Unit-06

Risk Management
 Risk has been defined as a measure of probability,
the severity, and the exposure of all hazards of an
activity. (Osama Jannadi)
 Hertz and Thomos (1983) defined risk as uncertainty
and result of uncertainty. It refers to lack of probability
about the structure, outcome or consequences in
planning or decision or situation.
 Risk analysis involves estimating the probabilities
needed as input data for the evaluation of decision
alternatives. (Lifson and Shaifar 1982)
 Risk= Probability of an accident x Losses per
accident. (or)
 Probability of an event occurring x Impact of event
occurring
Risk versus uncertainty
 Uncertainty: The lack of complete certainty, that is,
the existence of more than one possibility. The "true"
outcome/state/result/value is not known.
 Measurement of uncertainty: A set of probabilities
assigned to a set of possibilities. Example: "There is
a 60% chance this market will double in five years"
 Risk: A state of uncertainty where some of the
possibilities involve a loss, catastrophe, or other
undesirable outcome.
 Measurement of risk: A set of possibilities each with
quantified probabilities and quantified losses.
Example: "There is a 40% chance the proposed oil
well will be dry with a loss of 12 million Rs. in
exploratory drilling costs".
Factors responsible for Risk and
uncertainty
 Place - Ground strata Dewatering conditions at site beyond control
Vastu shastram etc
 Entrepreneur/management/organization - Relation ship between
Contractor / engineer-in-charge and owner
Frequent changes in designs/planning/execution instructions etc
Financial and economical risk (e.g. inflation, unavailability of funds)
Change in orders) (Al Bahar 1990)
 Construction machinery/labor - Availability or paucity of
Materials of construction / labors/ machinery
Fluctuation in cost of material or labor
Theft of materials at crucial time
Run away of labor at crucial time
Injury & failure
 Construction activities/processes/environment- Environmental conditions /
Seasonal restraints and constraints
Rehabilitation
 X factor -Act of God, (e.g. Earthquake, Flood, Fire, Cyclone, & Unknown factor)
International / local market conditions
Political risks. (e.g. changes in rules and regulations, War or political
uncertainty).
Type of Risk
 Risk can be of different types.
 They may be
 Physical Causing direct harm or damage,
 Psychological Causing damage to self-
esteem
 Social Causing loss of reputation
 Contagious Causing infectious,
communicable, transmittable losses
 Risk management
 Risk management is concerned with
identifying risks and drawing up plans to
minimise their effect on a project.
 A risk is a probability that some adverse
circumstance will occur
 Project risks affect schedule or resources;
 Product risks affect the quality or performance
of the software being developed;
 Business risks affect the organisation
developing or procuring the software.
The risk management process
 Risk identification
 Identify project, product and business risks;
 Risk analysis
 Assess the likelihood and consequences of
these risks;
 Risk planning
 Draw up plans to avoid or minimise the effects
of the risk;
 Risk monitoring
 Monitor the risks throughout the project;
Risk identification & Methods for
identifying risks
 Risk identification
(What they are, when, what effect and what measures)
 Technology risks.- The RCC design, Quality of materials, New
Technologies used
 People risks: Skill level of people.
 Organisational risks:
 Requirements risks.
 Estimation risks.
 Methods for identifying risks
 Brainstorming- session attended by the client, PM, RM and design team
 Interviews- The Delphi technique
 Questionnaires- Combination of previous experience and specific project criteria.
 Use of specialists
 Pervious experience
 Risk Assessment
 Qualitative assessment
• Classification of reference- environmental: site condition health
and safety contractual: client, contractor, third party. Design: planning permission

• Description of the risk

• Relationship of risk to other risks
• Potential impact
• Probability of occurrence
• Response/ mitigation strategy- Avoidance, Transfer, Reduction,
Risk responsibility

• Risk responsibility/ owner

 Risk Assessment

 Quantitative assessment-
• Simple assessment
• Probabilistic analysis
• Multiple estimating using risk analysis
• Sensitivity analysis
• Decision trees
• Monte Carlo simulation.
 Risk management strategies (i)
Risk  Strategy 
Organisational &  Prepare a briefing document for senior management 
financial problems  showing how the project is making a very important 
contribution to the goals of the business. 
Recruitment  Alert customer of potential difficulties and the 
problems  possibility of delays, investigate buying­in 
components. 
Staff illness  Reorganise team so that there is more overlap of work 
and people therefore understand each other’s jobs. 
Defective  Replace potentially defective components  
components 
 
Risk  Strategy 
Requirements  Derive traceability information to assess requirements 
changes  change impact, maximise information hiding in the 
design.  
Organisational  Prepare a briefing document for senior management 
restructuring  showing how the project is making a very important 
contribution to the goals of the business.  
Database  Investigate the possibility of buying a higher­
performance  performance database.  
Underestimated  Investigate buying in components, investigate use of a 
development time  program generator 

 
 The Cost of Risk
The total direct and
indirect cost of risk

The Cost of losses that Cost due to the

Costs incurred in
Nature occurs existence of risk
handling risk
of cost

The
Private cost Social cost
distribution
of cost
 Risk Handling Cost
Insurance premium, charges for loss prevention devices, and
fees for consulting services.
 Loss cost
Direct costs to a firm of industrial accidents include the
compensation payable to injured employees, damage to
machinery, loss of production
Indirect costs
 Private and social costs
Role of Risk Manager