Part - 3

Types of Risks
• Objective Risk & Subjective Risk
• Voluntary and Involuntary
• Financial Risk & Non Financial Risk
• Pure Risk & Speculative Risk
• Fundamental Risk & Particular Risk
• Internal Risks & External Risks
• Predictable & Non Predictable
• Generic Risks
• Specific Project Risks
• Business Related Risks
• Project Life Cycle Risks : Feasibility, Design, Construction and
Operation
 Basic Categories of Risk

• Objective and Subjective risk

• Objective Risk is relative variation between expected
loss and actual loss.
• Subjective risk is uncertainty on person’s state of
mind.
• Impact of subjective risk varies depending upon the
individual.
• Two persons in the same situation can have different
perception of risk and their behavior may alter
accordingly.

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• For example, assume that a property
insurer has 10,000 houses insured over a
long period and, on average, 1 percent,
or 100 houses, burn each year.
• However, it would be rare for exactly 100
houses to burn each year. In some years,
as few as 90 houses may burn; in other
years, as many as 110 houses may burn.
• Thus, there is a variation of 10 houses from the expected
number of 100, or a variation of 10 percent.
• This relative variation of actual loss from expected loss is
known as objective risk.
 Basic Categories of Risk
Voluntary and Involuntary
• Voluntary risks are the potential risks / opportunities
to which an organisation is exposed are largely
determined by the responsibilities it has accepted
under the array of legal contracts signed with its
business partners
• Contractor has accepted a contract that the building
will be completed within a certain budget.

• The important point is that these events are not risks

or opportunities to the other companies involved in the
project, which have not signed this particular contract.
These will be exposed to risks and opportunities
according to their contracts.
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• All companies are also exposed to involuntary risks
which are associated with their responsibilities implied
by common law, legislation and codes of conduct
issued by regulatory institutions and moral codes of
conduct in society and industry practices.
• Unfortunately, this is common in the construction
industry and many companies either fail to manage
these risks or are prevented from doing so by
established practices.
• For example, many contractors, sub-contractors and
facilities managers are excluded from the design
process and when organisations discover they are
exposed to involuntary risks then there will be delay,
financial loss and conflict.
• Risk can travel in 2 directions :
• Upside : Opportunity & Downside : Threat
Every risk has upside and downside but in construction business we focus
on downside risk due to Penal Nature of Construction Business : Under
performance penalties.
• Pure Risk and Speculative Risk :
• Pure: there are only the possibilities of loss or no loss.
• Speculative: both profit or loss are possible. It may prove to be
beneficial to the society.
Which type of risks are Theft, Exchange rate fluctuation ?
In past focus of RM is only on Pure risks because the common usage of the
word risk was only negative.

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 • Financial Risk and Non-Financial Risks
• Financial risks where loss can be measured in terms of
money. E.g. delayed in cash inflows, credit risk, interest
rate fluctuation, Exchange rate fluctuation,
• Fundamental and particular risk
• Fundamental: this is a risk that affects the entire
economy or large numbers of persons or groups.
• Particular: this is a risk that affects only the individual.

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• Enterprise Risk
• Encompasses all major risks faced by a
business firm, which include pure risk,
speculative risk, strategic risk,
operational risk, and financial risk
 Operational risk : Probability of loss
occurring from the internal inadequacies of
a firm or a breakdown in its controls,
operations, or procedures.

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• Strategic risk : A possible source of loss that might arise from
the pursuit of an unsuccessful business plan.
For example, strategic risk might arise
• From making poor business decisions,
• from the substandard execution of decisions,
• from inadequate resource allocation, or
• from a failure to respond well to changes in the business
environment,
• Corporate Governance Risk,
• Merger & Acquisition Risk,
• Talent Management Risk,
• Failure in Strategy Execution,
• risk of a decline in competitive advantage  

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 Project Risks

External Environment Internal Environment External Environment

Predictable Sources Unknown Uncertainties

Political & legal Acts of God

Design & Specification Ecological

Financial & Economic Safety & Health

Leadership & Organization

Scope Changes Failures

Time overrun Resources Failures

Costs Overrun Contractor Failures

Technology Change Quality Failures

Predictable Risks or Non Predictable

• Knowns are those risks that you are aware of and feel will impact
you. e.g. A planned absence of one of your team members. You
know it is going to happen and you know it will affect the labour on
your job., Poor Project Management practices, Lack of resources,
Multiple projects, external dependencies
• A known-unknown is a situation that you know is going to happen,
but are not sure if the situation will involve you.
• Eg. Expiration of the plant labour agreement. It is sure to happen,
but you don't know whether your contractors will support the
workers or their union .
 Unknown - Unknown Risks
• Unknown-unknowns cannot be analysed, because there is
no way to know they exist until they happen. They are
handled by a method called workarounds.
• Ex: Unexpected legal changes, resources losses, natural
disasters
• Just before a project meeting, the engineering lead received
word that his father had died in the middle of the night. The
team delayed making decisions on some critical engineering
events without the knowledge and judgment of engineering
manager.
• On a project in Dubai the entire twelve-member masonry
crew failed the drug screening test even though they had
been told that drug screening was required on the project.

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RISK ASSOCIATED WITH BRIDGE CONSTRUCTION PROJECT
FINANCE RISK/INSURANCE RISK/CONTRACTUAL RISK/MGMT RISK/DESIGN
RISK/EXTERNAL RISK/TIME MGMT

• Financial risks where loss can be measured in

terms of money. E.g. delayed in cash inflows,
credit risk, interest rate fluctuation, Exchange rate
fluctuation,
• Insurance Risk:An insurance risk is a threat that is
covered by an insurance policy and can cause financial
losses. When the insured event takes place and a
claim is filed, the insurance company has to pay the
policyholder the agreed reimbursement amount.
• Ex:The company obtain large loans, Health insurance
• Management Risk:
• Management in terms of tools, materials, and
staff, is to be defined as per the needs of project.
• Need to allocate responsibilities and set an
accurate time-frame for each task.
• Always try also to think carefully about the
obstacles that might emerge during the process.
• If this is not done properly it leads to Mgmt Risk.
• Ex: There no regular material test for materials in
the project site
• Regular inspection of the site
• Design Risk: Design risk is the potential for a design to
fail to satisfy the requirements for a project.
• This includes designs that are fundamentally flawed,
infeasible, inefficient, unstable or below client
standards.
• A poor design may manifest itself as functional
defects or hurdles to development that impede
project progress
• Ex: Dispute between owner and design team,Plans of
design are incompatible with execution
• Time Management Risk:If Time Management in construction
projects is not effectively done then it leads to Time Management
Risk.
• Ex:Long distance between procurement and project site, Casting and
curing time is more
 Types of Generic Risks in
Project & Business

Physical
Acts Financial
of &
God Economic

Risks

Political
Const.
&
Related
Environ.
Design
 Types of Generic Risks in
Project & Business

Physical
Acts Financial
of & Acts
Actsof
ofGod
God
God Economic

 Heat wave
 Rain
 Flood, Storm,
Risks  Earthquake
 Landslide
Political
 Fire, Cyclone
Const.
&
Related
 Wind damage
Environ.
Design
 Types of Generic Risks in
Project & Business

Physical
Acts Financial
of & Physical
God Economic
 Damage to structure
 Damage to
equipment
Risks  Labor injuries
 Fire
 Theft
Political
Const.
&
Related
Environ.
Design
 Types of Generic Risks in
Project & Business

Physical
Financial
Acts
of &
Financial & Economic
God Economic

 Inflation
 Availability of funds
 Complexity of
Risks
funding
 Exchange rate
Political
fluctuations
Const.
&
Related
 Financial default
Environ.
Design
 Types of Generic Risks in
Project & Business

Physical
Acts Financial Political &
of &
Economic
Environmental
God
 Changes in laws
and regulations
Risks  Requirement for
permits
 Law & order
Political
&
Const.
Related
 Pollution and
Environ.
Design
safety rules
 Types of Generic Risks in
Project & Business

Physical
Acts Financial
of & Design
God Economic

 Incomplete design
 scope
 Defective design
Risks
 Errors &
omissions
Political
 Inadequate
Const.
&
Related specifications
Environ.
Design
 Types of Generic Risks in
Project & Business

Physical
Acts Financial
of & Construction
Economic
God Related
 Labor disputes
 Labor
productivity
Risks  Different site
conditions
Political
 Design changes
Const.
&
Related
 Equipment failure
Environ.
Design
Project Risk Management Processes

• It is all about planning

• Planning risk management
• Identifying risks
• Risk Assessment & Prioritization
• Performing qualitative risk analysis
• Performing quantitative risk analysis
• Planning risk responses

• Controlling and Monitoring

• Controlling risk

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Project Risk Management Processes

• It is all about planning

• Performing qualitative risk analysis

• Performing quantitative risk analysis
• Planning risk responses

• Controlling and Monitoring

• Controlling risk

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Planning Process Group:
Performing Qualitative Risk Analysis
• Assess the likelihood and impact of identified risks to
determine their magnitude and priority
• Risk quantification tools and techniques include:
• Probability/impact matrixes
• The Top Ten Risk Item Tracking
• Expert judgment

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Probability/Impact Matrix
• Probability of risk occurring by impact of risk

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Probability/Impact Matrix: Risk Factors

• Numbers that represent the overall risk of specific events

based on their probability of occurring and the consequences
to the project if they occur

Information Technology Project Management, Seventh

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Edition
Top Ten Risk Item Tracking
• Top Ten Risk Item Tracking is a qualitative risk analysis tool
that helps to identify risks and maintain an awareness of
risks throughout the life of a project

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 Watch List
• A watch list is a list of risks that are low priority, but are
still identified as potential risks
• Qualitative analysis can also identify risks that should be
evaluated on a quantitative basis

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Planning Process Group:
Performing Quantitative Risk
Analysis
• Large, complex projects (or risks) involving leading edge
technologies often require extensive quantitative risk
analysis

• Main techniques include:

• Decision tree analysis
• Simulation
• Sensitivity analysis

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Quantitative Technique: Decision Trees and
Expected Monetary Value
• A decision tree is a diagramming analysis technique used to
help select the best course of action in situations in which
future outcomes are uncertain

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 Quantitative Technique:
Simulation

• Simulation uses a representation or model of a system to

analyze the expected behavior or performance of the system

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 Steps of a Monte Carlo Analysis

• Assess the range for the variables being considered

• Determine the probability distribution of each variable
• For each variable, select a random value based on the
probability distribution
• Run a deterministic analysis or one pass through the model
• Repeat steps 3 and 4 many times to obtain the probability
distribution of the model’s results

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 Quantitative Technique:
Sensitivity Analysis
• Sensitivity analysis is a technique used to show the effects of
changing one or more variables on an outcome

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Planning Process Group:
Planning Risk Responses
• After identifying and quantifying risks, you must decide how to
respond to them

• Four main response strategies for negative risks:

• Risk avoidance
• Risk acceptance
• Risk transference
• Risk mitigation

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Response Strategies for Positive Risks

• Risk exploitation
• Risk sharing
• Risk enhancement
• Risk acceptance

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