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Applying Risk Management to Project Performance
By Sagar B. Khadka, PSP, Project Manager
and Charles E. Bolyard, Jr., PSP, CFCC, Chairman of the Board/Chief Executive Officer
When it comes to the subject of risk management in construction, a vast array of literature (text books, best practice guides, standards of practice, etc.) and literary work (technical papers, white papers, case studies, etc.) have sprung up since the early 1970s that, when taken collectively, provide comprehensive material for a construction project team to draw upon and implement a sound risk management plan for its construction project. Particularly in the past decade, almost all major industry conferences (AACEI, ASCE, CMAA, PMI, etc.) have started including a track dedicated to the topic of risk management with the objective of promoting a discussion on benefits of risk management and techniques and tools currently available.
And yet, the vast majority of construction projects do not have a formal risk management plan in place. The more prevalent approach is, instead of managing and mitigating risk in the project, that the construction project team’s time is spent in managing the issues, which is the realization of risk itself. Why is it that, despite the existence of a wealth of literature, technical know-how, techniques and tools on risk management, a majority of construction project teams are not readily implementing risk management? This article discusses one key component in the overall process of risk management – the importance and application of qualitative risk management to project performance.
While several variations to the risk management model exist in the industry, there are essentially five steps in implementing a risk management program for capital construction projects.
As illustrated in the figure below, the steps required for both the quantitative risk analysis and qualitative risk management are common through Step 3, but a comprehensive risk management plan would need to follow all the steps shown in the model.
The literary works to date, whether they be text books, best practice guides, or technical papers in various trade journals, appear to have placed equal emphasis in all the steps outlined in the risk management model, and rightly so. The best benefits of risk management can be achieved when all bases are properly covered.
However, having equal emphasis on all the steps in a typical project risk management model might have given the impression to the construction community that, in order for the project to have a successful risk management plan, it must perform quantitative risk analysis. The simple fact is that not all project teams have the required resources (technical know-how, funds, etc.) to perform a quantitative risk analysis in their project. The lack of resources in carrying out the quantitative risk analysis might have deterred the project team from implementing any kind of risk management plan at all.
The question is: can a project team benefit from having a qualitative risk management plan in their project, even if it is not feasible for them to perform a quantitative risk analysis? The answer is “absolutely.” The primary reason is that these two applications (quantitative risk analysis and qualitative risk management) serve two different and specific purposes, and complement each other. Implementation of one does not necessarily replace the need for the other. Similarly, the inability to implement one should not deter the project team from applying the other.
Quantitative Risk Analysis
Quantitative Risk Analysis is typically performed at the inception of a project to evaluate the viability of the project cost and/or time objectives [1]. This is not to say that the quantitative risk analyses are not routinely performed in periodic intervals during the course of construction. Also, there may be instances in a project where circumstance might call for a quantitative risk analysis in the middle of a project, or at any point in the project life-cycle.
Quantitative Risk Analysis is performed, after gathering all the known risk items and prioritizing them, to evaluate:
- What is the probability that the project will be within the budget?
This will help in arriving at the estimate for setting up the contingency funds. If setting up a contingency fund is not an option or if there is a limited budget available, de-scoping of project may be in order or several other options may be considered.
- What is the probability that the schedule deadlines will be met?
This will help in setting realistic project deadlines. If the risk analysis shows that there is a very low probability of meeting the current deadline, the information gives the project team an opportunity to consider options in deciding a time contingency plan.
Besides evaluating the contingency plan for time and cost overruns, decision makers may perform quantitative risk analysis to evaluate such scenarios as the viability of the project itself and reach for alternative programs. [2] [3] [4].
The steps required (risk planning, risk identification and assessment) in terms of gathering the risk data for quantitative risk analysis are generally the same as those for the qualitative risk management. It is what is done with the risk data, how they are analyzed and the specific purpose it [quantitative risk analysis] serves, that makes quantitative risk analysis different from qualitative risk management.
Qualitative Risk Management and its Importance
It would be ideal to have the quantitative risk analysis performed at the inception of a construction project for the benefits it provides as discussed in the preceding section. However, it may not be feasible to perform quantitative risk analysis for every construction project due to resource limitations, or the lack of the technical application expertise.
What is feasible and within reach of most project teams is the application of qualitative risk management during construction. While quantitative risk analysis offers a snapshot of risks at a certain point in time – essentially at the time it is performed - qualitative risk management goes beyond snapshots in time and deals with those project risk events until they are resolved.
Qualitative risk management involves taking steps to identify every single foreseeable risk event (things that could go wrong) in the project, analyzing the potential impact of each risk event on the project and prioritizing them based on the severity of impact, creating problem solving strategies to mitigate (recover from) impacts, and keeping an eye on each until the risk item is either averted, mitigated or resolved.
As shown in Figure 1, the process of risk monitoring and control ensures continuity in its application throughout the project until it is complete.
The key to risk management is that it is always forward looking, anticipating risk events well in advance of their occurrence in the project and taking steps to prevent them from happening, or at least reducing their impact by having a pre-prepared strategy or plan. This is in contrast to issue management, which is managing problems in the projects that have already surfaced.
Put another way, the potential risks that could otherwise have either been eliminated or mitigated through the risk management plan at a lesser cost, when left unaddressed due to lack of a sound risk management plan in the project, usually turn into issues that now must be dealt with at full cost.
How much savings can be expected from a sound risk management plan in the project? There is no way to provide an answer that can satisfy all because risks faced by each individual project are different. However, findings from case studies involving two large programs that employed a risk management plan are very encouraging. Presented as the return on investment (ROI), which was defined as the ratio of savings to cost that indicates the value of performing risk management, both case studies reported ROI at over 20 to 1 [5]. Even though the case study involved only two programs, the result is still very impressive.
This article, within the context of project risk management, draws the distinction between quantitative risk analysis and qualitative risk management. While fully acknowledging the significance and importance of quantitative risk analysis, it is not always necessary to perform a quantitative risk analysis on a project in order to be able implement a qualitative risk management plan, which can provide immediate and far reaching value to project performance in terms of seeing the project through to completion on time and within budget.
References
- Hulett, David T. Quantitative Risk Analysis Fundamentals. https://acc.dau.mil.
- Hulett, David T. Project Cost Risk Analysis. Hulett & Associates, 2002. http://www.projectrisk.com/index.html.
- Hulett, David T. Schedule Risk Analysis Simplified. Project Risk Management Journal, 1996.
http://www.projectrisk.com/index.html.
- Singh, A., S. Shiramizu and K. Gautam. Bid Risk and Contingency Analysis. AACE International, Cost Engineering, Vol. 49, No. 12, 2007; 20-27.
- Hall, E. M. Risk Management Return on Investment. Systems Engineering, Vol. 2, Issue 3. 1999, 177-180.
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