RISK AND RISK MANAGEMENT

OVERVIEW DEFINITIONS RISK MANAGEMENT PROCESS ROLES AND RESPONSIBILITIES OF PROJECT PARTICIPANTS RISK MANAGEMENT TOOLS LIABILITY AVOIDING CONFLICT CONFLICT RESOLUTION ADR TERMINOLOGY LITIGATION

OVERVIEW Construction projects involve risks. All project participants face varying degrees and types of risks which are present during every phase of a project. Risks normally determine many of the financial, contractual, and practical relationships among the participants. Each participant must have a plan to manage these risks before making any commitment to the project and other parties.

DEFINITIONS Project risk is an uncertain event or condition that, if it occurs, has a positive or a negative effect on a project objective. Risk Management (RM) is the systematic process of identifying, analyzing, and responding to project risk. RM includes maximizing the probability and consequences of positive events and minimizing the probability and consequences of adverse events to project objectives.

Project Risks Types of risks that are involved in construction projects: –Safety (high potential for jobsite injuries) –Difficulty (uncontrolled field conditions) –Unforeseen conditions (modifications) –Diversity of interests –Control (inability to control various factors, e.g. weather, fire, earthquake, labor needs, market) –Professional (damage to reputation) –Legal (exposure to litigation and legal liability) –Financial (insufficient funding) –Community opposition

RISK MANAGEMENT PROCESS RM Planning: deciding how to approach and plan the RM activities. Risk Identification: determining which risks might affect the project and documenting their characteristics. Risk Analysis (quantitative and/or qualitative): performing an analysis of risks and conditions to prioritize and estimate their effects on project objectives. Risk Response Planning: developing procedures and techniques to enhance opportunities and reduce threats to project objectives. Risk Monitoring and Control: Monitor residual risks, executing risk reduction plans, and evaluate their effectiveness throughout project life cycle.

ROLES AND RESPONSIBILITIES OF PROJECT PARTICIPANTS Risk management requires that the project owner, designer, and contractor carefully identify and examine several aspects of the project at hand. They accomplish this by evaluating the potential risks of –the project itself, –the roles and qualifications of the other team members, –the method of project delivery, –contractual provisions for allocating risk, –and the means of establishing and providing incentives for performance.

RISK MANAGEMENT TOOLS Insurance Bonds Warranties

Insurance An owner uses insurance to protect against the risks posed by physical loss or damage to the work in progress at the construction site. To cover these risks, an owner may require the contractor to provide builder’s risk insurance. Designers typically carry insurance for professional liability (errors and omissions) insurance usually with deductibles.

Insurance (cont.) The contractor is normally required to indemnify and hold harmless other parties who do not control the site. Contractor’s insurance typically includes commercial general liability (CGL) that covers bodily injury and property damage, workers’ compensation, and employer’s liability insurance to cover injuries to workers; and builder’s risk insurance. On design-build projects, the design-builder should obtain the insurance policies that would be required of the contractor plus professional liability insurance to cover design responsibilities.

Bonds Bonds are not insurance policies; rather they are financial guaranties provided by a third party (a surety company). Bonds are backed by assets of the personal or corporate pledges of the parties whose actions or performance is being bonded. Typically there are 3 types of bonds in constr. projects: –Bid bonds –Performance bonds –Payment bonds

Bonds (cont.) Bid bonds protect owner when the contractor fails to agree with the owner at the bid price. The bond states that the surety will compensate the owner for difference between lowest and second lowest. Performance bonds guarantee the performance of contractor’s contractual obligations when contractor is unable or unwilling to complete them. If the contractor defaults, the surety is liable under the performance bond to the owner for the completion of the contract. Surety hires a replacement contractor. Payment bonds guarantee that persons providing labor and materials to the project will be paid the amounts due under their contracts. Payment bonds often provide the only security for subcontractors and suppliers on public projects where liens are prohibited.

Warranties The purpose of a warranty is to guarantee the quality of the materials or services provided by a construction trade or supplier. They can be provided for under a contract, or may arise by law in some cases. Like other risk management techniques, parties must evaluate the costs of providing a particular warranty against the benefits that the warranty would provide.

LIABILITY When risks become actual losses, the resulting liabilities must be evaluated. Often, these liabilities are allocated in contract documents. If the particular loss is not provided for under the contract, the law generally allocates responsibility for the loss.

AVOIDING CONFLICT Actions that can help stop conflicts: Selecting team members who are professionally and financially capable of performing responsibly. Balancing interests of team members with regard to schedule, payments, decision making, and performance. Structuring contracts to allocate risks clearly and fairly. Performing contract obligations on time and maintaining appropriate records. Being ready for unforeseen or changed conditions. Cooperating with other team members. Participation in a partnering exercise with team members to outline common goals and expectations on the project.

CONFLICT RESOLUTION A well-drafted contract provides procedures for conflict resolution without involving courts. i.e. ADR. Attention to: –Relying on designer to resolve conflicts between the owner and contractor; –Using third-party mediator to help participants structure negotiations, provide neutral evaluation and encourage fair settlement; –The use of hearing officers, dispute review board judges, or standing neutrals to resolve disputes and provide binding decisions; –Binding arbitration (under rules by National Construction Industry Arbitration Committee); –Other alternative dispute resolution (ADR) processes, preferably binding, including mini-trials and neutral fact- findings.

ALTERNATIVE DISPUTE RESOLUTION TERMINOLOGY Mediation: A process in which a third-party neutral (mediator) acts as a facilitator to assist in resolving a dispute between two or more parties. Binding arbitration: Referral of a dispute to one or more impartial persons for final and binding determination. Private and confidential, it is designed for quick, practical, and economical settlements. (Can be binding or non- binding) Mini-trial: A private process in which counsel for the opposing parties present their cases in condensed form in the presence of designated representatives for each side who have authority to settle. Dispute Review Boards: Experienced and trusted professional(s) with appropriate technical background to address prevention and resolution of disputes.

LITIGATION Litigation of construction disputes is usually complex, expensive, and time consuming. In most cases, litigation is the last resort and least preferable way to resolve a dispute. In such instances, the parties are wise to conduct a thorough and dispassionate review of the costs and benefits of litigation throughout the conflict. If litigation remains an option, each participant carefully evaluates not only the merits of his or her case, but also the likelihood of how well the facts can be presented in a formal judicial proceeding.

LITIGATION (cont.) In pursuit of legal remedies (litigation or arbitration), substantial direct and indirect costs are involved included, but not limited to: –Direct external costs, e.g. attorneys’ fees, court costs, deposition costs, expert fees, investigation costs (soil, hydrology, testing). –Direct internal costs, e.g. costs of key personnel working with attorneys and experts, attending forum proceedings, and other incidental costs. –Indirect costs, e.g. the interruption of management and key personnel duties, impacts on reputation, reduction in bonding capacity, interruption of cash flow, etc. –Loss of client relationship (temporarily or permanent).