Risk and Financial Management in Construction Management of Risk in Construction By Professor Simon Burtonshaw-Gunn – licensed under the Creative Commons Attribution – Non- Commercial – Share Alike License

Risk and Financial Management in Construction School of the Built Environment MSc Construction Management Risk Management in the Built Environment Presentation 2: Culture and Risk Management Planning Professor Simon Burtonshaw-Gunn

Risk and Financial Management in Construction Culture and Risk Management

Risk and Financial Management in Construction Who is responsible for Risk Management

Risk and Financial Management in Construction As shown in the Introduction presentation there are many definitions of risk management and even the ones most commonly used are often interpreted by Construction companies to align to their culture, own client base and strategic aspirations. Strategic Options Risk Tolerance Opportunities Strategic Choices Value Drivers (e.g. turnover, profit, cost of capital) Inherited Risk Relationship of Risk on Strategic Management

Risk and Financial Management in Construction Successful project risk management requires three key attributes to be in place and embedded within companies; these are: a systemic risk process in practise; staff involved in construction projects have an appropriate knowledge and experience of risk management and finally that there is a supporting culture to risk management. It is stressed that building the necessary culture is rarely a simple or straightforward process. It should be noted that culture covers a mixture of positive and negative traits and as such some need to be encouraged and others managed to reduce their impact.

Risk and Financial Management in Construction Cultural RuleObserved Behaviour “Don’t ask me for information” Be risk adverse Be reactive Don’t bring forward risks without solutions

Risk and Financial Management in Construction Cultural RuleObserved Behaviour Reward heroes Make commitments without determining the probability of success Ignore the soft stuff Make decisions based on emotion, rather than logic

Risk and Financial Management in Construction Cultural RuleObserved Behaviour “Don’t ask me for information”  Shoot the messenger  “No news is good news”  “There’s no evidence to the contrary” (with no effort to find it  Allow people to learn what information to report by trial and error  Filter bad news out, show only good news  Argue away information that conflicts with teams assumptions, decisions or success (group think)  Assume the competition is weak or incompetent  Don’t share information – it’s power  Don’t raise issues that may reflect poorly on upper management Be risk adverse  Don’t make decisions until outcome is guaranteed  Allow options to be eliminated by passage of time  Run risky decisions up to management chain for approval  Use unreasonable criteria for decision making  Don’t reverse past decisions Be reactive  Deal with symptoms rather than root causes  Deal with immediate and specific rather than the systemic  Don’t deal with anything until you have to  Believe the team can’t fail Don’t bring forward risks without solutions  Expect problems and risks to be brought forward “already solved”  Think of risks as something that can be solved  Don’t delegate upwards  Micromanage or burden the messenger with tasks

Risk and Financial Management in Construction Cultural RuleObserved Behaviour Reward heroes  Believe the team can’t fail  Pretend projects can be made to succeed by sheer force of will  Assign the best people to crises  Reward “lone rangers”  Assume engineering can pull off miracles on a regular basis  Don’t forget people’s failures Make commitments without determining the probability of success  Accept constraints without considering whether a feasible solution set exists  Assess probability intuitively and subjectively  Deal with estimates as point values  Don’t believe estimates  Expect the last best performance  Always plan for the best case scenario Ignore the soft stuff  Shield engineering from the business and marketing aspects of the project  View management tasks as administrative, not “real work”  Deal only with the technical issues and solutions  Ignore the people issues Make decisions based on emotion, rather than logic  Don’t reach closure on difficult issues  Talk about the difficult issues, but don’t document them  Discuss them regularly, covering the same ground as before  Accept silence as a sign of consensus or agreement  Don’t document or follow up on decisions made

Risk and Financial Management in Construction Risk Identification Planning

Risk and Financial Management in Construction Risk Identification Planning

Risk and Financial Management in Construction Risk Management cannot be owned by one individual in a project. All team members must be “risk aware” and participate in activities to improve a project’s position, through Action Plans, which are part of the main project plan. Project Plan Construction Plan Commissioning Plan Risk Plan Procurement Plan Risk Identification Planning

Risk and Financial Management in Construction The two objectives for the deployment of risk management are: Plan and take management action to achieve the aims of removing or reducing the likelihood and effects of risks before they occur and dealing with actual problems when they do; and, Continuously monitoring potential impacts of risks, review the associated action plans, and provide and managed adequate financial and schedule contingencies for risks should they occur. Risk Identification Planning

Risk and Financial Management in Construction Project Managers need to recognise that risks exist and actively manage them. This should be viewed as an indication of good project management, not an admission of failure. By looking ahead at the potential events that may impact the project and putting actions in place to address them (where appropriate), project teams can pro-actively manage risks and increase the chances of successfully delivering the project within..... Risk Management is therefore a key Project Management discipline. Time Cost Quality Risk Identification Planning

Risk and Financial Management in Construction Project Manager’s responsibility is not to make risks ‘disappear’ but to manage and communicate these through the implementation of a systematic risk management process. Often it is not possible for the project team to identify all risks as unexpected things may still occur, however these instances should now be very rare and project staff will be familiar with dealing with other examples of risk occurrence and mitigation. All project staff have some level of responsibility for internal control as part of their accountability for achieving objectives. Risk Identification Planning

Risk and Financial Management in Construction Individuals and organizations need to have an all-round approach to risk management; the most progressive risk management organizations achieve this by a uniform balance of tools, process, attitude and personnel. Risk Management has evolved into a formal systematic process of identifying potential risk or uncertainties and developing, selecting and managing options for addressing the risks through the life of the project. Risk evaluation is a key element for managing business risks with its main focus on identifying risks, evaluating their severity and managing the process. Risk Identification Planning

Risk and Financial Management in Construction Can the potential consequences be limited? What recovery measures are needed? Are recovery capabilities suitable and sufficient? Can the causes be eliminated? Is there a better way? How can it be prevented? How effective are the controls? What are the causes and consequences? How likely is it? How bad will it be? What is the risk and is it ALARP? Are people, environment or assets exposed to potential harm? What could go wrong? Common steps in a Risk Management Process Identify Assess Control Recover Risk Identification Planning

Risk and Financial Management in Construction In other words!!! Identify Assess Control What have you got? What can go wrong? What are you going to do about it? Risk Identification Planning

Risk and Financial Management in Construction to capture all of the potential risks which could arise within the project where risks are grouped into internal and external risks to quantify and evaluate the risk on the project which addresses how the risk will be managed, including risk reduction, avoidance, transfer and risk retention. Within Construction one common approach is a staged approval: Risk Identification Planning Risk Classification Risk Analysis Risk Response Risk Identification

Risk and Financial Management in Construction Within Construction one common approach is a staged approval: Is this familiar to you and used in your company? Do you use anything different - and how does this work ? Risk Classification Risk Analysis Risk Response Risk Identification Risk Identification Planning

Risk and Financial Management in Construction Clearly all risks cannot be controlled but to ignore risks and risk mitigation tools covered in this course will undoubtedly lead adverse consequences on projects. Such consequences of failing to deal effectively with risk can include significant cost overruns, schedule delays and inability to achieve desired project technical objective(s). Other important consequences include: Risk Identification Planning

Risk and Financial Management in Construction project de-scoping, loss of credibility, ultimately project cancellation and unhappy clients, and personal or organizational liability and fines. Clearly all risks cannot be controlled but to ignore risks and risk mitigation tools covered in this course will undoubtedly lead adverse consequences on projects. Such consequences of failing to deal effectively with risk can include significant cost overruns, schedule delays and inability to achieve desired project technical objective(s). Other important consequences include: Risk Identification Planning

Risk and Financial Management in Construction School of the Built Environment MSc Construction Management Risk Management in the Built Environment Presentation 2: Culture and Risk Management Planning Professor Simon Burtonshaw-Gunn