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Risk

Management

What is a Risk?
Risk is usually defined as a positive or negative deviation of a
variable from its expected value. In general parlance, risk is
understood only as a loss.

What is Risk Management?


Risk management is a proactive project management tool used to
reduce the susceptibility to losses incurred during a course of
action. The process focuses project resources on reducing
vulnerability, providing early visibility of potential problem areas
and creating mitigation actions.
Risk
Risk Identification
Identification

Risk
Analysis

Risk
Risk Monitoring
Monitoring
Controlled
Risk
Environment

Risk
Risk Estimation
Estimation

Risk
Risk Evaluation
Evaluation

Risk
Risk Response
Response

Risk Management Life Cycle

Step 1 : Identifying Risks


Risks that are not recognized also cannot
be assessed and dealt with.
However, a complete coverage of the risks
is impossible and therefore the task of risk
management is to cover the essential risks
as completely as possible.

Risk identification must therefore be


carried in a way that is both forwardlooking and in line with the progress of the
project, since before the start of the project
not all risks are completely recognizable
and during the project implementation
further risks may emerge.

Types of Risks in
Construction
Physical
Financia
l
&
Economi
c

Natural
Risks

Risks
Political
&
Environ.

Const.
Related
Design

Types of Risks in
Construction
Physical
Financia
l
&
Economi
c

Natural
Risks

Natural Risks

Flood
Earthquake

Risks

Landslide
Fire
Wind damage

Political
&
Environ.

Const.
Related
Design

Types of Risks in
Construction
Physical
Financia
l
&
Economi
c

Natural
Risks

Physical

Damage to structure
Damage to
equipment

Risks

Labor injuries
Fire

Political
&
Environ.

Const.
Related
Design

Theft

Types of Risks in
Construction
Physical
Financia
l
&
Economi
c

Natural
Risks

Financial & Economic

Inflation
Availability of funds

Risks
Political
&
Environ.

Exchange rate
fluctuations
Const.
Related

Design

Financial default

Types of Risks in
Construction
Physical
Financia
l
&
Economi
c

Natural
Risks

Political &
Environmental

Changes in laws
and regulations

Risks

Requirement for
permits
Law & order

Political
&
Environ.

Const.
Related
Design

Pollution and safety


rules

Types of Risks in
Construction
Physical
Financia
l
&
Economi
c

Natural
Risks

Errors & omissions

Const.
Related
Design

Incomplete design
scope
Defective design

Risks
Political
&
Environ.

Design

Inadequate
specifications

Types of Risks in
Construction
Physical
Financia
l
&
Economi
c

Natural
Risks

Construction
Related

Labor disputes
Labor productivity

Risks

Different site
conditions
Design changes

Political
&
Environ.

Const.
Related
Design

Equipment failure

Step 2 : Analyzing Risks


The objective is to describe the risk situation as completely and
precisely as possible and to prioritize the risks.
For this, the identified risks are investigated with regard to the
probability of their occurrence and the effect on the project.
A risk is always described as a damage or loss entailing event to
which a particular value can be allocated. From this, damage or
loss assessed in terms of costs and the probability of occurrence,
a value for the risk can be calculated.

Methods of analyzing risks are:


Error, possibility and influence analysis: In this, within a team, possible
potential errors are determined with the aid of a standard error, possibility
and influence analysis form, the consequences are investigated and the
causes are established and assessed. Next, the causes of errors are
systematically assessed in terms of the probability of their occurrence, the
significance for the customer and the probability of their being discovered.
The risk portfolio: In the risk portfolio risks are ordered according to the
amount of damage or loss and the probability of their occurrence.
Accordingly, the effects on the project and the need to take action are
evaluated.
Risk team analysis: The risk evaluation is carried out by the project
manager in the context of project controlling. Risks are determined and
analyzed according to types and indicators for the occurrence of risk. From
this, possible measures are elaborated and represented and persons
responsible for the risk monitoring and notification are determined.

Step 3 : Assessing Risks


Estimating the potential impacts of risk to decide what risks to
retain and what risks to transfer to other parties.
Risk Analysis
Techniques
Quantitative

Qualitative

Probability analysis

Ranking options

Sensitivity analysis

Comparing options

Simulation techniques

Descriptive analysis

Step 4 : Risk Response Planning


Risk Avoidance: Risk can be warded off by changing project management plan to
eliminate a threat, to isolate project objectives from the risk's impact, or to relax the
project objective that is in jeopardy, such as extending schedule or reducing the scope.
Risk Transfer: Transferring risk involves finding some other party who is willing to
accept responsibility for its management, and who will bear the liability of the risk. This
can be an effective way to deal with financial risk exposure. The aim is to ensure that
the risk is owned and managed by the party best able to deal with it effectively.
Risk Share: Allocate risk ownership of an opportunity to another party who is best
able to maximize its probability of occurrence and increase the potential benefits if it
does happen. Transferring threats and sharing opportunities are similar in that a third
party is used, those to whom the threats are transferred take on the liability and those
to whom opportunities are allocated should also be allowed to share in the potential
benefits.

Risk Mitigation/Reduction: Risk mitigation reduces the


probability and/or impact of an adverse risk event to an
acceptable threshold. Taking early action to reduce the
probability and/or impact of a risk is often more effective than
attempting to repair the damage after the risk has passed.

Risk Enhance: This response aims to alter the size of the


positive risk. The opportunity is enhanced by increasing its
probability and/or impact, thereby maximizing the benefits
gained from the project..
Risk Acceptance: It is not possible to eliminate all threats or
take advantage of all opportunities. This strategy is adopted
when it is not possible or practical to respond to the risk by the
other strategies, or a response is not justified by the grandness of
the risk. When the project manager and the project team decide
to accept a risk, they are agreeing to address the risk if and when

Risk Response Methods


Elimination

Transfer

Retention

Reduction

Risk Elimination Practices


Tendering a very high bid
Placing conditions on the bid
Pre-contract negotiations as to which party takes certain risks
Not biding on the high risk portion of the contract

Risk Response Methods


Elimination

Transfer

Retention

Reduction

Risk Transfer
Two basic forms.
(a) The activity responsible for the risk may be transferred, i.e.
hire a subcontractor to work on a hazardous process
(b) The activity may be retained, but the financial risk
transferred, i.e. methods such as insurance.

Risk Response Methods


Elimination

Transfer

Retention

Reduction

Risk Retention
Handling risks by the company who is undertaking the project.
Two retention methods, active and passive.
Active retention is a deliberate management strategy after a
conscious evaluation of the possible losses and costs of
alternative ways of handling risks.
Passive retention occurs through negligence, ignorance or
absence of decision.

Risk Response Methods


Elimination

Transfer

Retention

Reduction

Risk Reduction
Continuous effort.
Related with improvements of a companys physical, procedural,
educational, and training devices.
Improving housekeeping, maintenance, first aid procedures and
security.
Education and training within every department .

Step 5 : Risk Monitoring


The monitoring of risks is the continuous operative control of the
effectiveness of the risk control measures.
The monitoring of the risk helps guarantee that the risk position of the
project corresponds to the risk situation strived for.
This task is supported instrumentally through analyses of
internal control system is part of the monitoring of
continuous monitoring of the early indicators and the
verification are carried out by the persons responsible in
later than the respective milestone deadlines.

variances. The
the risk. The
repeated risk
each case, no

Risks that have occurred must be documented with the relevant amount
of damage or loss; critical situations of the managerial staff must be
reported.

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u!

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