Unity University
Department of construction Technology
and Management
Risk Management in Construction
Lecture 1
Chapter One
Introduction to the concepts of risk
Instructor:- Tesfaye F.
Prepared By:- Tesfaye F
Introduction
Construction is a process of constructing something by man for
one purpose or another. It may be a road, bridge, a dam, a
dwelling place, an airport, a commercial building, etc.
A building can be generally considered as a structure consisting of
floors, walls and roofs erected to provide covered space for
different uses such as residence, business, entertainment,
workshop, etc.
Building design: is the process of providing all information
necessary for construction of a building that will meet its owner‟s
requirements and also satisfy public health, welfare, and safety
requirements.
Building construction: is the process of assembling materials to
form a building based on the building design.
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GENERAL
• Construction Industry is an industry which is involved in the
planning, execution and evaluation of all types of construction
works
• CI Categories - Construction projects can be broadly classified as:
Building Construction (includes residential, institutional,
Educational, industrial , commercial, social and recreational
purposes),
Engineered Construction (includes highway and heavy (e.g.
dams, Sewage plant construction and Industrial Construction).
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Features of Construuction
work
Complexity Stakeholders in Construction work
Uniqueness Complex inter relationship and
interaction
Mobility of facility
Lack of organization set up
Multiplicity of Agencies
Safety hazards
LABOUR FORCE
Labur Quality
Conglomerate of Contractor
Productivity
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Challenges and Opportunities
in Construction industry
a) Employee Safety
b) Lower spending & Consumers
c) The rise in material costs
d) Better Compliance to employee wellness and safety
e) Improved governance of projects
f) Personalized sales experience
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What is Risk?
Risk is defined in financial terms as the chance
that an outcome or investment actual gains will
differ from an expected outcome or return. Risk
includes the possibility of losing some or all of an
original investment.
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Cont…
All construction projects carry some level of risk. Being able
to identify and manage risks requires skill, Careful planning
and being able to make good decision quickly. When risks
become reality, they can be determinant to the successful
completion of project. Properly managed risks can lead to
higher profits, stronger relationship with clients and the
ability to grow and expand your business.
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Cont…
Here are four common risk factor to watch out for on
construction projects along with tips on how to properly
manage them and prevent them from derailing your project.
1) Labor shortage and productivity issues
2) Health and safety hazards
3) Sub contractor Default
4) Change Orders
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Cont…
1. Labor shortage and productivity issues
Not having enough workers available to complete a
project or hit productivity goals is huge risk when taking
on new projects. Without the manpower to perform the
work, The project can suffer from longer construction
schedules and potential delays in delivering the project
to the owner.
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Cont…
2. Health and safety hazards
Keeping workers safe should be that the top priority on every
jobsites. Site condition can change rapidly and unexpected
hazards can crop up at any time creating unexpected project
risks. Major accidents can result in serious „injuries or
fatalities to your employs. Your goal on every project should
be accident free and ensure every workers goes home safe to
their family.
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Cont..
3. Sub contractor Default
Dealing with a subcontractor that fails to perform on project on
a project is a major risk factor for general contractor on
construction projects. A defaulting subcontractor that is not
meting its contractual obligation can completely wreck your
project schedule and destroy profit margin. Schedule delays can
also impact other subcontractor and can result in costly rework.
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Cont…
4. Change Orders
Change order are an inevitable part of construction and
can be a major risk factor when not managed properly. A
change order is simply an addendum or amendment to
the original construction contract of the scope of work.
They can be omission or errors in the original scope of
work or ambiguous construction drawings.
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Types of Construction risk
For proper construction risk management, you
need to know the types of risks inherent in
construction projects. These can be financial,
Contractual and environmental and can be caused
by both internal and external sources.
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Common risks include
Safety hazards that lead to worker acciedents and injuries
Managing change orders
Incomplete drawing and poorly defined scope
Unknown site condition
Poorly written contracts
Unexpected increase in material costs
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Cont…
Labor shortage
Damage or theft to equipment and tools
Natural disasters
Issues with subcontractor and suppliers
Availability of building materials
Poor Project Management
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Uncertainity
Uncertainty refers to epistemic situation involving imperfect or
unknown information. It applies to prediction of future events. To
physical measurement that are already made or the unknown.
Uncertainty arises in partially observable or stochastic environment
as well as due to ignorance. It arises in any number of fields including
insurance, philosophy, physics, statistics, economics, finance
psychology, sociology, engineering, metrology, Meteorology ecology
and information science.
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Causes of Uncertainties in
Construction
The unexpected rise in cost and delayed completion in a project is
usually caused by contractors, scheduling and [Link] is
uncommon of these factors to rise .The impact of schedule and cost
overrun influence the construction industry as well as the over all
economy. Considering the complex nature of construction projects
and pressure to meet deadlines, Project planning and scheduling
should be done in a manner which accommodates changes without
affecting the overall project goals
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Some of causes for
Uncertainty
Poor project scope management
Sudden increase in construction material
Lack of project controls
Issues with suppliers and subcontractors
Poorly written contract
Environmental or weather conditions
Unknown site condition
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Probability
The Probability is the likelihood of an event occurring and the
consequence to which extent the project is affected by an event, are
the impacts of risk. By combining the probability and impact, the
level of risk can be determined.
Probability- A risk is an event that “may” occur. The probability of it
occurring can range anywhere from just above 0 percent to just
below 100 percent.(Note: it can‟t be exactly 100 percent because
then it would be certainty, not a risk. And it can‟t be exactly 1
percent, or it wouldn‟t be a Prepared
risk. By:- Tesfaye F
Reduction mechanism for risk
probability
a) Improve companies financial status
b) Prepare effective schedule
c) Proper management and preparation of design
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Components of Risk Reward
The components need to be considered separately when
determining on how to manage the risk. Risk components are
The events could occur- the risk
The probability that the event will occur- the likelihood
The impact or consequence of the event if it occurs – the
penalty ( the price you pay)
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Prepared By:- Tesfaye F
