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Construction Is A Complex and Risky Business

Construction Is A Complex and Risky Business. Module 05-01 – Introduction to Risk Contrasting the Three Points of View – Owner, Designer, Builder Modified: June 7, 2014. Purpose:. To describe briefly the natural competitiveness of traditional practices within the construction industry.

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Construction Is A Complex and Risky Business

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  1. Construction Is A Complex and Risky Business Module 05-01 – Introduction to Risk Contrasting the Three Points of View – Owner, Designer, Builder Modified: June 7, 2014 CVEN 349 - Maxwell

  2. Purpose: • To describe briefly the natural competitiveness of traditional practices within the construction industry. • To illustrate how that leads to risk allocation – how risk is normally assigned to the various parties involved. • That is, who is liable for what? CVEN 349 - Maxwell

  3. Learning Objectives: • Students must be able to list conflicts as seen by the Owner, the Designer, and the Builder • Students must be able to site the general risk allocation rule. • Students must be able to list the allocation of specific risks to the usual three parties. CVEN 349 - Maxwell

  4. It is an Adversarial Process As strange as it may seem, the EPC (Engineering, Procurement, and Construction) process is an adversarial process wherein each of the three main parties (the Owner, the Designer, and the Builder) tends to be at odds with the other two because of conflicting interests and objectives. CVEN 349 - Maxwell

  5. The “People” Part • Most of the “art” of construction project management involves sorting out these external conflicts – partnering, negotiation, etc. • As well as external conflicts within your own organization – team and organizational problems CVEN 349 - Maxwell

  6. What Are Some Examples of External Conflicts? • Schedule Changes • Scope Creep / Design Changes • Change Orders • Local Building Codes and Inspection • Union Work Rules CVEN 349 - Maxwell

  7. What Are Some Examples of Internal Conflicts? • Marketing – Sell the job, regardless of the technical feasibility. • Technical – Deliver the “Statue of Liberty” every time, regardless of the budget or client expectations. • Fiscal – Stay within budget regardless of the quality and quantity of the work. CVEN 349 - Maxwell

  8. Exercise #5.1.1 • Take out a piece of paper, put your name and team # on it. • Individually take 2-minutes to list some conflicts you may have observed at work – regardless of where you worked. • As pairs take 3-minutes to discuss what caused these conflicts. • Ask several pairs to report. CVEN 349 - Maxwell

  9. The “Science” Part • This course involves the numerical tools related to the Project Manager’s four major responsibilities: schedule, budget, work, and safety. • You have to be able to succeed at both to gain positions of great responsibility (and great reward) within the process. CVEN 349 - Maxwell

  10. Types of Construction • Houses & light commercial (30-35%) • Buildings & heavy commercial (35-40%) • Industrial – Chemical plants, paper mills, power plants, etc. (5-10%) ** • Heavy - Dams, bridges, etc. (5-10%) ** • Transportation - Highways, railroads, canals, etc. (15-20%) (linear) ** ** Where engineers control things CVEN 349 - Maxwell

  11. The Owner’s Point of View • Project will be managed by Internal Staff or CM Firm. • There are Government (all three levels) to be satisfied: EPA, Building Codes & Permits, Use Codes & Permits, Access Permits, Tax Assessments, OHSA, … • Project Funding: Internal Cash Flow, Banks, REITs, Other Lenders, Tax Abatements, … • Future Users: Internal, External, … CVEN 349 - Maxwell

  12. Owner, Cont’d. • Risk Shifting: Bonding Companies, Insurance Companies, Contract Clauses… • Government Owners have Special Problems: Bidding Rules, Contracting Rules, Defaulting Rules, Labor Compliance Rules, Fraud Rules, Conflict of Interest Rules, … … CVEN 349 - Maxwell

  13. Designer’s Point of View • Engineering Staff will be internal or external: Structural, Foundation, Environmental, HVAC, Other Special, • Architectural Staff: Building and Other Special • Regulators: Professional Boards, Building Codes • Risks: Financial, Management, etc. CVEN 349 - Maxwell

  14. Designer Cont’d. • Conflicts between plans and specifications ** • Faulty Design ** • Shop Drawings ** • Errors and Omissions** **What you get sued for. CVEN 349 - Maxwell

  15. Builder’s Point of View • General Contractor – Usually a specified minimum, say 40%. Primary responsibility • Suppliers: Steel, Concrete, Materials, … • Trade Unions: Electricians, Masons, Painters, Glaziers, Carpenters, Dry Wall, Roofers, Plumbers, Laborers, Truckers, Operators, etc. • Sub contractors: Electrical, Mechanical, Erectors, Conveyances, Masonry, Dry Wall, Finish, etc. CVEN 349 - Maxwell

  16. Builder Cont’d. • Regulators: OHSA, Owner’s Inspectors, Code Inspectors, Labor Inspectors, Union Work Rules. • Major Risks: Safety, Budget, Schedule, Acts of God, Workmanship, Labor Strife, • Financial Partners: Insurers, Bonding Companies, Bankers CVEN 349 - Maxwell

  17. Your Primary Objectives as PM No matter who you work for, where you are in the organization, or what part of the process you “own,” your job is to deliver a product: • On Schedule, • On Budget, • On Scope (Work that meets or exceeds customer expectations), • While Maintaining a safe and non-threatening work place. All this and “have a life.” CVEN 349 - Maxwell

  18. PAT# 5.1.2 • Take out a sheet of paper and put your name on the Right-Side, Top Corner. • Individually, take the next 3-4 minutes to list the usual parties involved in the construction process and the conflicts that may arise from their traditional relationships. CVEN 349 - Maxwell

  19. What is Risk? • Risk is “the variation in the possible outcomes that exist … in a given situation.” • Types of risk: • Construction risks. • Physical and Environmental risks. • Contractual and Legal risks. • Performance risks. • Economic risks. • Political and Public risks. CVEN 349 - Maxwell

  20. How is risk allocated to the usual parties? • All risks are rightfully the Owner’s unless they are transferred to or assumed by another party for fair compensation. • Subject to: whether the party assuming the risk has both the competence to assess the risk and the expertise to control it or minimize it. • And: the choice and allocation must take place before the loss occurs. CVEN 349 - Maxwell

  21. How is it managed? • You try to minimizing risk – regardless of whose risk it is. • You try to identify the exact nature of the risk. • You try to reallocate risk by contract. • You try for an equitable sharing of the risks to all parties concerned. CVEN 349 - Maxwell

  22. Who should accept which risk?Multiple Parties. CVEN 349 - Maxwell

  23. Who should accept which risk?Owner. CVEN 349 - Maxwell

  24. Who should accept which risk?Contractor CVEN 349 - Maxwell

  25. Who should accept which risk?Engineer CVEN 349 - Maxwell

  26. PAT #5.1.3 • Take out a sheet of paper • Individually take 3 minutes to list the 3 rules in allocating risk. • Pass to the aisles. CVEN 349 - Maxwell

  27. Class Assessment • Take out a sheet of paper and … • Write 2 sentences on the topic that you think you will have the most problem remembering for the next exam. CVEN 349 - Maxwell

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