Construction projects: manage risk to achieve success By: Gareth Byatt, Principal Consultant Risk Insight Consulting Date: 12 th August 2017 Summary: This Paper discusses risk management on construction projects. The risk profile of construction projects means that they have a strong emphasis on people, safety and environmental risk as well as financial, reputational, legal, regulatory and compliance risks. An underlying ethos of this Paper is that risk is uncertainty, and uncertainty can be positive (in the shape of opportunities) and/or negative (in the shape of threats, sometimes called risks). The management risk of risk is the management of uncertainty, and what we need to focus on is the uncertainty that matters. How a construction project team takes and manages risk can be the difference between a successful project and an unsuccessful one. Good risk management can also play a valuable role in maximising productivity, which The Economist magazine highlighted recently as being lower in the construction industry than in other industries. Project team culture is key For risk management to be effective, you need a positive team environment and culture to exist. In a positive environment, project leaders regularly discuss project risks (positive and negative) and they set an example with the right tone from the top. When project leaders discuss risks and emphasise the importance of managing risk and uncertainty, the team s attitudes and behaviours to risk should be aligned with the project objectives. The project team will be willing to articulate and communicate its risks and to ask for help when they need it. Plan your approach to managing risk and uncertainty It is good practice for a construction project to have a project Risk Management Plan (RMP), or a Risk section of a Project Management Plan. Whether your project is residential, commercial, infrastructure or some other form, documenting and agreeing how you manage risk will pay dividends. This material is owned by Risk Insight Consulting. All rights reserved. 1
An RMP should cover at least four elements: 1. First, it should describe how all disciplines and teams on your project will manage risk in a coordinated way. 2. Second, it should describe roles and responsibilities for taking and managing risk, and the governance structure to review deliverables at key project phases and milestone reviews. 3. Third, it should describe the Risk tools and techniques you will use, and how they will be embedded into the rhythm of the project team s activities. 4. Risk tools and techniques may include: a. structured Risk workshops, planned into the schedule at key milestones (the way they are run will alter as the project progresses); b. a laminated Risk card, which summarises the RMP; c. an IT tool (ideally a database rather than Excel) to capture risks and controls and track actions as a shared risk register; d. good practices such as schedule risk, quality risk, and quantitative risk analysis for evaluating risks on cost and schedule. 5. Fourth, the RMP should describe how you will measure your success in managing risk, and leverage lessons learned from other projects. Agree your project s risk appetite Risk appetite is a technique common in industries such as finance. Projects can benefit from it also. Risk appetite can be used to define your propensity for taking different types of risk (financial, safety, quality, community risk etc.). Specific metrics can be agreed with tolerances defined within which you want to operate. When risk appetite is designed well, it guides the decision-making of the project team on how to tackle risks, what actions to take and the resources to apply to them, and when to correct trends that indicate under-performance. When a good team environment and culture exists, and your appetite for risk is understood, people know what risk is appropriate to take. Prioritise your risks Prioritisation of risks can be challenging, particularly in a regularly changing environment such as a construction project. You need to agree and focus on the risks that matter most (such as safety risk), and how they change over time. Many of us are familiar with an impact x likelihood = rating method to prioritise risks into a risk matrix and heat map and/or a risk register. This material is owned by Risk Insight Consulting. All rights reserved. 2
Using a risk matrix the structured of which is influenced by your risk appetite to prioritise risks, and displaying these risks in a heat map, is a common approach. Additional factors can be considered when you evaluate risks, such as risk velocity and impact that one risk has on others. The size of your project will influence the number of risks on your risk register (or perhaps you call it a risk & opportunity register, if that is your preferred terminology). On a large project, you may split your register up into project segments, reflecting the way the project is structured (e.g. into plots). This ensures that people on the project team re focused on the areas they are working on and responsible for whilst also being able to see the overall picture during project reviews. Team members need to have a manageable number of risks to own perhaps a maximum of ten per person (it depends on the project). Remember that risk is uncertainty, and what you need focus your efforts on are the uncertainties that matter most (which change over time) to achieving your objectives. Controls to manage risk are key Controls are fundamental to managing risk. Construction controls will include a major focus on Environment, Health & Safety controls, Scope Change Control, Procurement and Contract controls, and others. Having the right controls in place to manage risk, knowing which controls are critical, rating control effectiveness and testing controls is important to ensure that you have a robust control framework in place. Controls must be proportionate to the risks that are faced so that effort is focused on what matters most. The biggest risks need the most controls focus, and controls that are critical are those that need the most attention. Modern technology solutions offer new and innovative ways of managing risk and controls in a project environment (for example, technology can provide good safety benefits). Embedding risk management into regular activities Weaving the management of risk into the rhythm of your project governance structure is critical to ensuring it adds value. Management reviews, design reviews, schedule reviews and so on should have an agenda section dedicated to managing risk. It is vital to review operational construction risks as part of your daily activities. The nature of construction projects means that operational risks are dynamic they change over time. What was a low risk yesterday or last month may be a high risk today / this month, due to various factors (a new team coming onto site, weather changes, working in a new part of the site, or something else). This material is owned by Risk Insight Consulting. All rights reserved. 3
Taking the time to consider what s new or different today? is crucial when you are undertaking your daily construction work. You are what you measure Measure the cost of controls and actions to manage risks, and their effect and benefits on your project s outcomes and objectives. Track the cost of managing risk and your performance against risk appetite over time to achieve project objectives review your safety metrics, financial, schedule, supply chain metrics, community metrics and others. Keep learning to continuously improve Capture and share knowledge and lessons learned of how you have managed risk so that others in your organisation can learn from your experiences. Your RMP should include details of how you will run knowledge capture sessions, such as peer assists (seeking knowledge before activities commence), after action reviews (quick-fire learning during activities), and retrospectives (post-implementation lessons learned). An example in action taking and managing schedule risk Let s look at an example of a construction project that is assessing an opportunity to deliver safely a project to a tight schedule. It is prioritised as significant in the opportunity matrix. You have ideas of how to achieve a fast schedule safely (topdown construction, lean construction techniques, smart working shift patterns, etc.). You need to ensure that decision-makers understand and agree to the risks that are involved, with scenarios reviewed on how to take and manage risks and the costs to doing so that fit within your risk appetite for schedule and safety, and other types of risk (safety being paramount at all times). The team analyses the schedule to see insights into key risks - which ones to take, which ones to manage and which ones not to take. A Schedule Risk workshop, including a Pre-mortem analysis to work backwards from an imagined successful end outcome, is held to decide what to do. Controls against risks, including those that are critical, are agreed and costed. An assessment is undertaken, including quantitative risk analysis, to demonstrate that the cost of all actions is outweighed by the benefits of achieving the schedule. The work is then performed per the agreed plan, monitored and adapted when required, with cost-benefit and safety outcomes tracked. Lessons are learned and shared. This material is owned by Risk Insight Consulting. All rights reserved. 4
Conclusion Risk management is a construction project team s ally. Taking the time to plan, implement and monitor good practices to take and manage risk increases the likelihood of achieving your project s objectives and achieving successful, and predictable, outcomes. The diagram below describes a few pointers of risk management to keep in mind on a daily basis. This material is owned by Risk Insight Consulting. All rights reserved. 5