CVE 4070

Construction EngineeringRisk ManagementProf. Ralph V. Locurcio, PE

Views of risk taking…

What is risk???

An outcome different from what you expected or estimated…

Or… different from what you bid!

Sources of risk in construction…

Construction operations are hazardous Labor capacity, capability, competence… Subsurface conditions; physical factors Contractual provisions; timing, LDs… Economic conditions; prices, labor… Political & public; new laws, opposition

Basic premise…

All risks accrue to the owner unless assigned by contract to another party

In assigning risk to another they must be (a) able to assess the risk fairly, (b) competent to do the task, and (c) result in a better solution

Risk allocation… at start

Owner

Designer Builder

Not yet involved

Risk allocation… traditional

Owner

Designer Builder

Risk allocation… design-build

Owner

Designer + Builder

Risk Management Tools

Best Value procurements Two stage bid process Contractor helps finalize design Incorporates VE

Risk Management Risk identification Analysis Response

Pareto Principle

80/20 rule… States that 80% of the value comes

from 20% of the activities.

Therefore, we need a method to focus on the 20% of the activities that have the most influence on the outcomes.

And… we should avoid the 80% of activities that produce little gain

Best Value Process

UnderstandClient

Requirements&

Intent

BrainstormPossible Areas

forAdding Value

Find & IncludeExperts in Key Areas

DevelopOptions

WithPros & Cons

ID PreferredSolution &

Obtain NeededDesign Info

Present toExec Team

ForDecision

PreliminaryDesign

DetailedDesign

DevelopmentPlans

&Specs

Final ReviewBy

Exec Team

Final ApprovalBy

ClientConstruction

Contractor

Risk identification

Identify areas of risk intensity1. Buildability, logistics, health & safety2. Environmental, permits3. Cost environment

Develop risk registers1. Catalog all risk factors2. Assign responsibility to team

members

Risk analysis

Use decision & simulation theory Quantify maximum effect of each risk Identify probability of occurrence Determine economic impact of each Determine impact of combinations

Risk response

Plan mitigation strategies Specific action to be taken Avoidance, sharing, protection, etc. Accountable team member Account for inter-relationships Account for multiple risk scenarios

Construction Risk Management

Avoidance Retention

Insurance

Education & Training

Exemption Clauses

Risk sharing

Protection Clauses

Retention Money

Liquidated Damages

Rescind contract

Contingencies

Basic risk management-1…

Build a Risk Allocation Matrix Identify all potential risk of loss Assign to Owner, Contractor or Designer Quantify your potential loss Develop a risk management strategy

Basic risk management-2

Management strategies… Avoid the potential loss Transfer the risk Share risk with another firm Mitigate the potential for loss Recover any unavoidable loss

• Claim• Insurance• Litigation

Basic risk management-3

Keys to allocation of risk… Must be a reward for any risk assigned Asignee must be able to control risk Must produce “best” solution Must have financial capability Must follow terms assigned

Risk Management Strategies

Avoidance Transfer or Sharing Mitigation Insurance Recovery

Avoidance… Careful estimating & bidding Study the contract terms Study the owner’s style & record Study limits of insurance Prior planning for construction

Examine the plans, specs & conditions Examine the contract requirements Examine the site for unknowns & hazards Examine each process & plan your method

Transfer or sharing…

Reduce source & size of risk Use the contract terms

General conditions Plans & specs

Negotiate new terms May not work with government

Change strategic approach Merger or joint venture with another firm Hire subcontractor for high risk work Purchase additional insurance

Mitigation…

Good planning & communication Quality control processes

Use/acquire the right skills Use/acquire the right equipment Use your experience wisely

Act promptly if the unexpected occurs

Insurance…

Covers unexpected situations Situations beyond your control

Your track record is important Cost is a factor Do not overuse

Recovery…

Read the contract Good record keeping… especially

impacts Follow correct procedures Demonstrate mitigation efforts Make a convincing presentation Attempt settlement at lowest level Seek legal help

Cost recovery 101 (a)…

Detailed Work Breakdown Structure (WBS) for estimating List & code each activity & duration Establish start & finish dates & labor hours List materials required & procurement lead Labor hours for shop drawings & submittals Have accounting code for each of above

Cost recovery 101 (b)…

Develop change/claim spreadsheet Use bid data as base line List all estimated activities & costs in a WBS Calculate “actual” duration & costs for WBS Establish % triggers to identify problems Notify owner’s rep immediately of problems

Cost recovery 101 (c)…

Use data to analyze source of problem Defective plans & specs Differing site conditions Interruption of work flow Unusual weather conditions Delay in receiving EI or submittal response Problems with labor Bad bid

Cost recovery 101 (d)…

Read the contract Begin mitigation immediately to minimize loss Stay within contractor’s authority Determine risk allocation for each problem Comply with all notification requirements Request contract change when required Establish new activity code for all added work Track cost of new work Quantify delay to other work

Pyramid Cost Estimate-1…  =SUM(E8/

F8+G8*E8+H8*E8)*B8 

=SUM((E8/F8*I8)+(G8*E8*J8+10)+(H8*E8*K8+10))B8

Labor Cost Const     Laborers(L) Labor Rate  

  Time     (Note1) ($/day) Labor

  DaysS/U

Man-days

L/day Prod

Super Mgt L S M Cost

Planning 550 S 37,675 50 0.8 .1 .02 $5 $15 $30 $240,625

Master Plan 400 S 27,400 50 0.8 .1 .02 $5 $15 $30 $175,000

Site Selection 500 S 53,000 50 0.5 .1 .02 $5 $15 $30 $312,500

Build Camp 200 U 84,533 250 0.6 .02 .004 $2 $10 $20 $184,667

Demob Camp 150 U 63,400 250 0.6 .02 .004 $2 $10 $20 $138,500

Hire Workforce 1800 S 48,960 20 0.8 .1 .01 $5 $15 $30 $325,800

Train Team 1 500 S 65,500 100 0.8 .05 .01 $2 $10 $20 $170,000

Train Team 2 700 S 91,700 100 0.8 .05 .01 $2 $10 $20 $238,000

Train Team 3 650 S 85,150 100 0.8 .05 .01 $2 $10 $20 $221,000

Prep Const Site 550 U 929,867 1000 0.6 .02 .004 $3 $12 $25 $2,948,000

Const Core 3000 U12,144,00

0 2000 0.5 .02 .004 $3 $12 $25 $38,100,000

Pyramid Cost Estimate-2…Trim Exterior 2400 U 2,428,800 500 0.5 .02 .004 $3 $12 $25 $7,656,000

General Design 2000 S 137,000 50 0.8 .1 .02 $5 $15 $30 $875,000

Design Structure 520 S 17,810 25 0.8 .1 .02 $5 $15 $30 $118,950

Open Quarry 200 U 33,813 100 0.6 .02 .004 $3 $12 $25 $110,800

Cut Blocks 2400 U 971,520 200 0.5 .02 .004 $3 $12 $25 $3,091,200

Cut Trim 2000 U 809,600 200 0.5 .02 .004 $3 $12 $25 $2,576,000

Interior Design 1000 S 34,250 25 0.8 .1 .02 $5 $15 $30 $228,750

Room Constr 2500 U 2,138,333 500 0.6 .04 .004 $3 $12 $25 $7,025,000

Int Finishes 2200 U 842,914 250 0.7 .1 .004 $4 $14 $30 $4,022,857

Final Inspection 200 S 27,200 100 0.8 .1 .01 $8 $20 $50 $254,000

Demob Const Site 400 U 161,920 200 0.5 .02 .004 $2 $10 $20 $350,400

Bury Pharoah 100 S 13,211 100 0.9 .2 .01 $10 $30$10

0 $183,111

Labor Sub-total    21,247,55

7               $69,546,160

Pyramid Cost Estimate-3…

=SUM(B34*E34)

Stone Cost#stone

s    T/

stone Tons$/

Ton        =SUM(F34*G3

4)

Cut core2,556,98

8 37,670,964 $20 $153,419,280

Place Core-Note(3)

2,556,988 3

7,670,964 $12 $92,051,568

Cut trim 45,970 0.5 22,985 $10 $229,850

Place Trim-Note(3) 45,970 0.5 22,985 $45 $1,034,325

Stone Sub-total                     $246,735,023

Pyramid Cost Estimate-4…

=SUM(D8+D9+D10+D13+D14+D15+D16+D20+D21+D25+D28+D30)

Support Cost #man days   $/man-day                

Skilled Workers(S) 638,856   $10               $6,388,561

Unskilled Workers(U) 20,608,701   $4               $82,434,804

Support Sub-total 21,247,557                   $88,823,365

Grand Total                     $405,104,548

Questions?