is fully understood and prioritized
knowledge about risk mitigation strategies (50%).
by a company, resources will not be provided
for mitigation.
Construction Firms
■■Greater Competition among Bidders The fact that 92% believe that greater competition among
Identified as the most impactful by the largest percentage of bidders is a major obstacle demonstrates their concerns
respondents, this obstacle reflects the influence of difficult over the impact of the economy. As they do with the
economic times with shrinking profit margins, where firms triggers, contractors also see internal leadership being
bidding on projects may view risk management as a luxury needed to increase involvement in higher levels of risk
they cannot afford. Also, firms pushed to find profit may put management. The only other category that over 50%
factors like schedule and quality at risk, which may explain find highly impactful is the lack of investment by firms in
the high level of owner concern in this area. evaluating/managing risk.

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I-15 Corridor Reconstruction
Utah County, Utah
I
n order to be competitive for In response, instead of focusing that they wanted to deliver on the
the design-build contract for on offering the lowest price, Fluor two high-performance items, many
the I-15 highway reconstruction concentrated on delivering the of those risks were heightened.
in Utah, Fluor Enterprises and highest level of performance Understanding what those risks
its partners promised the owner an possible for the owner. According entailed and knowing that they could
aggressive schedule for completion, to Tuhr Barnes, the project director devise strategies to mitigate them
as well as minimal disruption to the of the I-15 project at Fluor, their properly made it possible to submit
flow of traffic. Their approach to risk competitive advantage came from the winning bid.
management before the bid and two decisions with a high impact One strategy they employed
during construction allowed them on project risk. First, Fluor offered during the bid process was having
to make these commitments. As of to “maintain the same number of their three partners do independent
early November 2011, the project was lanes during construction that were estimates in their expertise
70% complete, and their approach there prior to construction,” even areas. Stevens explains that the
has helped them to achieve the though that was not included in the appropriate process is necessary
ambitious goals they set. project requirements. In addition, for this approach to be effective: “If
they proposed an aggressive overall you have pre-specified the kind of
Formulating a construction schedule, completing breakdown that you want each party
Competitive Bid design and construction worth $1.1 to utilize, you can see deviations
Instead of asking bidders to billion dollars in under 36 months. and reconcile them.” He credits this
provide the lowest price, the Utah The entire bid team worked process with helping Fluor to ensure
Department of Transportation (DOT) together to determine this strategy that they accounted for the project’s
took an unusual approach to the after a careful look at the risk major risks and, just as importantly,
bid. Mark Stevens, leader of Fluor’s involved in the project. Barnes points created opportunities to draw on the
corporate risk group, explains that out that the project faced all the usual expertise of their partners to take a
the Utah DOT provided its budget up risks of a large design-build fast-track more efficient or better approach to
front and asked bidders, “How much highway project, including schedule, elements of the project.
can you give us of what we want at productivity and execution risks.
that budget?” Moreover, once they determined
continued
Aggressive scheduling on the

project necessitated strategies
such as working at night.
Photos Courtesy of the Utah Department of Transportation

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Mitigating Risk Mitigating the under construction at once. “One

in the MOT Plan Aggressive of the comments we got repeatedly

Once they won the contract, Fluor Schedule Risks from the public,” Barnes explains,
had to execute effectively the main- According to Barnes, the firm had to “was when this project started, [we]
tenance of traffic (MOT) plan they plan for “inefficiencies caused by the started everywhere ... You can see
had proposed. This element of their accelerated nature of the schedule,” construction crews all the way up
bid was of particular value to the and include them in their bidding and down all 24 miles.” This required
owner because there is no practi- and early design process. Those intensive efforts in initial stages of
cal detour for this route. However, inefficiencies included: the project.
once they won the contract, Barnes Fluor’s efforts to mitigate this
■■Labor: The large field crew
explains, “Failure to maintain our risk were aided by the Utah DOT’s
increased the number of
MOT plan would subject us to liqui- decision to lease office space
inexperienced workers.
dated damages.” that housed the design team, the
Because they knew the exact ■■Equipment utilization: They paid construction team and the owner’s
budget they were working with for extra, underutilized equipment team in one location. Barnes credits
during the bid, they were able to take to make sure that work could be that setup with improving their
the extra cost of keeping these traf- completed on multiple sections at ability to get this complex project
fic lanes open into account during once without schedule impact. “organized and moving in the first
the pre-bid process. That extra cost six to nine weeks.” This assisted
■■Materials: Materials were delivered
included providing temporary pave- with timely decision making, which
at night to minimize the impact of
ment and temporary bridge wid- Barnes considers key to a successful
traffic congestion.
enings so that traffic flow could design-build project. n
continue with little interruption. In order to complete the project
on the proposed schedule, many
Project Facts
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sections of the highway had to be
at
and Figures
s
Design-Build Team
Fluor Enterprises (Team Leader)
Ames Construction Inc.
Ralph L. Wadsworth
Construction Company, Inc.
Wadsworth Brothers
Construction , Inc.
Owner
Utah Department of
Transportation
Type of Project
Highway Reconstruction
Photos Courtesy of the Utah Department of Transportation
Size
24 Miles
Value
$1.1 billion
Construction Start
January 2010
Completion
December 2012
Temporary lanes were added to avoid disrupting the flow of
traffic during the project.

Triggers, Obstacles and Influencers for
Investment in Risk Management Practices continued
Departments Involved in Risk Management
At least 50% of all respondents report most major The high level of involvement reported by the A/E firms is
departments in their firm are involved with risk consistent with the owners’ high level of engagement in
management. This includes eight different types of risk planning during the design stage.
departments, including teams directly involved in the
project, senior leadership and finance. A/E Firms
This result demonstrates the importance of a wide The departments identified by the largest percentage:
range of input beyond the project team to best mitigate • Project Management: 75%
the impacts of risk. The varied perspectives are critical, • Engineering Personnel/Team: 75%
as is buy-in from senior leadership. • Vice President/Division Head: 67%
• Architect/Design Personnel/Team: 67%
Variation by Player
Owners Construction Firms
Key owner departments involved in risk management: Departments with the highest level of involvement:
• Project Manager/Project Team Management: 91% • Project Management (100%)
• Engineering Personnel/Team: 82% • Vice President/Division Head (100%)
• Director or Other Senior Management: 73% • C-Level (92%)
• Architect/Design Personnel/Team: 73% • Director or Other Senior Management (92%)
• Estimating Team (92%)
They are far less engaged with engineering or architect

teams, suggesting they rely most on internal expertise.
Key Influencers for Investment in Risk Assessment

and Mitigation
Project managers and firm leadership are the two Players with High Influence on
biggest influencers for investment in risk mitigation for
Firm’s Risk Mitigation Investment
(By Percentage of Respondents Who Find Them Influential)
respondents at their firms—both selected by 80% as
highly influential. Project managers have final responsi-
bility for prioritizing risk management in their individual Project Manager
projects, while firm leadership determines the overall 80%
investment firms are willing to make in mitigation.
Firm Leadership (CEO, CFO, etc.)
80%
Variation by Player
Owner/Client
A/E Firms: Owner/clients are critical influencers for A/E
■■
71%
firms in particular (selected by 83%).
Design Team
Contractors: The greatest influence by far is firm lead-
■■
57%
ership (92%), while owners/clients are less critical
(58%). This is consistent with the fact that contractors General Contractor
look inward for leadership on risk mitigation. 35%
Third-Party Consultants
Owners: A larger percentage of owners are influenced
■■
by the design team (64%) than by the general contrac- 23%

tor (45%). Since the majority of risk assessment by
owners is conducted during the design stages, it is
logical that the A/E firms would carry more influence.

Sidebar: Health Care Sector
Risk Management in the Health Care Sector

Constant change and the need for flexibility make managing the risk
of constructing health care facilities particularly challenging.
S
ignificant project com- build universal spaces and grid days, Noonan says.
plexities coupled with the structures that allow for different “Underwriters seem to clearly
ever-changing programmatic sets of procedures.” prefer when the general contractor or
requirements of the indus- For contractors, health care construction manager is the sponsor,
try cause health care facilities to rank projects present a variety of because they have day-to-day
among the most difficult building challenges. Beyond standard control of the project,” he says.
types to construct from a risk man- MEP systems, hospitals typically
agement perspective. house a broader range of systems, Joint Ventures
such as gas lines and additional IT In recent years, many health care
Programming and infrastructure. All of these need to megaprojects requiring joint
Construction Challenges be tightly coordinated within ventures have broken ground
Delivering a state-of-the-art facility is available space. around the country. “That can
a highly dynamic process. The health Additionally, existing and neigh- add some complexity,” Beck
care industry steadily introduces new boring facilities are a concern, says says. “You’ve got to have clear
technologies and treatments that can Bill Noonan, vice president of risk partnering sessions to determine
change a hospital’s programmatic management at Structure Tone. roles and responsibilities,” he says.
requirements. A major hospital proj- “In health care, you’re dealing with “The risk resides in the quality of
ect can take three to five years from a project that is typically in, around communication and role clarity.”
planning to completion, during which or next to an occupied building,” he
time owner demands may change to says. “Projects may be in or around Mitigation Strategies
ensure that the latest technologies buildings that house people whose In light of the recession, program
are installed. immunity levels are lower. The stan- managers like Navigant keep a close
“Integration of technology in dard of care has to be at an extremely eye on financials, Campobasso
health care is the most challenging high level.” says. “You need to be vigilant about
risk to manage,” says Christopher cash-flow-troubled suppliers and
Beck, vice president of risk Insurance Programs subcontractors,” he says. “These
management at Turner Construction. To help manage risk, consolidated days, you need to sharpen your
“On a multiyear project, the most wrap-up insurance programs are reporting and processes to avoid
important thing is staying in tune often used. It is not uncommon to unnecessary risk.”
with the client to deliver the facility see owner-controlled insurance pro- The move toward modularization
they need at the delivery date. The grams (OCIPs) on health care proj- (see MHC’s Prefabrication and
facility they thought they needed in ects, particularly among large Modularization SmartMarket
the beginning may not be the one owners with in-house design and Report) also helps project teams
they want at the end.” construction staff. address risk, Beck says. Building
For owners, mitigating those risks “Really sophisticated owners elements, such as bathrooms,
requires proper budgeting at the understand the risks,” says Ed Little- can be built as modular units in a
front end of the project coupled with ton, vice president of risk manage- controlled environment, which, he
a design that allows for flexibility, ment at Balfour Beatty Construction. says, improves safety, accelerates
says Fred Campobasso, managing “It’s typically not a one-off situation schedules, provides uniformity and
director of the health care real estate for them. We feel comfortable with reduces product damage.
practice at Navigant Consulting. an OCIP in that situation.” “Modular construction lowers
“Budgets are very sensitive, However, some owners and insur- the risk profile from a construction
but you have to balance that with ers appear to favor contractor-con- defect and safety standpoint,”
flexibility,” he says. “You need to trolled insurance programs these he says. n
SmartMarket Reports McGraw-Hill Construction 40 www.construction.com

Sidebar: Global Construction
Risk Management for Global Construction

International work entails special risks and requires
a more rigorous approach to manage them.
W
ith the recession still someone who has been successful in changing dynamics of areas with a
reducing construction that market.” lot of unrest.”
opportunities in the The key to doing business in this
U.S., companies DO YOUR DUE DILIGENCE region, according to Debs, is forming
are seeking opportunities abroad. It is critical to understand the busi- good relationships. “Frequently,
Five experts on global construction ness customs and requirements of relationships determine how
risk reveal some best practices for the region you are in. Pierson says, [contracts] are enforced and how the
working internationally, as well as “Every time I’ve seen a company project will be implemented, so you
insights into a few specific regions. be unsuccessful in a new region, it need to focus on long-standing and
The five experts interviewed is generally because they didn’t do deep relationships.”
included George Pierson, CEO at nearly enough homework to under-
Parsons Brinckerhoff; Mike Kirchner, stand how business is done locally.” China
deputy director of risk management, Pollard points out that it is also As with the Middle East, Pierson
and Jody Debs, enterprise risk essential to understand everyone emphasizes the critical nature of
manager, at CH2M Hill; and Nicholas you do business with—clients, establishing long-term relationships
Pollard, COO EMEA & AsiaPac, suppliers, partners and funders. in China. He states, “Often, you need
and Michael Stokes, managing to attempt to work together several
director MENA region, at the global Middle East/North Africa times before you actually do, in order
construction practice at Navigant The credit crunch is a major risk in to build the level of understanding
Consulting. this region. Stokes says, “There are and trust that can cross cultures.”
still many of examples of projects The other critical issue in China
Best Practices for stopping halfway along when clients is avoiding corruption. According
Managing Risk When realize that a project is no longer to Pierson, “China is one of those
Working Abroad viable, or has run out of cash.” Debs countries where one has to be
NO BUSINESS AS USUAL and Stokes also caution that there quite careful about how one
Pollard states that firms must may not be good avenues for dispute conducts business to make sure
accept that, “if you just do things as resolution if a firm ceases to be paid. it is consistent with your own culture
normal, you won’t succeed.” Pierson Stokes points out that culturally, and ethics code.”
cautions, “People underestimate a lack of transparency in business
the different systems, the different affairs is common, making due Europe
problems that they may encounter in diligence challenging in this region. As with the Middle East, the
a [new] jurisdiction.” He adds, “The The Arab Spring has also created economy and the stability of work are
worst mistake a company can make unique challenges. Debs points out the largest issues currently in Europe.
is to go to a new region and try to that this is an issue both for the safety Pollard points out that, given the
impose its [home] country’s business of a firm’s employees and for “the problems with the euro zone, there is
practices straight across.” status of your contracts.” Contracts “little appetite for investment.”
in this region are typically with a However, he states, there are also
FIND A GOOD LOCAL PARTNER government, so active projects may “odd glimmers of light where people
All consider a good local suddenly face a new government are spending money,” such as the
partner essential to conducting “that might not have the stability, London Underground. However,
international business. Debs even the systems or the processes that intense competition for work leads
recommends going into a region as the former government had.” For to greater risk because, “in desperate
a subcontractor for the first time, “so Debs, the situation warrants paying times, people resort to desperate
you can have a chance to learn with attention “on a daily basis to the measures.” n

Data:Impact of New Practices
and Technologies on Risk
Impact of BIM on Construction Project Risk

Impact of BIM on Construction Project Risk
71% of respondents believe that using building Source: McGraw-Hill Construction, 2011
information modeling software (BIM) will decrease

risk on construction projects. Only 6% believe it will
increase risk.
The Business Value of BIM SmartMarket Report
71%
demonstrated that using BIM improves project 6%
Decrease
outcomes, reduces rework and increases project profit- 23% Increase
ability. A project team working in BIM can reduce clashes, No
Impact
thus avoiding costly delays and improvised solutions on
the job site. Using BIM also encourages a more detailed
and extensive design process, which increases the like-
lihood of identifying and assessing risk during design.
Inexpensive mitigation solutions can be determined performance, which is particularly important when a
better in the design phase than during construction. BIM building is mandated to achieve sustainability goals.
use also helps with more accurate budget and schedule Most experts on BIM believe that its greatest value is
estimates for the project. as a tool that helps integrated teams work more effec-
The Green BIM SmartMarket Report revealed that tively on projects. See page 44 for more information on
modeling tools in BIM help achieve better building how integrated teams help decrease design risk.
Impact of Public-Private Partnerships

on Construction Project Risk
Impact of Public-Private Partnerships on

54% believe that using a public-private partnership (PPP) Construction Project Risk
will decrease the risk faced by a construction project. Source: McGraw-Hill Construction, 2011
PPPs for infrastructure projects involve private entities
designing, constructing and/or operating major infra-
structure assets owned by public agencies.
In the U.S., PPPs are a relatively well-established prac-
tice for water infrastructure, but they are still emerging as
54%
a practice for transportation infrastructure, such as high- Decrease 26%
ways, airports and ports. With a large portion of the U.S. No 20%
transportation infrastructure aging and a strong need for Impact Increase
new capacity, especially in dense urban areas, significant
funds are needed to keep U.S. infrastructure functioning
effectively. However, finding that funding is a challenge
faced by the industry.
Concerns are especially high currently as critical trans- capital. However, use of PPPs for transportation infra-
portation funding legislation has stalled in Congress, structure has been bogged down in some regions by
leaving an unclear portrait of future funding levels for political concerns about the cost of allowing private
infrastructure projects. This political gridlock at the investment in infrastructure, especially the fear of high
federal level, combined with budget shortfalls at the state tolls and fees. States like Texas have struggled with
and local levels, is leaving most of the industry in doubt strong debates about the benefits and drawbacks of
about the levels of future funding for infrastructure work. PPPs. This political debate may account for why a portion
PPPs have been proposed as one solution to the (20%) of the respondents consider PPPs to increase risk
funding shortfall, with their ability to mobilize private on construction projects.

Impact of New Practices and Technologies on Risk continued
Impact of Using Integrated Teams

on Construction Project Risk
Impact of Using Integrated Teams on

77% of respondents believe that using integrated teams Construction Project Risk
on construction projects reduces risk. Integrated teams Source: McGraw-Hill Construction, 2011
help address or eliminate several factors associated with

risk in construction:
Design Completion: An integrated team typically

■■
engages all major players during the design phases,

77%
resulting in a more complete design. Decrease 6%
17% Increase
Better Communication: Integrating the team helps
■■ No
ensure better communication among players. Trans- Impact
parent, accurate and timely communication is an
important best practice for reducing risk on construc-
tion projects.
Project-Focused versus Firm-Focused: Proponents of

■■
integrated teams report that in a successful team, all

members focus on how decisions impact the success
of the project as a whole rather than just the compo-
nent for which they are responsible. This not only
decreases the risk of schedule delays and cost over-
runs, but it also allows for better resolution of issues
before they become disputes.
Shared Liability: When the integrated team approach

■■
is formalized into an integrated project delivery (IPD)

contract, the team as a whole shares liability for the
project. Even when that formal relationship does not
exist, the increased involvement of all team members
at all stages makes the members more liable for all
components.
For more information on integrated project teams and

collaboration, please see the sidebar article on page 44.

Sidebar: Collaboration and Integrated Design
Using Collaboration and

Integrated Design to Reduce Risk
Collaboration and integrated design are considered by some to
be the best approaches to improve building performance, avoid
disputes and litigation, ensure the vision for the project is sustained
throughout, tackle challenges on large, complex projects, and
achieve project completion on schedule and on budget.
C
oncerns about productivity Formal IPD Contracts SHANGHAI TOWER, CHINA
increases and cost savings, Despite these benefits, some indus- The project featured a complicated
as well as the desire try professionals think participants dual façade. Because the consul-
to improving building in this process are inadequately pro- tants and curtain wall manufac-
performance, have encouraged tected from risk. Traditional con- turers were engaged early in the
project teams to take an integrated tracts typically assign specific risks to process, the façade became less
approach to design and construction. specific parties, assuming an adver- costly and quicker to build than orig-
sarial relationship among the team inally estimated. The design team
Adopting an Integrated members, and insurance compa- also reported that their sustainability
Design Process nies underwrite the risks taken on by and performance goals were easier
It is critical to engage key disciplines firms based on those assignments. to achieve because they engaged the
and stakeholders as early as possible In order to reconceptualize the engineers and contractors early in
in the project’s lifecycle to reap the shared risk of integrated design, in the process.
benefits of a collaborative approach. 2010 the American Institute of Archi-
PALOMAR MEDICAL CENTER
Early participation allows the tects (AIA) and ConsensusDOCS
WEST, ESCONDIDO, CA
project to benefit from the expertise introduced model Integrated Project
The project team considered the
of the entire team when creating Delivery (IPD) contracts. An evalu-
BIM-enhanced integrated design
the initial design. More importantly, ation of these documents in Archi-
process a green design process.
successful collaboration results in tectural Record magazine raises
They emphasized the importance
the team sharing the same vision questions about how well the doc-
of getting buy-in from the entire
and definition for the success of uments protect the participants
team on the sustainability goals.
the project, from cost and schedule against potential claims. The article
In addition, input from the steel
achievements to sustainability goals. also questions the protection of intel-
subcontractor substantially changed
Collaboration is most effective lectual property rights under these
a key design element, a long-span
when the participants prioritize what agreements and points out the chal-
green roof with a rolling design,
is in the best interest of the project lenges of finding insurance without a
which saved time, money and
as a whole rather than what is in traditional contract.
raw materials.
the best interest of their individual Adoption of these documents has
firms. Some industry players report been limited, even on projects taking TEXAS HEALTH HARRIS
that convincing firms new to an a collaborative approach. Precedents METHODIST ALLIANCE
integrated approach to adopt this in the courts will be needed before HOSPITAL, FORT WORTH, TX
mind-set is their biggest challenge. the effectiveness of IPD contracts can An integrated approach allowed
Because the risks of the project are be fully understood. the project team to explore time-
seen as risk shared by the team as a and money-saving opportunities,
whole, most successful integrated Success Stories such as the use of prefabrication.
design teams experience far fewer Case studies from previous Metrics tracked by the owner, Texas
formal disputes than traditional McGraw-Hill Construction Smart- Health Resources, demonstrated
project teams. Market Reports demonstrate the that using an integrated team led to
benefits of adopting an integrated “more value, quicker work and fewer
design process. change orders.” n
1
Novitski, B.J. “IPD Contracts: Ready for Prime Time?” Architectural Record. 1 October 2010. p. 49.

ca
se
st
ud
y
Managing Risk Through Effective Coordination
World Trade Center 2,3 and 4
New York, New York
T
he new World Trade Center
office towers are part of a

larger public-private part-
nership to rebuild the
entire complex. Multiple stakehold-
ers, including Silverstein Properties,
the Port Authority of New York and
New Jersey, the Metropolitan Tran-
sit Authority (MTA) and the Memorial
Foundation, not only had to agree
on a master plan but coordinate con-
struction on the 16 acre site, with the
infrastructure elements impacting all
of the other projects.
While the project faced signifi-
cant risks due to the length of the
construction schedule, the degree
of public scrutiny and the eco-
nomic upheavals in the local leasing
market, the risk inherent in the coor-
dination of the project has been the
most challenging and impactful.
Coordination efforts have included
building consensus among the
diverse stakeholders as well as pro-
viding an effective environment for
the large project team to communi-
cate efficiently. For the stakeholders,
arbitration during the early stages
of the project led to an approach Construction at the World Trade Center site.
to coordination that has helped to
building in isolation.” All of Silver- “The biggest challenge was the coor-
identify and eliminate problems
stein’s three office towers rest on dination of the infrastructure proj-
and avoid major impacts on sched-
infrastructure that the public part- ects with the towers, trying to get the
ule and cost. For the project team,
ners—the Port Authority and the public entities to support the con-
a simple but innovative approach
MTA—are responsible for, thus struction schedule of the towers.”
has improved the ability to iden-
requiring intensive schedule coordi-
tify problems, create solutions and
Photograph by Joe Woolhead courtesy of Silverstein Properties
make decisions quickly—a key factor

nation. Worsley describes the impact The Need for
when constructing three skyscrapers
of the infrastructure and other public Stakeholder Alignment
construction on site as “add[ing] a Creating stakeholder agreement
simultaneously.
level of complexity to the planning ... proved to be a drawn-out and chal-
that you wouldn’t normally have” in lenging process, the result of two
Interrelated a private office project. In fact, David arbitration processes. Bruce Ficken,
Infrastructure Tortorello, managing director of the a partner with the law firm Pepper
As David Worsley, the senior vice
global construction practice for Nav- Hamilton LLP, which represents Sil-
president and director of construc-
igant, the consultant brought in by verstein Properties, affirms the
tion for Silverstein Properties,
Silverstein to coordinate the proj- importance of stakeholder align-
observes, “We [Silverstein] are not
ect among the stakeholders, affirms, ment for a public-private project:
continued

y
ud
World Trade Center 2,3 and 4
st
ed
se
New York, New York
u
n
ca
ti
n
co
“Until the interests of the public enti- sharing specific, detailed logistical for an e-mail reply or the next meet-
ties are aligned with the interests of risks, even years ahead of actual con- ing. This seemingly simple solution
the private entities so that they both struction, was essential to garner the helped them “get around the logis-
have the same priorities for schedule, necessary support of the other stake- tics of the design phase” and make
budget and concept of the project, holders. For example, a delay in the prompt decisions. n
there will be conflict, and it will hurt subway line would affect the comple-
the project.” tion of the office buildings by impact-
Project Facts
st
The challenge of aligning the inter- ing the utilities, the electrical service,
and Figures
at
s
ests of the Port Authority, an agency the emergency evacuation routes
funded by two different states with and even traffic in and around the Owner/Developer
World Trade Center
their own agendas, the MTA, the site. “[Frequent risk reviews] opened Properties LLC (Affiliate of
Memorial Foundation and Silver- everyone’s eyes to say, ‘Wow, that Silverstein Properties)
stein Properties was further compli- really is going to be a problem’ and
Architect
cated by changes in leadership at the allowed them to circumvent poten- 2 WTC: Foster + Partners (UK)
public agencies through the course tial delays before they occurred,” 3 WTC: Rogers Stirk Harbour +
of the project. According to Worsley, according to Tortorello. Worsley Partners (UK)
“Through the course of the last six or points out that the coordination was 4 WTC: Maki and Associates
seven years, we’ve gone through four detailed enough to “make sure a con- (Japan)
governors in each state of New York crete truck can make it through the General Contractor
and New Jersey. [The] fifth executive Brooklyn Battery Tunnel and to the 2 WTC: Turner Construction
director of the Port Authority is about job site in the allotted time, [which 3 & 4 WTC: Tishman
to be appointed, and the people even] involved the New York Police Construction
[associated with the leadership Department to make sure there were Risk Consultant
changes] cause some discontinuity in no unnecessary traffic issues.” Navigant
the decision-making process.”
Attorney Representing
Coordinating the Silverstein Properties
Risk Mitigation Project Team Pepper Hamilton LLP
through Stakeholder In addition to coordinating with Wachtell, Lipton, Rosen & Katz
Coordination their public-sector partners, Wors-
Project Schedule
For Tortorello, “the most important ley also credits the coordination
2 WTC: Building’s superstructure
part [of coordinating the stakehold- of the project teams for minimiz- began June 2010—Completion
ers] was to develop a communi- ing risks and improving efficiency contingent on securing tenants
cations channel that would allow on the three office towers. Because 3 WTC: Foundation reaches
real-time information to get to the dif- of the infrastructure component, he ground level December 2011—
ferent stakeholders.” To accomplish observes, “The design coordina- Building opens end of 2014/
this, a task force was created to per- tion on a technical level was incred- early 2015
form risk reviews. After the second ibly complex.” In response to that, 4 WTC: Steel tops out Spring
2012—Building opens Fall 2013
arbitration, these reviews were con- Silverstein created a design studio
ducted semi-annually rather than floor in their offices at 7 World Trade Stories
sporadically. Center that housed all the architects 2 WTC: 88
Tortorello explains that stakehold- and engineers on the project. Wors- 3 WTC: 80
ers were each asked to identify the ley explains the benefits: “Having 4 WTC: 72
critical risks for their projects. Those everybody work in the same room Square Feet
risks were then combined “to deter- was a huge benefit to mitigating the 2 WTC: 2.8 million (rentable)
mine where the biggest risks are risk of design miscoordination and 3 WTC: 2.5 million
going to be in the total program con- schedule slip.” Questions could be 4 WTC: 2.3 million (rentable)
struction.” They discovered that answered directly, without waiting

Data:Litigation
Common Causes of Claims and Disputes
on Infrastructure Projects
Common Causes of Disputes on

Factors impacting how and when work is done during Infrastructure Projects
construction are identified as causes of disputes far Source: McGraw-Hill Construction, 2011
more than contractual terms and payments.

Changes in Scope of Work
Changes in scope of work, alterations to schedules, and
60%
technical issues related to design and construction were
each selected by 40% or more of the respondents. Schedule/Time
A few best practices from the experts in the in-depth 48%
interviews (see page 19) can help minimize the risk of Technical/Design Issue
these factors occurring: 40%
• All members of the project team need to share the
Contractual Terms and Conditions
same priorities and goals.
• Good communication is required to provide all team 32%
members with an accurate and full understanding of Construction Materials
project status throughout the project lifecycle. 24%
• Design should be complete before construction begins. Payment
Integrated teams may be one solution to help achieve 12%
these goals. Labor Disruptions or Productivity
For more information on recommendations to avoid 8%
litigation or claims, please see page 23.
Variation by Player
Owners Construction Firms
In addition to changes in scope of work, more owners The largest percentage of contractors feel that sched-
(50%) find changes to schedules to be a common cause ule and time issues are the biggest causes of disputes,
of disputes. Schedule changes can have serious politi- but far fewer construction firms (33%) select changes
cal and/or business repercussions for owners. (For more in scope of work comparedGRI_Q7c
to A/E firms and owners.
information, see page 8.) For contractors, delays in schedules can result in costly
penalties, but changes in the scope of work are more
A/E Firms likely to result in change orders—a potential source of
The highest percentage of A/E firms (88%) find changes profit for these players.
in scope of work to be a common cause of disputes. 50% No contractors find payments a source of claims and
also find technical issues related to design or engineering disputes. The most likely reason for this is that infrastruc-
another frequent factor in disputes. Since these factors ture work is largely publicly funded, and up to this point,
most directly relate to the A/E firms’ involvement in infra- construction firms in this sector have not suffered from
structure projects, it is logical that they would be the most the risks of default faced by firms that do more commer-
prominent for these firms. cial construction.

Litigation continued
Approaches for Settling Claims and Disputes for

Infrastructure Projects
Methods Used for Dispute Resolution on

Negotiation is the most commonly used strategy for Infrastructure Projects
settling claims and disputes, reported by nearly all of Source: McGraw-Hill Construction, 2011
the respondents (96%). Arbitration, mediation and liti-

gation appear to be evenly split, but there is some Negotiation
variation when examined by player. 96%
Litigation is acknowledged by most of the indus-
Litigation
try to be a very expensive strategy, in ways that extend
beyond paying claims and legal fees. A highly public 48%
dispute in the courts can damage a firm’s reputation Mediation
and interfere with its ability to find new clients. Involve-
48%
ment in litigation can also consume a great deal of time
from many individuals in a firm, including leadership Arbitration
and project managers, which can interfere with their 48%
work and responsibilities for other clients.
Variation by Player
Owners
Other than negotiation, owners are most likely to
engage in mediation (50%). They are the player least
likely to use arbitration and litigation. In fact, the
percentage of owners who select litigation (25%) is less GRI_Q7d
than half that of A/E firms (50%) or contractors (67%).
A/E Firms
More A/E respondents report engaging in arbitra-
tion (62%) and mediation (62%) as compared to other
players. However, their use of litigation is also relatively
high (50%).
Construction Firms
A higher percentage of construction firms (67%) report
engaging in litigation, while a smaller percentage
report engaging in mediation (33%) as compared to
other players.

Sidebar: Insurance
Trends in Insurance
The tough economic climate in the construction market has many
construction firms rethinking risk profiles, recalculating insurance
coverage and reviewing their partners more thoroughly.
T
he troubled economy says those concerns are echoed Douglas Rieder, president of Ster-
is the common thread by sureties. “Surety companies for ling Risk Advisors, says that sureties
that runs through all subcontractors are telling us that are concerned about the grow-
insurance requirements [2012] is critical for subcontractor ing trend among subcontractors
today, according to Paul Becker, prequalification and making sure that to travel into new areas to pursue
construction practice leader at Willis, you have the right subs on the right work. “It’s fraught with increased
North America. “There are huge job,” he says. “Subcontractors risk,” he says. “There are a lot of
pressures on costs and keeping all have tried to make it through the unknowns when you travel, such as
expenses down, so that companies last few years, and we’re not through regulatory issues, licensing, taxes
can sustain themselves until work the worst.” and legal issues. Sureties really fret
comes back again,” he says. “Some In light of this, the insurance about this in times like these.”
clients aren’t buying as much industry has expanded its offerings
insurance as they did in the past, for subcontractor default insurance. Subcontractors Guard
meaning the limits of liability they Zurich was the first major carrier against False Workers’
can buy in certain lines of coverage to provide subcontractor default Compensation Claims
like general liability, professional insurance. In September 2011, XL At the subcontractor level, compa-
liability and pollution liability.” Insurance began offering Construct- nies are keeping a close watch on
Becker says that in lean economic Assure, a type of subcontractor employees, reports Rieder. When
times, companies are looking to default coverage to protect general the economy is down, Rieder says,
better align limits with their current contractors from financial losses that companies are instinctively more
assets. “People question whether may result when their subcontractors vigilant about questionable workers’
they need the same amount of insur- fail to perform contracted services. compensation claims.
ance as when revenue was higher.” To protect against default, many “If employees don’t see another
Meanwhile, carriers are review- contractors are demanding greater job on the horizon and they sense
ing claims with increased scrutiny, transparency from subcontractors. that layoffs are coming, [contrac-
Becker says. “The construction busi- Christopher Beck, vice president of tors] worry that employees will
ness is down, but our claims depart- risk management at Turner Construc- suddenly have a claim,” he says.
ment is as busy as ever,” he says. tion, says Turner has used subcon- “We see people looking to protect
tractor default insurance for about 10 themselves.”
Insuring against years but is not relying on that as a Among other techniques to
Subcontractor Default safeguard. Turner is heavily focused reduce claims, Rieder says, some
In such an environment, many on financial and portfolio reviews of companies require signed “end of
contractors are keeping closer watch its subcontractors, looking closely at week” statements from employ-
on subcontractors and other partners their past, current and future jobs. ees. When employees collect their
to better manage risk. With many “People are taking on more risk to paychecks on a Friday, they could
specialty contractors scrambling put work on their balance sheets,” be asked to sign a document stating
for work and profit margins getting he says. “We’re asking our subcon- that they were not injured that week
squeezed in a competitive market, tractors for quarterly balance sheet and didn’t witness an unreported
construction firms are concerned reviews now, whereas previously, it accident. “It helps deter reporting
about the financial stability of their had been a yearly process,” he adds. injuries that happen over the week-
subcontractors. “We want to see the current forecast end [when employees are off the
Bill Noonan, vice president of risk balance sheet [on new projects] at clock] as work-related injuries on
management at Structure Tone, the time of award.” Monday,” he says. n

Sidebar: Design-Build
Using Design-Build to Manage Risk

Design-build offers parties on construction projects more options
for risk management today than traditional design-bid-build.
A
lthough still dubbed equipment for a project to avoid a “The frequency of claims is lower
an alternative delivery markup from the design-builder. with design-build,” he says. “The
system, design-build “They might offer to furnish the typical errors and omissions are
procurement has become equipment and have [the design- absorbed by the team.”
more commonplace in recent years. builder] install it,” he says. “Some- Still, claims can happen. Quatman
times in those situations, they ask notes that, while teams often work
Risk Transfer [the design-builder] to warrant that through minor issues, major issues
While design-bid-build places equipment’s performance. That’s can lead to disputes. As a result,
owners between designers and where the design-build contractor claims on design-build projects tend
builders, design-build allows has to perk up and say, ‘We’ll install to be more severe, he says.
owners to transfer risk to the design- it, but you bought it, and you have to
builder and create single-point go to the vendor and get them to war- Insurance
accountability. Proponents believe rant this.’ It’s a risk design-builders Along with assuming new risk,
that one of the greatest advantages have to be careful of.” design-builders have to be
of design-build is the potential to Parkinson notes that while more aware of possible gaps in
more effectively place risk with the owners can transfer risks to the coverage. Quatman notes that most
party who can best manage that risk. design-builder, not all risks should general contractors do not carry
Although the single-point account- be transferred. For example, an professional liability insurance,
ability concept represents design- owner could try to transfer risks but under a design-build contract
build in its purest form, it is not related to site conditions. “It might where they are the lead, that
necessarily the norm. While some be an unmanageable risk, but that contractor assumes responsibility
owners like the transfer of risk, they doesn’t mean it should be shifted to for design issues.
may not be comfortable with the per- the design-builder,” she says. “The Likewise, if an A/E firm takes the
ceived loss of control that goes with owner owns the site, so it is in the lead on a design-build contract,
design-build, says Robynne Thax- best position to manage that risk.” the firm needs to make sure
ton Parkinson, a Seattle-based con- While significant risk does get insurance is in place to cover any
struction lawyer and member of the shifted away from the owner in possible construction defects,
Design-Build Institute of America’s design-build, Parkinson says, teams Quatman says.
national board of directors. “They need to remember that risk still While it is fairly common for
want to have their cake and eat it needs to be put with the party that owners to ask to be an additional
too,” she says. “They want to shift can best manage it. “The primary insured on a contractor’s insurance
the risk but maintain control.” objective should be to get a project policy, Quatman says, professional
For example, an owner might delivered on time and on budget,” liability policies do not permit
provide prescriptive specifications she says. “Putting the project interest additional insureds.
or a preliminary design. That design first means creating balanced risk Surety bonds are an issue
would need to be bridged to the that benefits everyone.” as well. “A surety bonds the
design-build team, but the owner contractor’s performance, but
would retain responsibility for that Disputes and Claims [the surety] doesn’t see itself as a
information, says William Quatman, In the risk arena, the benefits are professional liability insurer,” he
general counsel and vice president evidenced by claims activity, says. “Some state legislatures
of Burns & McDonnell Engineering in Quatman says. If the design-build have come out with statutes saying
Kansas City, MO. team is properly integrated, changes that on a design-build project,
The same holds true, Quatman can be handled smoothly, resulting in the surety bond does not cover
says, when owners ask to provide less conflict. design services.” n

Sidebar: Sustainability Risks
Reducing the Risks of Sustainability

The emphasis on sustainability has left some wondering about their
exposure to risk when working toward a high-performance building.
Three steps form a best practice for minimizing that exposure.
H
igh-performance build- through the certification process, the To help address this, AGC’s Consen-
ings often carry high expectations may be less clear-cut. susDOCS Green Building Addendum
expectations. Owners “At that point, it’s up to the archi- recommends assigning a “green build-
may construct green tect and the consultants to work with ing facilitator.” The facilitator would
buildings to reduce utility costs, the owner to decide what ‘high-per- take the lead on coordinating efforts
create better work environments, formance’ means,” Cobleigh says. among all parties to ensure that the
develop more desirable tenant “What baseline would the project be owner’s goals are met.
spaces, garner tax incentives or compared to?”
comply with government mandates. Approach Certification
In order to manage the risks asso- Agree on a Plan Wisely
ciated with such goals, owners, The team also needs to be sure that One of the most critical risks that
architects, engineers and contractors the owner understands the design must be managed on a green project
need to outline specific project objec- assumptions. is the potential that it won’t achieve
tives, agree on a plan, and approach “If the building is designed to certification. Although this could be
certification wisely. allow for fluctuations in humidity or an owner’s main goal, AIA advises
temperature, it’s important that the that architects and contractors
Outline Specific Project owner understands that they will should never warrant or guarantee
Objectives have to operate the building within that a certification will be achieved.
“There should be a heightened those parameters,” Cobleigh says. However, he adds, nothing
awareness of the fact that everyone “They can’t have someone come in absolves the architect or contrac-
needs to have discussions about and adjust the systems to maintain a tor from negligence or poor perfor-
expectations, roles and relationships constant humidity and temperature.” mance. “If the contractor performed
because this is all so new,” says Cobleigh suggests establishing defective work, they aren’t absolved
Ken Cobleigh, managing director benchmarks that all parties can agree from liability,” he says. “If the archi-
and counsel for the American on to determine a building’s perfor- tect breached the standard of care
Institute of Architects’ (AIA) mance. In this case, an owner may and, as a result of that negligence, the
contract documents. need to keep detailed maintenance certification fails, nothing absolves
AIA recently released its Guide and operations records, he adds. the architect.”
for Sustainable Projects, which Brian Perlberg, senior counsel of The certification process also pres-
includes documents to “address construction law and contracts at ents risks. By choosing certain certi-
the unique roles, risks and the Associated General Contrac- fication authorities, parties may have
opportunities encountered tors of America (AGC), maintains to enter into agreements required
on sustainable [projects].” that achieving high performance in a by those authorities. All parties need
The first step to managing risk in building often hinges on the interde- to be aware of these agreements,
sustainability is making sure all par- pendence of team members. Cobleigh notes.
ties understand the expectations, “What’s unusual about green Cobleigh says that there are some
Cobleigh says. If the goal is to have buildings is that there are hybrid subjective elements of review by
a project certified as green by a third responsibilities associated with these certifying authorities. “Once
party, the objective is clear as long as them,” he says. “Sometimes it’s the you introduce subjectivity, you intro-
all parties understand the steps nec- designer; sometimes it’s the con- duce risk,” he adds. “To address that
essary to achieve that certification. tractor; sometimes it’s a product element of risk, everyone needs to
However, if a developer wants a high- manufacturer; sometimes it’s a com- understand that there is some level
performance building without going bination of those.” of subjectivity.” n

Methodology:
Risk Mitigation Study Research
Infrastructure Risk 12 general contracting/construction the energy sector was carried out
Survey management firms and 11 infrastruc- among CURT (Construction Users

McGraw-Hill Construction conducted ture owner firms. Roundtable) members.
the 2011 Risk Mitigation Study in the While 35 is a robust sample size for Respondents were screened by
infrastructure sector to assess the quantitative findings, the firm type firm type (same as infrastructure),
level of impact caused by risks, the sample sizes would be considered energy construction project size (had
scope of use of risk assessment and small. Therefore, data presented by to be involved with projects $100 mil-
mitigation procedures and the fre- firm type must be viewed only as lion or greater in value within the last
quency and causes of litigation. trend information and not be extrap- five years) and involvement with risk
The CATI (Computer Assisted olated for that particular group. management at the firm.
Telephone Interview) survey was A total of 16 responses were
conducted in October 2011. To be Energy Risk Survey obtained. Findings from this module
eligible respondents had to be In addition to the main survey on can be found on page 18 and are illus-
involved with risk management infrastructure, a small online survey trative of trends, not representative for
for construction projects at their focusing on risk management in all firms working on energy projects. n
firms. Additionally, respondents
were screened based on firm type Geographic Distribution of Respondents
(owner, engineering/architectural Source: McGraw-Hill Construction, 2011
and general contracting/construction

management), as well as project type
and size (had to have worked on an
infrastructure project $100 million
Northeast
or greater in value that started in the 37%
last five years.) Midwest 9%
A sample of firms for this survey West 31%
was pulled from the McGraw-Hill
Construction Dodge database, which
tracks construction project starts
South 23%
across the U.S.
Firm-type quotas ensured that
the total sample was almost equally
divided across the three firm types.
The total sample size of 35 consisted
of 12 engineering/architectural firms, Meth_Q18
Type of Respondents Title Role of Respondents at Firm

Source: McGraw-Hill Construction,(inside)
2011 Source: McGraw-Hill Construction, 2011
More than 75% Source: McGraw-Hill Construction, 2011
51%-75% Text
26%-50%
Architect/
Numbers Meth_S2 Project Manager
1%-25%Engineering Firm 32% 34% Director or Other 23%
29%
Senior Management
General Contracting/
Construction Management Firm Vice President/ 6%
D1 D2 D3 D4 D5 Head of Division
blue orange lit yellow green lit grey
Owner/Infrastructure Firm
34% C-Level (CEO, President,
Principal, Other C-level) 20% 23%
Other
C1 C2 C3 C4
grey purple lit yellow lit orange

*stroke
Resources
Organizations, websites and publications that can help you
get smarter about mitigating construction risk.
Acknowledgements:
The authors wish to thank our premier research partners Navigant Consult-
ing Inc. and Pepper Hamilton LLP for helping us bring this information to the
McGraw-Hill Construction market. Specifically, we would like to thank Jim Zack, Shannon Prown, Andrew
Main Website : construction.com Bosman, Fred Campobasso and Dave Tortorello at Navigant Consulting; and
Research & Analytics: Bruce Ficken and Bill McCusker at Pepper Hamilton.
construction.com/market_research
analyticsstore.construction.com We would also like to thank the Construction Users Roundtable (CURT) and the
Engineering News-Record : enr.com Construction Owners Association of America (COAA) who helped us dissem-
Achitectural Record: archrecord.com inate the survey to their members. We also thank Robert Prieto at Fluor for
GreenSource: greensourcemag.com his insights. Additional thanks to all those who were willing to be interviewed
Sweets: sweets.com for this report, including Ed Littleton, Balfour Beatty Construction; Robynne
Thaxton Parkinson, Design-Build Institute of America; William Quatman,
Burns & McDonnell Engineering; George Pierson, Parsons Brinckerhoff; Mike
Kirchner and Jody Debs, CH2M Hill; Nicholas Pollard and Michael Stokes, Navi-
gant Consulting Inc.; Christopher Beck, Turner Construction; Paul Becker,
Willis North America; Bill Noonan, Structure Tone; Douglas Rieder, Sterling
Risk Advisors; Billy Miller, Zurich; Gary Amsinger, McCarthy Building; Scott
Trethewey, Moss & Assocs.; Ken Cobleigh, AIA; and Brian Perlberg, AGC.
Finally, we thank the firms that provided information about their projects and
experiences with risk mitigation as well as for their assistance in helping us
secure images to supplement their project information.
Navigant Consulting Inc. Pepper Hamilton, LLP

www.navigant.com www.pepperlaw.com
Global Construction Practice : ConstructLaw :
navigant.com/construction/ constructlaw.com
Navigant Construction Forum :
navigant.com/NCF
Research Partners Construction Financial Management

Construction Users Roundtable : curt.org Association : cfma.org
Construction Owners Association of America : coaa.org Construction Management Association
of America : cmaanet.org
Other Resources: Design-Build Institute of America : dbia.org
American Bar Association : abanet.org
International Risk Management Institute : irmi.com
American Council of Engineering Companies : acec.org
Risk Management Association : rmahq.org
The American Institute of Architects : aia.org
National Association of Surety Bond
American Society of Civil Engineers : asce.org
Producers : nasbp.org
Associated Builders and Contractors : abc.org
National Council for Public-Private
The Associated General Contractors
Partnerships : ncppp.org
of America : agc.org
National Utility Contractors Association : nuca.com
■ Design and Construction Intelligence
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McGraw-Hill Construction SmartMarket Reports™
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For more information on these reports and others, visit
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SmartMarket Report

McGraw-Hill Construction Mitigation of Risk

today, is looking to improve

McGraw-Hill Construction 1 www.construction.com SmartMarket Report

14 Severity of Specific Risks on Construction Projects

24 Adoption of Risk Assessment and Mitigation Procedures

24 Formal Risk Mitigation Procedures in Firms

35 Triggers, Obstacles and Influencers for Investment in Risk Management Practices

42 Impact of New Practices and Technologies on Risk

SmartMarket Report McGraw-Hill Construction 2 www.construction.com

19 Data Sidebar: Opinions of Risk Experts—Risk Mitigation

McGraw-Hill Construction 3 www.construction.com SmartMarket Report

Good risk management is a business imperative in construction.

and the overrun averages 14% of the total project cost.

■■11% of their projects experience disputes, with an

their project portfolios, increasing the average level

Impact of Risks on Large Infrastructure Projects

SmartMarket Report McGraw-Hill Construction 4 www.construction.com

the largest percentage of respondents indicated that Decrease Project Risk

Percentage of Firms with Formal Risk Assessment and

More than 75% 18%

McGraw-Hill Construction 5 www.construction.com SmartMarket Report

Effective risk management involves a commitment to risk throughout

SmartMarket Report McGraw-Hill Construction 6 www.construction.com

become a business imperative in the construction industry. Con- Note about

McGraw-Hill Construction 7 www.construction.com SmartMarket Report

Time Overruns on Infrastructure Projects

Projects With Time Overruns Variation by Player

84% report that they had at least one infrastructure Owners

Percentage of Infrastructure Projects Average Time Overrun (Among Those

Average 24% Median 15% Average 17% Median 15%

SmartMarket Report McGraw-Hill Construction 8 www.construction.com

Budget Overruns on Infrastructure Projects

Projects with Budget Overruns Construction Firms

Percentage of Infrastructure Projects Percentage of Budget Overrun

1%-4% 5%-9% 10%-14% 15% or More

Average 19% Median 15% Average 14% Median 10%

McGraw-Hill Construction 9 www.construction.com SmartMarket Report

Change Orders for Infrastructure Projects

percentage of change orders of 15%.

SmartMarket Report McGraw-Hill Construction 10 www.construction.com

Disputes Occurring with Infrastructure Projects

Average Size of a Claim A/E Firms

Percentage of Infrastructure Projects Average Size of Claim

$1- $50,001- $100,001- $250,001- More than

Average 11% Median 2% Average $3,095,882 Median $400,000

McGraw-Hill Construction 11 www.construction.com SmartMarket Report

Two Lessons Learned

SmartMarket Report McGraw-Hill Construction 12 www.construction.com

San Francisco/Oakland Bay Bridge SAS Span, California

McGraw-Hill Construction 13 www.construction.com SmartMarket Report

Greatest Risks to Successful Projects (Top of Mind)

risks to a successful project. Since these choices were

SmartMarket Report McGraw-Hill Construction 14 www.construction.com

Seriousness of Specific Risks

Most Serious Risks to Project Success

Source: McGraw-Hill Construction, 2011

For the owners surveyed, 86% of whom are in the

public sector, the political ramifications of delays

McGraw-Hill Construction 15 www.construction.com SmartMarket Report

engineering or other construction issues demonstrate

SmartMarket Report McGraw-Hill Construction 16 www.construction.com

Top Risks for Public and Private Projects

While the bottom line risks of greatest importance to

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