RISK ASSESSMENT AND MANAGEMENT IN

CONSTRUCTION PROJECTS

Project by
A.DEVIPRASADH
M.E Construction Engineering and Management

Under the guidence of

Dr.M.SEKAR
Professor & Dean, College of Engineering – Guindy,
INTRODUCTION

 Project risk management is the processes

concerned with identifying, analyzing, and
responding to project risk.

 Risk is a multi-facet concept. In the context of

construction industry, it is the likelihood of the
occurrence of a definite event or combination
of events which occur during the whole process
of construction.
 Risk is exposure to the consequences of
uncertainty.
RISK ASSESSMENT
 Risk assessment is defined as a technique that
aims to identify and estimate risks to personnel
and property impacted upon by a project.

 Construction involves many variables, and it is

often difficult to determine causality,
dependence and correlations.

 As a result, subjective analytical methods that

rely on historical information and the
experiences of individuals and companies have
been used to assess the impact of construction
risk and uncertainty.
RISK IN REAL ESTATE AND
CONSTRUCTION INDUSTRY

 The real estate and construction industry has

changed significantly over the past years.
 It is an industry driven primarily by private investors;
the presence of securitized real estate has increased
considerably.
 Not unexpectedly, the influence of institutional
investors on the real estate industry is formidable.
 They are beginning to experience a higher degree of
scrutiny by investors, consultants and analysts, and
are expected to deliver "best in class" service in all
areas - from property management to risk
management.
The four major processes of project risk
management

 Risk Identification
Determining which risks are likely to affect the project and
documenting the characteristics of each.
 Risk Quantification
Evaluating risks and risk interactions to assess the range
of possible project outcomes.
 Risk Response Development
Defining enhancement steps for opportunities and
responses to threats.
 Risk Response Control
Responding to changes in risk over the course of the
project.
 General Sources of risk in construction
projects

 Misunderstanding of contract terms and conditions

 Design changes and errors

 Poorly coordinated work

 Unskilled staff

 Poorly defined roles and responsibilities

 Natural hazards

 Political and legal problem

OBJECTIVE
 Infrastructure projects being huge in nature
and involving a large amount of money, any
sort of wastage (either time, resources etc)
would lead to huge monetary losses.

 The losses are due to various risks associated

with such mega projects.

 Research on risk assessment and management

has been done by various people, mostly on
developed countries.
 In India, only few research works have been
done in this area.

 This study focuses risk assessment and

management in India in field of construction.

 The scope of this work is limited to the

construction of large building projects like IT
parks, Multiplexes, Malls, Large residential
complex etc.
METHODOLOGY

 Study of literature related to Risk Analysis and Risk

Management capabilities
 Preparation of Questionnaire.
 Site visit to major construction project sites.
 Questionnaire survey and personnel interviews with
in-charges and managers and collection of data
from site.
 Analyzing the Questionnaire
 Qualitative analysis of data obtained from site and
to identify the root cause.
 Remedial measures to be suggested and the
present data to be recorded for future reference.
 Conclusions, recommendations and suggestions for
future study.
 Types of risk

Financial risk

1. Bankruptcy of project partner

2. Loss due to fluctuation of inflation rate
3. Loss due to fluctuation of interest rate
4. Loss due to fluctuation of exchange rate
5. Loss due to rise in fuel prices
6. Low credibility of shareholders and lenders
7. Changes in Bank formalities and regulations
Legal risk

1. Breach of contract by project partner

2. Lack of enforcement of legal judgment
3. Improper verification of contract documents
4. Lack of knowledge of arbitration
5. Uncertainty and unfairness of court justice
Management risk

 Change of Top management

 No past experience in similar projects
 Short tendering time
 Sub-contractor related problems
 Improper project feasibility study
 Improper project planning and budgeting
 Inadequate choice of project partner
Management risk contd…
 Improper project organization structure
 Poor relation and disputes with partner
 Poor communication between clients
 Internal management problems
 Team work
 Poor relation with government departments
 Time constraint
 Project delay
Policy and political risk

1. Cost increase due to changes of Govt policies

2. Loss incurred due to corruption and bribery
3. Loss incurred due to political changes
4. Loss due to bureaucracy for late approvals
Technical risk
 Design changes
 Equipment failure
 Errors in design drawings
 High degree of difficulty in construction
 Accidents on site
 Stiff environmental regulations
 Incompetence of transportation facilities
 Industrial disputes
 Materials shortage
Technical risk contd…

 Obsoleteness of building equipment

 Poor quality of procured materials
 Problems due to partner’s different practice
 Shortage in supply of water
 Shortage in supply fuel
 Shortage in supply electricity
 Unknown site physical conditions
 Following government standards and codes
 Wastage of materials by workers
 Theft of materials at site
 Site distance from urban area
 Surplus materials handling
 Architect Vs Structural Engineer dispute
 Shortage of skilful workers
Environmental risk
 Any adverse impact on project due to climatic
conditions

 Any impact on the environment due to the

project

 Healthy working environment for the workers

METHOD OF SURVEYING
 The general methodology of this study relied largely on
the survey questionnaire which was collected from the
local building contractors of different sizes by mail or by
personnel meeting. A thorough literature review was
initially conducted to identify the risk factors that affect
the performance of construction industry as a whole.

 This research has adopted the more general and broad

definition of risk as presented by Shen et al (2001)* on
China’s construction joint ventures and more risk factors
from other literature. Also some interviews with industrial
practitioners were conducted to produce to check
effectiveness of questionnaires.

 *Shen et al (2001) based on their survey, established a risk

significance index to show the relative significance among the risks
associated with the joint ventures in the Chinese construction
procurement practice. Real cases were examined to show the risk
environment faced by joint ventures.
ANALYSIS OF SURVEY RESULTS
 For calculating the significance score = multiply the
probability of occurrence by the degree of its
impact.
 Thus, the significance score for each risk assessed
by each respondent can be obtained through the
model

where
Si = significance score assessed by respondent j for risk i;
αj = probability of occurrence of risk i, assessed by respondent
j; and
βi = degree of impact of risk i, assessed by respondent j.
 By averaging scores from all the responses the risk
index score is obtained and is used to rank all
risks. The model for the calculation of risk index
score can be written as

 RSi = index score for risk i;

 Si = significance score assessed by respondent j for
risk i and
 T = Total number of responses. To calculate Si, the
five point scales for α and β, which will be
converted into numerical ( Likert scale) scales.
KEY FOR QUESSIONAIRE
Example
Results of survey
 Totally for seventy five companies the questionnaires
were given, out of which forty five had an effective
reply and two were rejected due to improper
answering. Thus the response rate is 60%, which is
considered a good response in this type of survey.

 For easy understanding the survey analysis is divided

into two part (i.e.) one for the project costing below
fifty crores and the other for projects costing above
fifty crores.
FINANCIAL RISK

Loss due to fluctuation of inflation rate 3.05

Loss due to fluctuation of interest rate 2.99
Loss due to rise in fuel prices 2.75
Bankruptcy of project partner 1.69
Loss due to fluctuation of exchange rate 1.43
Changes in Bank formalities and 0.93
regulations
Low credibility of shareholders and lenders 0.86
 Rank ing of F inanc ial ris k s 1. Los s due to fluc tuation
of inflation rate

3.5 2. Los s due to fluc tuation

3.052.99
of interes t rate
3 2.75
3. Los s due to ris e in fuel
2.5 pric es
2
Mean Value

1.69 4. B ank ruptc y of projec t

1.43 partner
1.5
0.93 0.86 5. Los s due to fluc tuation
1
of ex c hange rate
0.5
6. Changes in B ank
0 form alities and regulations

F ac tors 7. Low c redibility of

s hareholders and lenders
MANAGEMENT RISK

Shortage of skilful workers 4.58

Materials shortage 2.94
Unknown site conditions 2.83
Design changes 2.74
Site distance from urban area 2.6
Errors in design drawings 2.53
Poor quality of procured materials 2.39
Wastage of materials by workers 2.3
Technical risk 2.15
High degree of difficulty in construction 2.07
Ranking of Market risks
Sub risks
Mean
Competition from other companies 3.51
Fall short of expected income from project 1.15
Increase of accessory facilities price 1.54
Increase of labour costs 2.95
Increase of materials price 3.07
Inadequate forecast about market demand 1.33
Local protectionism 0.98
Unfairness in tendering 1.26
TECHNICAL RISK

Time constraint 4.12

Sub-contractor related problems 3.94
Project delay 3.94
Improper project planning and budgeting 3.25
Poor communication between clients 3.03
Internal management problems 2.93
Improper project feasibility study 2.86
Improper project organization structure 2.79
Team work 2.56
LEGAL RISK

Improper verification of contract 3.83

documents
Breach of contract by project partner 2.91
Lack arbitration clause in agreement 2.13
Lack of enforcement of legal judgment 1.26
Uncertainty and unfairness of court justice 1.04
POLITICAL RISK

Cost increase due to changes of Govt 2.24

policies
Loss due to bureaucracy for late approvals 1.73
Loss incurred due to corruption and bribery 0.78

Loss incurred due to political changes 0.68

ENVIRONMRNTAL RISK

Any adverse impact on project due to 2.5

climatic conditions
Any impact on the environment due to 0.8
the project
Healthy working environment for the 0.8
workers
For project costing more than 50 crores top
ten risks
S.No Sub risk
Mean SD
1 Shortage of skilful workers 4.58 3.61
2 Time constraint 4.12 4.58
3 Sub-contractor related problems 3.94 5.72
4 Project delay 3.94 6.39
5 Improper verification of contract documents 3.83 3.6
6 Competition from other companies 3.51 6.31
7 Improper project planning and budgeting 3.25 2.92
8 Increase of materials price 3.07 4.73
9 Loss due to fluctuation of inflation rate 3.05 3.45
10 Poor communication between clients 3.03 4.47
For project costing less than 50 crores top
ten risks
S.No Sub risk
Mean SD
1 Increase of materials price 4.51 3.5
2 Loss due to fluctuation of inflation rate 4.5 4.13
3 Increase of labour costs 3.93 5.13
4 Materials shortage 3.92 6.56
5 Errors in design drawings 3.85 3.16
6 Shortage of skilful workers 3.56 6.32
7 Time constraint 3.45 3.93
8 Sub-contractor related problems 3.17 5.71
9 Project delay 3.11 4.44
10 Competition from other companies 2.99 6.17
 Bar chart for project costing less than 50 crores - Top ten risks

5 Increase of materials price

4.51 4.5
4.5 Loss due to fluctuation of
3.933.923.85 inflation rate
4
3.56 Increase of labour costs
3.45
3.5
3.173.11
2.99 Materials shortage
3
Errors in design draw ings
Mean

2.5
Shortage of skilful w orkers
2

1.5 Time constraint

1 Sub-contractor related
problems
0.5
Project delay
0
Factors Competition from other
companies
Conclusion
 Shortage of skilful workers is the major risk faced by
almost all the companies. This is because; the skilled
workers are migrating between companies very often
due to the high demand in the market/ Middle east
countries.

 Since real estate, construction sector are in the boom

side, construction companies are in move to make
profit as soon as possible in current wave itself;
 but this creates tremendous pressure to the
management & workers to complete the project in a
very short span. This time constraint risk prevails in all
the companies surveyed.
Conclusion..contd
 Sub-contractor related risks are also high,
since most of the sub contractors are not able
to meet the standards of the main contractor
and the client due their size of work.

 Delay in the project is also one of the main

risks, but this delay is looped with various
others factors and risks directly or indirectly.
Conclusion…
 Inflation rate is very high in India and increasing
proportionately with time, this causes the
increase in prices of materials like cement, steel
which intern causes financial risk to the
developers and construction firms.

 Banks have also raised their interest rates for the

loan given by them, this have affected the
residential construction market hugely. Thus the
financial part of risk is very high than any other
risk.

 Political risk is substantially very low for the large

firms when compared to other risk.
Conclusion…
 Legal risk is also very low, but the
implementation of court directive is not proper;
this was the complaint seen from this survey.

 Large companies are accepting that there are

few environmental effects due to their project,
but says that it is a global phenomena and it can
not be nullified, but only can be reduced.

 Overall management and the financial risks are

high when compared to other risks.
Suggestions to the companies:

 Risk management should be considered a primary

tool to assess the project. From the survey we can
understand that risk management is not followed in
most of the companies as such but if followed also it
is not done systematically. Immediate mitigation
measures are not in place if a risk event happens.
 During the planning stage itself a full fledged risk
assessment about the project should be made as a
effective measure to curb risks.
 Financial part of the risk is a global phenomena and
this risk should be handled carefully using financial
consultants since this cannot be handled by
engineers alone.
 There is not a single company with a separate person
in the manager level who handles risk management
within the company and takes decision on his own.
Thus a risk management body within the company
should be formed and atleast monthly once evaluation
should be done.
 Most of the company’s management follow Top to
down approach which is a traditional approach, but
Down to top approach should be followed so that the
employees’ voices are heard.
 It is better to involve a risk consultant in a large
construction project.
 With the assistance of the practical survey, this paper has
systematically examined major risks affecting the construction
industry.

 This study should assist management in identifying activities where

there is a risk of injury or loss and hence provide a basis for
management decisions on the application of resources.
 These findings are very important for
implementing further effective measures to
ensure the right direction of future development
and create a more attractive construction sector.
National Conference
National Seminar
 Thank you
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