Risk Management System

1. Risk Management System 위험도 관리 및 의사 결정론

2. - Attention to Risk is essential at company, project or a work package level Few analyze the risks in practice other than intuition and experience Should we just be aware of risks? try to quantity them and build mathematical model? use sophisticated computer software? Risk Management

3. Not new, nor does it employ magical techniques It is a system or a systematic approach which aims to identify and quantify all risks to which the business or project is exposed So that a conscious decision can be taken on how to manage risks Risk Management

4. Must practical, realistic, and cost effective Need not be complicated nor require the collection of vast amounts of data Matter of common sense, analysis, judgment intuition, experience, and a willingness to operate a disciplined and/or structured approach Risk Management System

5. Risk Management Framework Identify the source and type of risks RISK IDENTIFICATION Consider the type of risk and its effect on the person or organization RISK CLASSIFICATION -Evaluate the consequences associated with the type of risk, or combination of risks, by using analytical techniques. -Assess the impact of risk by using various risk measurement techniques RISK ANANYSIS RISK ATTITUDE Consider how the risk should be managed by either transferring it to another party or retaining it RISK RESPONSE Any decision about risk will be affected by the attitude of the person or organization making the decision

6. Identified Risk It is not a risk, it’s management problem Factor to be considered in the risk identification RISK IDENTIFICATION Source Event and Effect of Risk Controllable Uncontrollable Dependent Independent Total dependence Partial dependence

7. SOURCES OF RISK Source Event Effect Possible Sources Event Possible Effects Lack of safety Death of workman Serious injury to workman Inadequate safety checks on site Project being stopped by the Health and Safety Officer with the issuing of a prohibition notice Injury to workman on site Specialist contractor not familiar with the system of working Project being delayed Defective equipment Loss of morale and poor labour relations amongst the workforce Inexperienced workforce not suitable for the type of work to be undertaken Prosecution and fine by statutory authorities Cost of loss production and welfare payments to injured workman Unforeseen weather conditions Future increased cost of insurance provision Lack of care by the workman

8. SOURCES AND EFFECTS • The sources of risk must be distinguished from the effects of risk • The sources of risk can be : • inflation rising above the allowance in the estimate ; • unforeseen adverse ground conditions ; • exceptionally inclement weather ; • late delivery of crucial materials, for instance after a fire at a suppliers’ works ; • incorrect design details, such as the wrong size beams being shown on the architect’s drawings ; • insolvency of the main contractor ; • no co-ordination, for instance between the mechanical services contractor’s drawings and the suspended ceiling specialist’s drawings. • The most serious effects of risk are : • failure to keep within the costestimate ; • failure to achieve the required completion date ; • failure to achieve the required quality ; • failure of the project to meet the required operation needs ; • damage to the property as a result of fire or flood ; • injury to a worker due to an inadequate system of working.

9. Controllable vs. Uncontrollable risk • Driving a car (Controllable risk) • Increased risk of injury relative to rail travel • We have come control over the outcome of the journey • Weather conditions (Uncontrollable risk) • Entirely beyond control of decision maker • Adverse effect may be mitigated by taking appropriate action in scheduling and in the organization of the site

10. Controllable risk • Decision-maker voluntarily accept the increased risks associated with new technology • Performance risk and financial risk • This risk may be tolerated if additional benefits ( prestige accumulation of expertise, favorable financial outcomes) are likely to occur • By exploiting available expertise and through careful planning, we may be able to control the eventual outcome

11. Uncontrollable ( Involuntary risk ) • Usually emanate from the external environment - Physical vs. Political, social or economic • Weather conditions, Inflation, Taxation changes • Cannot be influenced by the decision maker but usually the degree of exposure to such risks can be reduced • - Financial consequences of increased gas prices can be reduced by the design of a more efficient plant or one can ‘design out’ the risk by using alternative fuel source.

12. Dependent vs. Independent risks • Dependency • “Expected life of a building component” • Dependent on its design, the standard of workmanship, quality of materials. • Aging, Physical wear and tear, Poor maintenance. • Technological obsolescence and fashion.

13. Three types of dependence • No dependence (Mutually exclusive) • Total dependence • Partial dependence • Ex. Overall sq. m price of gross floor area • vs. Number of stories • Floor finishing, painting, decorating unlikely to be affected but the substructure cost will increase due to the increased loads

14. RISK CLASSIFICATION RISK CLASSIFICATION CONSEQUENCE OF RISK TYPES OF RISK IMPACT OF RISK Company Market/ Industry Speculative risk (market risk) – possibility of loss or gain Pure risk (specific risk) – no potential gain Project/ Individual Environment Capital related or financial risk Asset related or business risk Severity/ Impact Predictability Frequency

15. RISK CLASSIFICATION • The various types of risk relating to the construction industry

16. IMPACT OF RISK • The risk hierarchy The environment The market/industry The company The project/ individual

17. Risk and the general environment • Physical vs. Political, Social, Economic • Physical • Weather & Natural phenomena • Cannot control, but their effects can be mitigated (Rescheduling particularly vulnerable operations) • Political, Social, Economic • Partially controllable (National vs. International) • * eg. Laws regarding development controls on office building • Recent real estate market crash • Speed of change • Environmental risk • Most events are uncontrollable by individual or company • Attention on evaluation of risk exposure

18. The market/industry risk • Any event that might affect the complete industry (eg. National strikes of all building workers or unions) • All companies want to maintain their market share of available project • Companies must constantly evaluate competition and price levels • - All are subject to market risk. Reaction of one firm to market risk may have consider actions of other companies

19. The company risk • Company operates within a market • Company must ultimately bear the • consequences of a risky project • Company in project risk are intrinsically • linked

20. Project risk and individual risk • Many risks are easiest to see at the working level (Work package) • Impractical for people operating at work package level to have a well developed overview of total project • Risk management system should ensure bottom-up and top-down approach equally

21. CONSEQUENCE OF RISK • Consequence • the maximum probable loss • the most likely cost of the loss • the likely cost of servicing the loss if no insurance has been effected • the cost of insuring against the event occurring • the reliability of the prediction about the event

22. CONSEQUENCE OF RISK Event-likelihood of damage to adjoining buildings as a result of pile driving Likelihood Severity

23. RISK ANALYSIS - Integral part of risk management system ‘ To try to eliminate risk in business enterprise is futile. Risk is inherent in the commitment of present resources to future expectations. Indeed, economic progress can be defined as the ability to take greater risk.’ Hertz and Thomas (1984)

24. RISK ANALYSIS • Example. • $ 1,600,000 Remodeling of school bldg • 8 work packages of $ 200,000 • Design not finished, ±10% cost variance • (Total $1,440,000~$1,760,000) • * It is unlikely that all eight packages will go wrong, the total is unlikely to fall outside the range of $1,520,000~$1,680,000) • Each of the packages needs to be analyzed to identify risks • Risks analysis gives an insight into what happens if the project does not proceed according to plan

25. RISK ANALYSIS RISK ANALYSIS Identify alternative options Take risk attitude into account Risk measurement Quantitative Qualitative Probability analysis Objective Subjective Direct judgment Sensitivity analysis Single Multiple Ranking options Scenario analysis Breakdown Combination Comparing options Simulation analysis Type of distribution Estimates Number of simulations Relationship with other items Descriptive analysis Correlation analysis Linear/non linear Single/multiple

26. RISK ANALYSIS An example of risk analysis The effect of varying weather conditions is considered upon the excavation of isolated column bases in clay - The probable cost is ￡5.46 with a probable time of 23.7 minutes. The difference between the very wet and very dry unit price rates is considerable. The contractor must ask what premium should be added to the base unit price rate at which he still remains competitive in the market place yet gives some comfort that if the worst eventuality happens the loss suffered can be sustained. - The analysis has not solved the problem, but it has highlighted the option. A discerning interpretation of the results is required.

27. RISK RESPONSE RISK RESPONSE Risk retention (sometimes called risk absorption) Risk reduction Risk transfer Risk avoidance Ex. Pricing for an underground construction project - Contractor will have available site investigation data - Incomplete knowledge of the site geology and the possibility of unforeseen ground conditions poses great risks to the contractor - Part of that risk will have to be transferred to the sub-contractors - Contractor adds risk premium and inflate the unit price rates - Some transferred risk and some retained

28. RISK RESPONSE • Some fundamental considerations which govern the allocation of risk • which party can best control the events that may lead to the risk occurring ; • which party can best manage the risk if it occurs ; • whether or not it is preferable for the client to retain an involvement in the management of the risk ; • which party should carry the risk if it cannot be controlled ; • whether the premium to be charged by the transferee is likely to be reasonable and acceptable ; • whether the transferee is likely to be able to sustain the consequences if the risk occurs ; • whether, if the risk is transferred, it leads to the possibility of risks of a different nature being transferred back to the client.

29. Risk retention • Risk that produce small, repetitive losses are suited to retention • ex. Deductible for motor insurance • Retention is dictated by the financial circumstance and likelihood of loss • Full coverage or limited excess provision of insurance for claim • Factors to be considered for retention • the cost of the insurance premium ; • the maximum probable loss ; • the likely cost of the loss ; • the likely cost of paying for the loss, if uninsured.

30. Risk reduction • Four categories of risk reduction • Education and training to alert the staff to potential risks • Preventive protection to reduce the likelihood of loss ( ex. Quality assurance company) • Systematic approach to ensure consistency and to make people ask ‘what if’ questions • Physical protection to protect people and property

31. Risk transfer • Removes it to another party • Risk transfer may increase risk • ex. General contractor imposing liquidated damage clause for late completion to sub-contractor • Commonest form of risk transfer • “Insurance”

32. Risk avoidance • Refusal to accept risks • Refusal to contract • Change in business plan • Associated with pre-contract negotiations • Use of exemption clauses