Managing Risk in Construction Projects

Investment in any new project invariably carries risk but the construction industry is subject to more risk and uncertainty than perhaps any other industry.

This guide for construction managers, project managers and quantity surveyors as well as for students shows how the risk management process improves decision-making. Managing Risk in Construction Projects offers practical guidance on identifying, assessing and managing risk and provides a sound basis for effective decision-making in conditions of uncertainty.

The book focuses on theoretical aspects of risk management but also clarifies procedures for undertaking and utilising decisions. This blend of theory and practice is the real message of the book and, with a strong authorship team of practitioners and leading academics, the book provides an authoritative guide for practitioners having to manage real projects.

It discusses a number of general concepts, including projects, project phases, and risk attitude before introducing various risk management techniques. This third edition has been extended to recognize the reality of multi-project or programme management and the risks in this context; to highlight the particular problems of risk in international joint ventures; and to provide more coverage of PFI and PPP.  

With case studies and examples of good practice, the book offers the distilled knowledge of over 100 man-years of experience in working on all aspects of project risk, giving sound practical guidance on identifying, assessing and managing risk.

Nigel J. Smith is Professor of Project & Transport Infrastructure Management at the School of Civil Engineering, University of Leeds

Tony Merna is Senior Partner of Oriel Group Practice and a lecturer for Manchester Business School Worldwide.

Paul Jobling is a managing consultant with Kingsfield Consulting

Preface ix

Authors’ Biographies xi

Acknowledgements xiii

1 Projects and Risk 1

1.1 Construction projects 1

1.2 Decision making 2

1.3 Risk management strategy 4

1.4 Project planning 5

1.5 Summary 6

2 The Project Environment 8

2.1 Projects 8

2.2 The project constitution 9

2.3 Project organisation 11

2.4 Project phases 13

2.5 Effect of project phase on risk 16

2.6 Project appraisal 17

2.7 Summary 19

3 Understanding the Human Aspects 21

3.1 Risk management – context 21

3.2 Risk management – organisations 22

3.3 The risk management process 23

3.4 Some guidelines to the risk management process 24

3.5 The risk workshop 26

3.6 Communication 29

3.7 Summary 30

Reference 30

4 Qualitative Methods and Soft Systems Methodology 31

4.1 Qualitative risk assessment 31

4.2 Review of project programmes and budgets 32

4.3 The risk log 33

4.4 Using a risk log to formulate risk management strategy 35

4.5 Qualitative methods 37

4.6 Soft systems methodology 38

4.7 Case study: SSM in use in the procurement of construction projects 40

4.8 Summary 48

5 Risk and Value Management 49

5.1 Introduction 49

5.2 Approaches to the management of risk 50

5.3 The standard risk management model 52

5.4 Applying risk and value management 53

5.5 Value management processes 55

5.6 Understanding the project risk 56

5.7 Applying value and risk management 62

5.8 Iteration of the process 65

5.9 Summary 66

References 66

6 Quantitative Methods for Risk Analysis 67

6.1 Sanction 67

6.2 Project appraisal and selection 69

6.3 Project evaluation 71

6.4 Engineering risks 72

6.5 Risk management 75

6.6 Probabilistic analysis 76

6.7 Response to risks 79

6.8 Successful risk management 80

6.9 Principles of contingency fund estimation 81

Appendix 6.A: Alternative methods of risk analysis 82

7 The Contribution of Information Technology to Risk Modelling and Simulation 87

7.1 Purpose of RMS 88

7.2 When to use RMS 88

7.3 Requirements of the analyst 90

7.4 Modelling and simulation 90

7.5 Modelling using RMS 91

7.6 Data management 92

7.7 Analytical mechanisms 93

7.8 Classification of RMS 94

7.9 Selection of RMS 95

7.10 Modelling a project for risk management 96

7.11 Data requirements for realistic modelling 98

7.12 Choice of variable distribution 100

7.13 Case study 101

7.14 Case study simulations 107

7.15 Analysis of the result 109

7.16 Discussion of findings 115

7.17 Summary 115

8 Risk Allocation in the Contracting and Procurement Cycle 117

8.1 Typical contracting and procurement processes 117

8.2 Value planning case study 121

8.3 Known and unknown risks in contracts 123

8.4 Risk allocation strategies 125

8.5 Risk allocation according to payment mechanism 135

8.6 Contract award 138

8.7 Summary 140

Reference 141

9 Managing Financial Risks in Major Construction and PFI / PPP Projects 142

9.1 Project financing 142

9.2 Types of finance 143

9.3 Appraisal and validity of financing projects 148

9.4 Typical financial risks 151

9.5 Promoter 152

9.6 Financial risk in concession contracts 153

9.7 Global and elemental risks in concession contracts 155

9.8 Summary 160

10 Risks in International Construction Project Joint Ventures 161

10.1 Background 161

10.2 Concept of joint venture 162

10.3 Motives for joint venture formation 162

10.4 Assessing joint venture success 163

10.5 Case study 165

10.6 Summary 169

Acknowledgement 169

References 169

11 Risk Management at Corporate, Strategic Business Unit and Project Levels 171

11.1 Risk in organisations 171

11.2 Risk management 173

11.3 The risk management process 173

11.4 Benefits of risk management 174

11.5 Recognising risks 175

11.6 Why risk management is used 176

11.7 Risk management actions at different levels 177

11.8 Summary 182

References 183

12 Case Studies 184

12.1 Introduction 184

12.2 Heavy lift vessel design and fabrication programme risk assessment 185

12.3 Risk identification 186

12.4 High Speed 1 189

12.5 Brief history of HS1 190

12.6 The risk management process 193

12.7 Risk assessment, analysis and response 198

12.8 Summary of the preliminary schedule risk analysis results 205

13 Risk Management in a Multi-Project Environment 209

13.1 Introduction 209

13.2 Drivers for the multi-project approach to project delivery 209

13.3 A conceptual model of the multi-project environment 211

13.4 Risks that are unique to or amplified in multi-project environments 213

13.5 The change in mindset required to manage risk in multi-project environments 214

13.6 Summary 217

References 217

Further reading 217

14 Key Issues and Guidance in Practical Risk Management 218

14.1 Decision making 218

14.2 Preparation for risk management 219

14.3 Risk management process 220

14.4 Models 224

14.5 Uncertainty 226

14.6 Socio-technical approach to risk 226

14.7 Summary 228

References 229

Index 231

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