CVE 5074 Leading Construction OperationsTEAM LEADERSHIP

PART VII – RISK MANAGEMENT

Introduction

Risk = uncertainty about some consequence

Causes of risk = design + construction

Project Controls = managing schedule, budget, change orders & quality to minimize risk

Contract Risk = type of contract used

Construction Risk Management

Avoidance Retention

Insurance

Education & Training

Exemption Clauses

Risk sharing

Protection

Retention Money

Liquidated Damages

Rescind contract

Contingencies

What is risk???

An outcome different from what you expected or estimated…

Or… different from what you bid!

Generic sources of risk…

Construction is hazardous, costly, uncertain…

Labor capacity, capability, competence…

Subsurface conditions; physical factors…

Contractual provisions; timing, constraints…

Economic conditions; prices, labor…

Political & public; new laws, opposition

Risk in Construction

It’s different than manufacturing:

Every project is one-off… another TJ Hall?

Every site is different…

Every team is different

(like football w/new team every game!)

Environment is different… day to day!

Market cannot be controlled… price of fuel!

Client cannot be controlled

Causes of Risk

Design Risk Site conditions Control of design

process Client needs & wants Materials availability Cost creep Stakeholders

Causes of Risk Construction Risk

Design flaws – Essayons Dredge $46m claim

Site conditions –Rock at WP; library & gym

Policy Changes – ARVIN gym seismic

Weather – Hurricanes in Florida; effect of Katrina

Materials & Market – Cost of fuel, steel & concrete

Changes to schedule & budget – Redesign/rebid

Client input – WP security measures; AT design

Subcontractors – Availability/dependability

Risk identification Identify areas of risk intensity

1. Buildability, logistics, health & safety

2. Environmental, permits

3. Cost environment

Develop risk registers Catalog all risk factors Assign responsibility to team members

Risk analysis

Use decision & simulation theory

Quantify maximum effect of each risk

Identify probability of occurrence

Determine economic impact of each

Determine impact of combinations

Risk response Plan mitigation strategies

Specific action to be taken

Avoidance, sharing, protection, etc.

Accountable team member

Account for inter-relationships

Account for multiple risk scenarios

Control Risk with Contracts

Lump-sum

Unit-price

Fixed-price with incentives

Cost-reimbursable

Time & materials (T&M)

Cost-plus-fixed-fee (CPFF)

Cost-plus-incentive fee

Guaranteed Maximum Price (GMP)

Fixed PriceFixed Price

Cost PlusCost Plus

Basic legal premise…

All risks accrue to the owner unless

assigned by contract to another party

In assigning risk to another they must be:

(a) able to assess the risk fairly,

(b) competent to do the task, and

(c) result in a better solution

Risk allocation… at start

Owner

Designer Builder

Not yet involved

Risk allocation… traditional

Owner

Designer Builder

Risk allocation… design-build

Owner

Designer + Builder

Risk Management Planning

Basic risk management-1…

Build a Risk Allocation Matrix

Identify all potential risk of loss

Assign to Owner, Contractor or Designer

Quantify your potential loss

Develop a risk management strategy

Basic risk management-2

Management strategies…Avoid the potential lossTransfer the riskShare risk with another firmMitigate the potential for lossRecover any unavoidable loss

• Claim

• Insurance

• Litigation

BESTBEST

GOODGOOD

WORSTWORST

Basic risk management-3

Keys to allocation of risk…

Must be a reward for any risk assigned

Assignee must be able to control risk

Must produce “best” solution

Must have financial & management

capability

Must follow terms assigned

Avoidance… Careful estimating & bidding Study the contract terms Study the owner’s style & record Study limits of insurance Prior planning for construction

Examine the plans, specs & conditions Examine the contract requirements Examine the site for unknowns & hazards Examine each process & plan your method

Transfer or sharing…Reduce source & size of risk

Use the contract terms General conditions

Plans & specs

Negotiate new terms May not work with government

Change strategic approach Merger or joint venture with another

firm

Hire subcontractor for high risk work

Purchase additional insurance

Mitigation…

Good planning & communication Quality control processes

Use/acquire the right skills Use/acquire the right equipment Use your experience wisely

Act promptly if the unexpected occurs

Insurance…

Covers unexpected situations Situations beyond your

control

Your track record is important

Cost is a factor Do not overuse

Recovery… Read the contract

Good record keeping… especially impacts

Follow correct procedures

Demonstrate mitigation efforts

Make a convincing presentation

Attempt settlement at lowest level

Seek legal help

Cost recovery 101 (a)…

Detailed Work Breakdown Structure (WBS) for estimating

List & code each activity & duration

Establish start & finish dates & labor hours

List materials required & procurement lead

Labor hours for shop drawings & submittals

Have accounting code for each of above

Cost recovery 101 (b)…

Develop change/claim spreadsheet

Use bid data as base line

List all estimated activities & costs in a WBS

Calculate “actual” duration & costs for WBS

Establish % triggers to identify problems

Notify owner’s rep immediately of problems

Cost recovery 101 (c)…

Use data to analyze source of problem

Defective plans & specsDiffering site conditions Interruption of work flowUnusual weather conditionsDelay in receiving EI or submittal responseProblems with laborBad bid

Cost recovery 101 (d)…

Read the contract Begin mitigation immediately to minimize loss Stay within contractor’s authority Determine risk allocation for each problem Comply with all notification requirements Request contract change when required Establish new activity code for all added work Track cost of new work Quantify delay to other work

Claims & Disputes

Conflict resolution Informal discussion Formal recorded meetings Negotiation – parties solve together

Expert determination – mediator hired by both Adjudication – binding expert(s) decision; DRB

Arbitration – administrative trial; summary judge

Litigation – formal legal proceedings

Resolving differences…

1. Negotiation… like a change order

2. Dispute Resolution Board …provided in most standard contract provisions; involved outside panel of experts

3. Alternate disputes procedures… use of facilitator, mediator, mock court, or any non-legal method

4. Arbitration… binding or non-binding; requires signed agreement on procedures

5. Litigation… most time consuming; most expensive; court proceeding in special contracts court

Kuwait Reconstruction

Unspecified scope of work – no right to know Corps prequalified contractors on assumed scope Contractors paid to “mobilize” on 14day notice Corps teams surveyed/estimated priority projects Contractor teams prepared estimate “on order” Corps negotiated cost/scope; issued NTP @ cost plus Corps inspected/documented every contract action Negotiated final cost of contract cost on completion Total = 1200 projects @ $600m in 300 days

Hydro Dam – Savannah River Cost of dam = $275m; 500mw power Added 4 pump back turbines @ $80m SC environmental objection to fish kill Partnering to find acceptable solution Failed to resolve; Corps research & design $25m Fish screen added to dam Political solution to dispute

And there’s always personal risk…

SC political cartoon

That’s all folks!!!!

Questions?