Abstract

Construction projects are initiated in dynamic environment which result in circumstances of

high uncertainty and risks due to accumulation of many interrelated parameters. The
purpose of this study is to use novel analytic tools to evaluate the construction projects and
their overall risks under incomplete and uncertain situations. It was also aimed to place the
risk in a proper category and predict the level of it in advance to develop strategies and
counteract the high-risk factors. The study covers identifying the key risk criteria of
construction projects at King Abdulaziz University (KAU), and assessing the criteria by the
integrated hybrid methodologies.
The proposed hybrid methodologies were initiated with a survey for data collection. The
relative importance index (RII) method was applied to prioritize the project risks based on
the data obtained. The construction projects were then categorized by fuzzy AHP and fuzzy
TOPSIS methodologies. Fuzzy AHP (FAHP) was used to create favorable weights for fuzzy
linguistic variable of construction projects overall risk. The fuzzy TOPSIS method is very
suitable for solving group decision making problems under the fuzzy environment. It
attempted to incorporate vital qualitative attributes in performance analysis of construction
projects and transformed the qualitative data into equivalent quantitative measures. Thirty
construction projects were studied with respect to five main criteria that are the time, cost,
quality, safety and environment sustainability. The results showed that these novel
methodologies are able to assess the overall risks of construction projects, select the project
that has the lowest risk with the contribution of relative importance index. This approach will
have potential applications in the future.

How to Calculate Risks During Selection of Your Projects

written by: Rupen Sharma, PMP edited by: Michele McDonough updated: 5/23/2013
Risk Management and Project Selection usually go hand-in-hand. A project may be
successfully implemented and deployed, but need not necessarily lead to financial gain.
Read on to explore the role of Risk Management and Project Selection.

Two Important Considerations

Project selection is usually based on several decision-making points, such as the project's
potential for profitability and its life-cycle cost. As the inflow of funds is usually limited,
project selection is critical. Another key decision making point that is usually left out is the
level of risk. During the project selection process, risk management needs to be conducted.
Let's look at an example to understand the importance of risk management during the
process of project selection.

Suppose you are implementing a project that increases a manufacturing plants capacity.
The project involves installing new equipment and building workforce capacity. After months
of careful project execution and risk management, you close the project successfully. This is
when theoretically the project should provide value to the project sponsor. However, what if,
during project selection, the stakeholders did not consider the risk of low demand for the
manufactured product? The extra plant capacity provided by the new project would be an
absolute waste. The money spent on the new project could have been used on another
project that would have given greater returns. Therefore, it is imperative to conduct Risk
Management and Project Selection simultaneously.

Measuring Benefits Vs. Mathematical Models

Two commonly used project selection techniques are benefit measurement models and
mathematical models. In the workplace, benefit measurement models are often conducted,
including cost-benefit analysis, weighted scoring models, cash flow analysis, and time value
of money.

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Cost-benefit analysis: Provides you with a net gain. To compute the net gain during project
selection, subtract the benefit value from the cost. When using this method, make sure you
calculate the total cost, include Life Cycle Costs and Cost of Quality. Typically, the net gain is
proportional to the risk level, i.e. the higher the risk, the higher the gain. Therefore, risk
management and project selection should factor in the ultimate decision.

Weighted scoring model: Each project is evaluated based on set criteria. For example,
suppose the project decision factors are profit potential, marketability, life-cycle cost, cost of
quality, and risk of incompletion. Each project is then evaluated based on those criteria. The
profit potential can be deduced from the cost-benefit analysis. Risk of incompletion is a
factor that needs to be considered when comparing projects. Use this weighted scoring
model for risk management and project selection to help you select a project.

Cash flow analysis: Takes into account the payback period. For example, if youve invested
$400,000 and you have cash flows as follows:

Year 0: ($400,000)

Year 1: $40,000
Year 2: $ 3,600,000
Year 3: $350,000
Therefore, the payback period is two years ($400,000 - $40,000 - $360,000 = $0). If the
payback for another project, which requires a $400,000 investment, is one year and all
factors are considered the same, then the latter project is a better selection. However, that
is too simplistic of a scenario. Usually, there are several other factors that need to be
considered. For example, if Project 1 has a lower risk of incompletion than Project 2, then
your decision might sway in favor of Project 1. Risk management and project selection need
to be considered.

Time value of money: Uses Net Present Value (NPV) and Internal Rate of Return (IRR).
Generally, the higher the NPV, the better the project is. Using this as the sole criterion for
choosing a project is not advisable as this method does not account for risk.

PMP Exam Tip: Mathematical models are used for extremely complex projects. This
technique is not often used nor is it often asked in the PMP exam. Benefit measurement
models often show up in the PMP exam.

Generally, people perceive risk with a negative connotation. There are positive risks in every
project and you should know how to respond to them. Risk Management and Project
Selection should also account for positive risks. Another risk-related criterion you can use for
risk management and project selection is expected monetary value by using Decision trees.
The article about computing EMV with decision trees contains an effective example

A risk analysis should address:

What could possibly go wrong?
What is the likelihood of it happening?
How will it affect the project?
What can be done about it?
Identifying risks
Focus on risks related to your particular project. These might be related to:

Staff - What if you cant hire staff soon enough? What if they dont have the right
skills? What if a key member of the team leaves?
Organisation - What if you cant get a buy-in from your institution? What if they
dont deliver the support they promised? What if an institution withdraws from your
project consortium? What if you cant get take-up? Could there be cultural
problems, e.g. working with vendors?
Technical - What if you cant get equipment soon enough? What if it costs more
than you estimated? What if the methodology doesnt work?
External suppliers - What if they dont deliver on time? What if they go bust?
Legal - What if you cant get permissions from content owners? What if legal
agreements take longer than you think? What if there are legal problems with IPR
or data protection?
Analysing risks
In the project plan template, theres a table where you can analyse the risks:

List the potential risks

Assign a probability to each risk (1 is low, 5 is high)
Assess the severity should the risk occur (1 is low, 5 is high)
Give each risk a score (probability times severity)
Plan how you will prevent risks happening (or manage them if they occur). The
highest scoring risks need to be considered and planned for in more detail.
Preventing and managing risks
Think about the risk analysis at the start of the project in order to prevent risks
from happening. If its essential that suppliers deliver on time, make sure your
agreement has penalty clauses for late delivery. If it would be devastating for a
project partner to leave the consortium, think of ways to keep them on board, and
make sure your consortium agreement has clauses for resolving disputes and spells.
You may want to have some contingency in the budget for unforeseen expenses, or
some slack in the project schedule in case of delays. If a project partner does leave,
think through whether the remaining partners should share the work or recruit
another.

Risk Log/Register

During the project, keep an eye on the risks. Look for early warning signs that
indicate a risk is about to occur. A Risk Log or Risk Register provides a means of
recording the identified risks. It should be reviewed at regular points during the
project as some risks might disappear and others might occur.