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RISKS IN PROJECT AND RISK MITIGATION MEASURES

– AN OVERVIEW

MR. KISHOR P. SHETYE

ADMISSION NO.: DPGD/JL13/0773

SPECIALIZATION: OPERATIONS

THE WELINGKAR INSTITUTE OF MANAGEMENT


APRIL 2015
CERTIFICATE FROM THE GUIDE

This is to certify that the Project work titled RISKS IN PROJECT AND RISK

MITIGATION MEASURES – AN OVERVIEW is a confide work carried out by

MR. KISHOR P. SHETYE (Admission No.) DPGD/JL13/0773 a candidate for the

final year of Post Graduate Diploma in Business Management (PGDBM – Operations)

examination of the Welingkar Institute of Management under my guidance and direction.

SIGNATURE OF GUIDE :

NAME : MR. VISHVESH JOSHI (B.Arch, MBEM)

DESIGNATION : DIRECTOR O&E PROJECT MANAGEMENT PVT. LTD.

ADDRESS : ARIHANT PLAZA CHS LTD., 102, PHASE I,


OVALA, GHODBUNDER ROAD,
THANE (W) 400 607

STAMP/SEAL OF ORGANIZATION :

DATE: 24.04.2015

PLACE: MUMBAI

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UNDERTAKING BY CANDIDATE

I declare that project work entitled


“RISKS IN PROJECT AND RISK MITIGATION MEASURES – AN OVERVIEW”
is my own work conducted as part of my syllabus .

I further declare that project work presented has been prepared personally by me and it is not
sourced from any outside agency. I understand that, any such malpractice will have very
serious consequence and my admission to the program will be cancelled without any refund
of fees.

I am also aware that, I may face legal action, if I follow such malpractice.

__________________________
Signature of Candidate
CONTENTS:

SR.NO. TOPIC PG.NO.


1 INTRODUCTION 2
2 CONCEPT OF RISK ANALYSIS & MANAGEMENT 4
3 RISK MANAGEMENT IN CONSTRUCTION INDUSTRY 8
4 RISK MANAGEMENT – CURRENT ISSUES & CHALLENGES 15
CASE STUDY – RISING CITY PROJECT 21
CONCLUSION 38
BIBLIOGRAPHY

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1. INTRODUCTION

Construction industry is highly risk prone, with complex and dynamic project environments
creating an atmosphere of high uncertainty and risk. The industry is vulnerable to various
technical, sociopolitical and business risks. The track record to cope with these risks has not
been very good in construction industry. As a result, the people working in the industry bear
various failures, such as, failure of abiding by quality and operational requirements, cost
overruns and uncertain delays in project completion. In light of this, it can be said that an
effective systems of risk assessment and management for construction industry remains a
challenging task for the industry practitioners. The aim of this report is to identify and
evaluate current risks and uncertainties in the construction industry.

Project management is the science which applies skills, tools and techniques to fulfill project
activities in a way that the expectations and requirements of stakeholders are
fulfilled or exceeded. Project risk management is an integral part of the process which aims at
identifying the potential risks associated with a project and responding to those risks. It
includes activities which aim to maximize the consequences associated with positive events
and to minimize the impact of negative events. It is believed generally that risk in an
environment is a choice rather than fate, and the inherent uncertainty in the plans can affect
the desired outcome of achieving project and business goals.

Risk management is a concept which becomes very popular in a number of businesses. Many
companies often establish a risk management procedure in their projects for improving the
performance and increase the profits. Projects undertaken in the construction sector are
widely complex and have often significant budgets, and thus reducing risks associated should
be a priority for each project manager.

Risk is present in all the activities in a project; it is only the amount which varies from one
activity to another. Risks and uncertainties inherent in the construction industry are more than
other industries. The process of planning, executing and maintaining all project activities is
complex and time-consuming. The whole process requires a myriad of people with diverse
skill sets and the coordination of a vast amount of complex and interrelated activities. The
situation is made complex by many external factors. The track record of construction industry
is very poor in terms of coping with risks, resulting in the failure of many projects to meet
time schedules, targets of budget and sometimes even the scope of work. As a result, a lot of
suffering is inflicted to the clients and contractors of such projects and also to the general
public. Risk in the construction industry is perceived to be a combination of activities, which
adversely affect the project objectives of time, cost, scope and quality. Some risks in
construction processes can be easily predicted or readily identified; still some can be totally
unforeseen.
Construction risks can be related to technical, management, logistical, or sociopolitical
aspects or can be related to natural disasters. In the domain of project management, some of
the critical effects of risks are failure to achieve operational requirements and the required
quality, non-completion of the project within stipulated time and estimated cost.

The development of infrastructure is one of the most important activities that can boost up the
business of various industries, thereby increasing the gross domestic product (GDP) of a
country. Due to this fact countries stress on infrastructure development and provide finances
for the same in their short term and long term financial plans. The vastness of construction

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projects leaves a lot of scope for various environmental, socio-political and other unforeseen
problems during conceptual phase, land expropriation, and execution leading to time and cost
overruns in projects and compromise in quality. The cost overruns can be of huge magnitude
in a project involving a large amount of money.

The loss of services given by the project during the time in which the project overruns can be
enormous if put into monetary terms. Hence, to reduce the losses, efficient management of a
construction project is required. Application of various project management techniques have
to be made from the conception to the completion stage, which include managing various
risks associated with the project in its every stage. Risk management becomes an important
part of project management. The construction industry, perhaps more than most of other
industries, is overwhelmed by risks. If these risks are not dealt with satisfactorily there is a
maximum likelihood of cost overruns, time delays and low quality, resulting in dissatisfaction
of clients and public.

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2. CONCEPT OF RISK ANALYSIS & MANAGEMENT

The concept of risk is multi-dimensional. In the context of construction industry, the


probability that a definite factor detrimental to the overall project occurs is always present. A
lack of predictability related to the consequences of a planning situation and the associated
uncertainty of estimated outcomes leads to the consequence that results can either be better
than expected or can be worse. In addition to the different definitions of risks, risks can be
categorized for different purposes as well. The broad categories of construction risks are
external risks and internal risks; while some other categories curtail risks as political, social
and safety risk, etc.

1) Project Risk: Risk management in a project encompasses the identification of influencing


factors which could negatively impact the cost schedule or quality objectives of the project,
quantification of the associated impact of the potential risk and implementation of measures
to mitigate the potential impact of the risk. The riskier the
activity is, the costlier will be the consequences in case a wrong decision is made. Proper
evaluation and analysis of risks will help decide justification of costly measures to reduce the
level of risk. It can also help to decide if sharing the risk with an insurance company is
justified. Some risks such as natural disasters are virtually unavoidable and effect many
people. In fact, all choices in life involve risks. Risks cannot be totally avoided but with
proper management these can be minimized.

2) Determination of Risk: There are two methods to determine risks in a project, namely the
qualitative and quantitative approach. The quantitative analysis relies on statistics to calculate
the probability of occurrence of risk and the impact of the risk on the project. The most
common way of employing quantitative analysis is to use decision tree analysis, which
involves the application of probabilities to two or more outcomes. Another method is Monte
Carlo simulation, which generates value from a probability distribution and other factors.
The qualitative approach relies on judgments and it uses criteria to determine outcome. A
common qualitative approach is the precedence diagramming method, which uses
ordinal numbers to determine priorities and outcomes. Another way of employing qualitative
approach is to make a list of the processes of a project in descending order,
calculate the risks associated with each process and list the controls that may exist for each
risk.

3) Factors affecting Risk: Several factors expose projects to normal than higher risk.
a) History: Newer projects pose more risk because the process has not been refined with the
passage of time. If a project of similar nature has been done many times before, then the
likelihood of success with the current project is also enhanced.

b) Management Stability: Management stability means that the whole management team
shares the same vision and direction, thereby leading successful achievement of goals.
If the management is unstable then it can lead to unrealistic and impractical schedules for the
project and inefficient use of resources.

c) Staff expertise and experience: In the event that the members of a project team lack the
direct working knowledge and experience of the area, there is a likelihood of time delays,
estimated cost upsets and poor quality.

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d) Team Size: In case of large teams, the probability of problem occurrence increases due to
the team size. One of the reasons can be the difficulty of communication due to the large
team size.

e) Resource Availability: If the availability of resources is easy, the probability of


responding to problems in real time also increases. For example, easy availability of money
makes securing human, material and equipment resources easy on as needed basis. However,
an abundance of resources does not provide guarantee against risks, all it does is to equip the
project team with the tactics to respond to risks.

f) Time Compression: In case of highly compressed time schedule, the risks are magnified
in the project. When more time is available, more flexibility is present in the
project and there is an opportunity to mitigate and reduce the impact of occuring risks.
g) Complexity: In case of a highly complex or sophisticated project, the opportunity of a
mistake or a problem is also enhanced.

4) Types of risks: Risks can be associated to technical, operational or business aspects of


projects. A technical risk is the inability to build a product that complies with the customer’s
requirement. An operational risk arises when the project team members are unable to work
cohesively with the customer.

Risks can be either acceptable or unacceptable. An unacceptable risk is one which has a
negative impact on the critical path of a project. Risks can either have short term or long term
duration. In case of a short term risk, the impact is visible immediately, such as a requirement
change in a deliverable. The impact of a long term risk is visible in the distant future, such as
a product released without adequate testing.

Risks can also be viewed as manageable and unmanageable. A manageable risk can be
accommodated, example being a small change in project requirements. An unmanageable
risk, on the other hand, cannot be accommodated, such as turnover of critical team members.

Finally, the risks can be characterized as internal or external. An internal risk is unique to a
project and is caused by sources inherent in the project; example can be the inability of a
product to function properly. Whereas, an external risk has origin in sources external to the
project scope, such as cost cuts by senior management.

Risks associated with the construction industry can be broadly categorized into:
a) Technical risks:
• Inadequate site investigation
• Incomplete design
• Appropriateness of specifications
• Uncertainty over the source and availability of materials

b) Logistical risks:
• Availability of sufficient transportation facilities
• Availability of resources-particularly construction equipment spare parts, fuel and labor

c) Management related risks:


• Uncertain productivity of resources
• Industrial relations problems

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d) Environmental risks:
• Weather and seasonal implications
• Natural disasters

e) Financial risks:
• Availability and fluctuation in foreign exchange
• Delays in Payment
• Inflation
• Local taxes
• Repatriation of funds

f) Socio-political risks:
• Constraints on the availability and employment of expatriate staff
• Customs and import restrictions and procedures
• Difficulties in disposing of plant and equipment
• Insistence on use of local firms and agents

5) Common sources of risk in construction projects: The common sources of risks in


construction industry are listed below:
• Changes in project scope and requirements
• Design errors and omissions
• Inadequately defined roles and responsibilities
• Insufficiently skilled staff / Subcontractors
• Inadequate contractor experience
• Uncertainty about the fundamental relationships between project participants
• New technology
• Unfamiliarity with local conditions
• Force majeure

6) Major processes of project risk management: Risk management involves four processes
namely:
a) Risk Identification: Determination of most likely risks affecting the project and
documentation of characteristics of each risk.

b) Risk quantification: Assessment of risks and the possible interactions of risks with
project activities to evaluate the possible outcomes of the project.

c) Risk response development: Definition of response steps for opportunities and threats
associated with risks.

d) Risk response control: Response to the changes implemented to remove risks throughout
the project duration.

7) Response to risk: There are five categories of classic risk response strategies: accepting,
avoiding, monitoring, transferring and mitigating the risk.

a) Accepting the risk: This category implies to understand the risk, its consequences and
probability of occurrence, and not doing anything about it. The project team will react to the
risk in case of occurrence. This strategy is commonly used in cases when the probability of a

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problem occurrence is minimal. This strategy makes sense for cases when consequences are
cheaper than the cure.
b) Risk quantification: Risk can be avoided by not doing part of the project which contains
risk. Scope of the project is changed in this manner, which might change the business case as
well, since a scaled down product could lead to lesser revenue or cost saving opportunities.
More risk is involved with high return on an investment. Avoiding risks on projects can have
same effect on low risk, low return projects.

c) Monitor the risk and prepare contingency plans: Risk can be monitored by employing a
predictive indicator to watch the project as it approaches a risky point. The risk strategy is to
monitor the risk by being part of the test team. Contingency plans are the alternative courses
of action prepared before the risk event occurs. The most common contingency plan is to set
aside extra money, a contingency fund, to draw on in the event of unforeseen cost overruns.
Contingency plans can be looked on as a kind of insurance and, like insurance policies, they
can be expensive.

d) Transfer the risk: In order to transfer the risk in a project, many large scale projects
purchase insurance for risks ranging from theft to fire. By doing so, the risk is effectively
transferred to the insurance company in such a way that if a disaster occurs, the insurance
company would be liable to pay the costs associated with the disaster.
Insurance certainly is the most direct method of transferring risk; however, there are other
methods as well. For example, a fixed price contract with a contractor states that work will be
done for a pre-specified amount. Fixed schedule can also be added to such a contract, and
penalties are imposes in case of overruns. Thus these measures effectively transfer cost and
schedule risks from the project to the subcontracting firm and any overruns will be the
responsibility of the sub-contractor. The only drawback in this case is that the sub-contractor
knowingly makes a higher bid to make up for the risk he is assuming. Risk can also be
transferred by hiring an expert. Transferring risk to another party has advantages, but it also
introduces new risks.

e) Mitigate the risk: Mitigation is process of response to the risk after it has affected the
project. Mitigation covers all actions the project team can take to overcome risks from the
project environment.

8) Advantages of risk management: Following are advantages of risk management:


a) Achievement of objectives
b) Shareholders reliability
c) Reduction of capital cost
d) Less uncertainty
e) Creation of value

9) Limitations of risk management: In the event of improper assessment of risks, important


time can be wasted in dealing with risk losses which are unlikely to occur. If too much time is
spent on the assessment and management of unlikely risks, then important resources can be
diverted which otherwise could have been very profitable. Unlikely events can occur, but if
the likelihood of the risk occurrence is too low, then it is better to retain the risk and deal with
the result if the risk in fact occurs.

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3. RISK MANAGEMENT IN CONSTRUCTION INDUSTRY

Risks in Construction Industry can be categorized as mentioned below:


1) Financial risks
2) Legal risks
3) Management risks
4) Market risks
5) Policy and political risks
6) Technical risks
7) Environmental risks
8) Social risks

Many explanations and definitions of risks and risk management have been recently
developed, and thus it is difficult to choose one which is always true. EVERY Project
Manager provides his own perception of what risk means and how to manage it. The
description depends on the profession, project and type of business. Risk management in
general is a very broad subject and definitions of risk can therefore differ and be difficult to
apply in all industries in general. For the purpose of this thesis one definition of risk and risk
management will be chosen, in order to have a clear understanding of these concepts in
construction industry.

Risk definition:
Risk and uncertainty are the two most often used concepts in the literature covering RM field.
Also practitioners working with risk have difficulty in defining and distinguishing between
these two. Often definitions of risk or uncertainty are tailored for the use of a particular
project. To make it more systematized, a literature research was done. The findings of this
search resulted in a number of definitions of risk and uncertainties. These have been
compiled and are presented below;

Author Risk definition Uncertainty definition

Uncertainty is a part of the


information required in
A stage where there is a lack order to take a decision. The
of information, but by required information
looking at past experience, consists of the amount of
Winch (2002) it is easier to predict the available information and
future. Events where the uncertainty. The level of
outcome is known and uncertainty will decrease the
expected. further a project is
proceeding throughout the
lifecycle.

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Uncertainty is the intangible
Risk is the statement of measure of what we don’t
what may arise from that know. Uncertainty is what is
lack of knowledge. Risks left behind when all the
Cleden (2009)
are gaps in knowledge risks have been identified.
which we think constitute a Uncertainty is gaps in our
threat to the project. knowledge we may not be
even aware of.

There might be not enough


Risks occur where there is information about the
Smith et al. (2006) some knowledge about the occurrence of an event, but
event. we know that it might
occur.

Risk is a situation in which


he possesses some
Uncertainty is a situation
objectives information
with an outcome about
Webb (2003) about what the outcome
which a person has no
might be. Risk exposure can
knowledge.
be valued either positively
or negatively.

Risk is a possibility of loss


Darnall and Preston (2010)
or injury.

Risk is exposure to the


Cooper et al. (2005) consequences of
uncertainty.

All risk definitions complied in above Table describes risk as a situation where lack of some
aspect can cause a threat to the project. Lack of information and knowledge are those factors
which are most commonly considered as leading reasons for a failure. The description
provided by Cleden (2009) is best suitable; it concerns how risk is defined as a gap in
knowledge which, if not handled correctly, will constitute a threat to the project.

Uncertainty is defined in a more abstract way. The descriptions provided in above Table are
similar to each other and the common factor is again lack of information and knowledge. The
biggest difference by definition is awareness.

Darnall and Preston (2010) find some of the risks to be predictable and easy to identify before
they occur, while the others are unforeseeable and can result in unexpected time delays or
additional costs. This statement finds confirmation in the definition provided by Cleden

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(2009) who uses the same arguments defining uncertainty as rather unpredicted,
unforeseeable events, while risk should be possible to foresee. The overview of definitions
which can be found in literature regarding those two terms implies that uncertainty is a broad
concept and risk is a part of it. This confirms close relation between those two concepts but at
the same time distinguishes them.

Concept of risk management:


Risk management cannot be perceived as a tool to predict the future, since that is rather
impossible. Instead, they describe it as a tool to facilitate the project in order to make better
decisions based on the information from the investment. In this way, decisions based on
insufficient information can be avoided, and this will lead to better overall performance. In
the literature, RM is described as a process with some predefined procedures. From a number
of definitions which can be found in the management literature Cooper et al. (2005)
explanation brings the essence of this concept:

The risk management process involves the systematic application of management policies,
processes and procedures to the tasks of establishing the context, identifying, analyzing,
assessing, treating, monitoring and communicating risks (Cooper et al., 2005).

Risk management process (RMP) is the basic principle of understanding and managing risks
in a project. It consists of the main phases: identification, assessment and analysis, and
response (Smith et al. 2006) as shown in following Figure. All steps in RMP should be
included when dealing with risks, in order to efficiently implement the process in the project.

Risk Identification Risk Analysis

Risk Control

Risk Review Risk Response

Figure: The Process of managing risks (Smith et al. 2006)

Risk management process (RMP):


Components of RMP are:
1. Risk Identification
2. Risk Analysis
3. Risk Response
4. Risk Review

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RMP is best illustrated by following figure:

All four steps are included and are placed on the left hand side. On the right, the follow up
procedures are listed to clarify some of the techniques used to manage the risks in the most
effective way. By following the arrows on the graph, all the necessary steps of RM will be
performed. This process should be continuously performed throughout the whole project in
order to keep track of all potential risks.

Risk identification
Risk identification is the first and perhaps the most important step in the risk management
process, as it attempts to identify the source and type of risks. It includes the recognition of
potential risk event conditions in the construction project and the clarification of risk
responsibilities. Risk identification develops the basis for the next steps: analysis and control
of risk management. Corrects risk identification ensures risk management effectiveness.
Hence identification and mitigation of project risks are crucial steps in managing successful
projects.

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Experience is the most frequent answer to questions about risk identification methods.
Previous projects are considered to be a great source of potential risks. Another way of
discovering possible risks is to analyze future consequences already in early stages of the
project on basis of anticipation. Problems should be dealt with before it would be too late.
Therefore it is important to raise awareness in early stages where actions are still possible to
change.

Checklists and manuals were commonly used documented forms of risk identification on the
organizational level. Discussions and experience are commonly used as information
gathering methods while observations and learning are additional forms of identification.

Risk assessment
To manage and analyze the potential risks, the most widely used tool is discussion. The risks
were primarily managed within the organization concerning only the scope of worked
assigned, which was then managed and consulted with the other members of the project team.
The problems should be consulted with experts from the field in which the problem was
identified. Systemizing and mapping were those only techniques of handling risk.

The most common way is to set criteria in order to prioritize the most critical risks. The type
of criteria used depends on the profession. Based on the created pattern, all potential risks
should be listed and put in order. An example of the order obtained from prioritizing risks
was the economy related problems which were ranked higher in the hierarchy than the time
related problems. Other factors identified are resources, economy and technical aspects.
Another example of hierarchy was needs of the end users over needs of secondary ones. The
other way to prioritize risks within the project is through discussion which involves a small
group of team members across various business functions.

Risk assessment shows where to put focus on in order to keep the project running without
interrupting and to have control. Critical risks also affect the cost aspect. If there is no
attention paid to these risks means that they could result in additional costs for the project.

Risk response
Whereas some organizations had procedures or used checklists to minimize risks, few others
feel more comfortable with transferring it to experts in the relevant area. Moreover, a
discussion had again been mentioned as yet another tool used to mitigate the problem.
Further on, for each problem identified, an action should be taken in order to respond to the
risk.
Risk review
Although there is no structured way of working with risk in a project, it is the responsibility
of the individual organization to manage its own risks identified in the project. However, this
does not mean that risk is ignored. Project kick-off meeting for an introduction to the project
involving all stakeholders from various business functions should be conducted and engage
them to interact with each other to exchange experience and raise all potential problems
associated with the project. At that meeting, all participants involved in the initial stage of the
project should discuss issues related to the project as well implementation of various RM
tools like checklists, manuals, etc.

It is important to deal with the risks when they are still manageable in order to deliver what
the client wants and within the project objectives. It is the reason for why the three objectives

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– cost, time and quality – have been inspected and evaluated. The ideal scenario would be
that all major and potential risks are evaluated to facilitate the way to success for the project.

How are risks and risk management perceived in a construction project?


RM is explained as a structured way of managing risks and other threats in daily work. This
is of great importance in the construction industry where projects are often exposed to
uncertainties and risks. According to the theory, following all steps of the RMP facilitates
achieving success with a project. For everyone who has been studying construction
management, RM is recognized as a widely used concept and is emphasized in many courses.
But when investigating the concept in practice, there are not many who understand the
meaning and content of RM. Surprisingly, people operating in the construction industry are
not even familiar with the expression “risk” which is more understood as an undesired event,
problem or threat that makes it difficult to achieve project objectives. However, risk can be
both positive and negative in its effect, which contradicts our opinion that risk can have only
negative consequences.

In fact, many companies in the construction industry tend to adapt RM to only some extent.
As was mentioned in the theory, organizations can have different approaches regarding how
and to what extent risks are handled. Those main concepts were risk-averse, risk-natural and
risk-seeker. Again, organizations within the construction industry do not work with RM in
such a structured way, which means that there are some other ways of managing risks when it
occurs.

Another point is that most personnel are not familiar neither with the concept of RM nor any
methods within the RMP. Risk processes and theoretical models are totally unknown.
However, some organizations use techniques from the area of RM to take actions against
potential problems which could be classified as RM methods, even though the personnel are
not aware of it

In some organizations, critical risks are selected and handled immediately; which helps to
eliminate smaller risks and focus on the most threatening ones. This is a typical way of
analyzing risks according to the qualitative method called Risk Urgency Analysis.

Lack of information and lack of sufficient time are the biggest obstacles preventing
implementation of risk management. It is very vital to categorize risks differentiated on how
they are managed whether by individuals or by a team. Individuals and their organizations
most often use checklists and other manuals while groups use discussion as the most common
technique to identify risks and problems.

How do risks change during a project life cycle?


Study shows that personnel and their roles change depending on the phase of the PLC. Some
participants are present under the whole PLC while the others are involved only in some part
of it. Most of the respondents held an active role in first two phases and a passive role in the
others. Therefore, a number of risks identified in those initial parts of the PLC are higher than
in the later ones.

The nature of risks identified by respondents differed depending on the project phase.
Initially, risks are rather broad, such as the risk of misunderstanding client‟s requirements,
not choosing the right consultants, project design or construction strategy. The further in the
PLC, the more specific the range of the risk becomes, as a result of more detailed planning

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and design process is required. Therefore in the next phase - planning and design, risks
identified are shortage in resources, problems with design or selection of consultants as the
critical risks. Looking further on the longest phase - project operation, only very
characteristic risks such as delays in the construction schedule or quality discrepancies were
identified as potential risks. The nature of risks changes with the project progress, from a
broad to a narrower range of issues. Furthermore, the type of risk is closely associated with
the type of activity undertaken in a certain phase, since type of risks identified differs
significantly over the various stages of the PLC. Problems closely related, for instance to
design process, will not be identified as a potential threats in any other phases.

Conclusion

 Risk is perceived as a negative term, even though in theory it can have two dimensions.
 Professionals in the construction industry are using techniques described in the literature
concerning RM, but are not aware of it. Risks are being managed every day in the
industry, but not in such a structured way as the literature describes. As also other
researchers confirmed, the knowledge of RM and RMP is close to zero, even though the
concept of risk management is becoming more popular in the construction sector.
 There is a willingness among respondents to start using RMP, but it has to bring profits to
the organization.
 By applying a simple method, it is possible to identify potential risks in an easy way.
Moreover it gives possibility to detect which of the identified risks has the biggest impact
on time, cost and quality. Those risks should be eliminated or mitigated by taking an
appropriate action. The research showed that the most common action was risk
mitigation. Moreover it was proven that the results from probability and impact method
may differ among projects due to the fact that each project and its scope are unique.
 It was important to identify which phase of the PLC the participants of RMP are taking
part in and what their role in the project was. Based on that, we could systematize the
answers and see types of risks identified in various phases of the PLC. The conclusion
was that there are risks which are characteristic for each project stage.
 As the research showed, unstructured form of RM is to some extent used in the
construction sector. Thus application of actual RM into companies should not be difficult.
As proved by the research, knowledge is the factor which is missing for organizations to
implement RM. Thus, this aspect of application of RM could be further investigated in
terms of how to facilitate use of RM in a construction sector. Moreover a simple RM
manual could be developed including basic theoretical information as well as ready-to use
guidance for one of the RM methods.

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4. RISK MANAGEMENT – CURRENT ISSUES AND CHALLENGES

In today’s post-crisis economy effective risk management is a critical component of any


winning management strategy. Risk management is one of the nine knowledge areas
propagated by the Project Management Institute (PMI). The PMBOK (Project Management
Book of Knowledge) Guide recognizes ten knowledge areas typical of almost all projects
which are mentioned as follows:

1. Project Integration Management: Project Integration Management includes the


processes and activities needed to identify, define, combine, unify, and coordinate the
various processes and project management activities within the Project Management
Process Groups.
2. Project Scope Management: Project Scope Management includes the processes required
to ensure that the project includes all the work required, and only the work required, to
complete the project successfully.
3. Project Time Management: Project Time Management includes the processes required
to manage the timely completion of the project.
4. Project Cost Management: Project Cost Management includes the processes involved in
planning, estimating, budgeting, financing, funding, managing, and controlling costs so
that the project can be completed within the approved budget.
5. Project Quality Management: Project Quality Management includes the processes and
activities of the performing organization that determine quality policies, objectives, and
responsibilities so that the project will satisfy the needs for which it was undertaken.
6. Project Human Resource Management: Project Human Resource Management
includes the processes that organize, manage, and lead the project team.
7. Project Communications Management: Project Communications Management includes
the processes that are required to ensure timely and appropriate planning, collection,
creation, distribution, storage, retrieval, management, control, monitoring, and the
ultimate disposition of project information.
8. Project Risk Management: Project Risk Management includes the processes of
conducting risk management planning, identification, analysis, response planning, and
controlling risk on a project.
9. Project Procurement Management: Project Procurement Management includes the
processes necessary to purchase or acquire products, services, or results needed from
outside the project team
10. Project Stakeholders Management: Project Stakeholder Management includes the
processes required to identify all people or organizations impacted by the project,
analyzing stakeholder expectations and impact on the project, and developing appropriate
management strategies for effectively engaging stakeholders in project decisions and
execution.

Each of the ten knowledge areas contains the processes that need to be accomplished within
its discipline in order to achieve effective project management. Each of these processes also

15
falls into one of the five process groups, creating a matrix structure such that every process
can be related to one knowledge area and one process group.

Although these knowledge areas are all equally important from a project manager’s point of
view, in practice a project manager might determine the key areas which will have the
greatest impact on the outcome of the project.

Each PMI knowledge area in itself contains some or all of the project management processes.
For example, project risk management includes:
Risk management planning;
Risk identification;
Qualitative risk analysis;
Quantitative risk analysis;
Risk response planning;
Risk monitoring and control.

Risk management is probably the most difficult aspect of project management. A project
manager must be able to recognise and identify the root causes of risks and to trace these
causes through the project to their consequences. Furthermore, risk management in the
construction project management context is a comprehensive and systematic way of
identifying, analyzing and responding to risks to achieve the project objectives. The use of
risk management from the early stages of a project, where major decisions such as choice of
alignment and selection of construction methods can be influenced, is essential. The benefits
of the risk management process include identifying and analyzing risks, and improvement of
construction project management processes and effective use of resources.

The construction industry is heterogeneous and enormously complex. There are several major
classifications of construction that differ markedly from one another: housing, non-residential
building, heavy, highway, utility, and industrial. Construction projects include new
construction, renovation, and demolition for both residential and non-residential projects, as
well as public works projects, such as streets, roads, highways, utility plants, bridges, tunnels,
and overpasses. The success parameters for any project are in time completion, within
specific budget and requisite performance (technical requirement). The main barriers for their
achievement are the change in the project environment. The problem multiplies with the size
of the project as uncertainties in project outcome increase with size. Large construction
projects are exposed to uncertain environment because of such factors as planning, design
and construction complexity, presence of various interest groups (owner, consultants,
contractors, suppliers, etc.), resources (manpower, materials, equipment, and funds)
availability, environmental factors, the economic and political environment and statutory
regulations.

Construction projects can be unpredictable. Managing risks in construction projects has been
recognized as a very important process in order to achieve project objectives in terms of time,
cost, quality, safety and environmental sustainability [19]. Project risk management is an
iterative process: the process is beneficial when is implemented in a systematic manner
throughout the lifecycle of a construction project, from the planning stage to completion.

Construction is the sector most at risk of accidents, with more than 1300 people being killed
in construction accidents every year. Worldwide, construction workers are three times more
likely to be killed and twice as likely to be injured as workers in other occupations. The costs

16
of these accidents are immense to the individual, to the employer and to society. They can
amount to an appreciable proportion of the contract price.

The PMBOK Guide defines a project risk as “an uncertain event or condition that, if it
occurs, has a positive or negative effect on at least one project objective”. There are many
possible risks which could lead to the failure of the construction project, and through the
project, it is very important what risk factors are acting simultaneously. Too many project
risks as undesirable events may cause construction project delays, excessive spending,
unsatisfactory project results or even total failure.

Many approaches on risk classification have been suggested in the literature for effective
construction project risk management. Tah and Carr categorized risks into two groups in
accordance with the nature of the risks, i.e. external and internal risks. Combining the fuzzy
logic and a work breakdown structure, the authors grouped risks into six subsets: local,
global, economic, physical, political and technological change. The classification of the risks
depends mainly upon whether the project is local or international. The internal risks are
relevant to all projects irrespective of whether they are local or international. International
projects tend to be subjected to the external risk such as unawareness of the social conditions,
economic and political scenarios, unknown and new procedural formalities, regulatory
framework and governing authority, etc.
According the PMBOK Guide, the risks are categorized into such groups: technical, external,
organizational, environmental, or project management. Some categories of risk that affect a
construction project are similar to risks for other investment projects, whether it is an Risk
Management in Construction Projects investment in common stocks or government bonds,
and some are specific to construction. The risk identification process would have highlighted
risks that may be considered by project management to be more significant and selected for
further analysis. Risk identification is an iterative process because new risks may become
known as the project progresses through its life cycle and previously-identified risks may
drop out.

Construction projects carry complex risks for all involved—including owners, consultants,
contractors, and suppliers—that can increase when construction takes place near an active
facility or congested area. Risks include geological or pollution-related conditions,
interference with ongoing operations, construction accidents, as well as design and
construction faults that may negatively impact the project both construction and when the
project is complete.

Generally two broad categories, namely, qualitative and quantitative analysis are
distinguished in literature on risk assessment. A qualitative analysis allows the key risk
factors to be identified. Risk factors may be identified through a data-driven (quantitative)
methodology or qualitative process such as interviews, brainstorming, and checklists. It is
considered as an evaluation process which involves description of each risk and its impacts or
the subjective labeling of risk (high/medium/low) in terms of both risk impact and probability
of its occurrence. Qualitative risk analysis assesses the impact and likelihood of the identified
risks and develops prioritized lists of the risks for further analysis or direct mitigation.

Carr and Tah introduced a hierarchical risk breakdown structure (HRBS), and the HRBS
represents a formal model for qualitative risk assessment. Quantitative analysis involves more
sophisticated techniques and methods to investigate and analyze construction project risks.
Quantitative risk analysis attempts to estimate the frequency of risks and the magnitude of

17
their consequences by different methods such as the decision tree analysis, the cost risk
analysis, and Monte Carlo simulation. The application of the quantitative risk analysis allows
the construction project exposure to be modeled, and quantifies the probability of occurrence
of the identified risk factors as well as their potential impact.

Various risk management tools are available, but unfortunately they are not suitable for many
industries, organizations and projects. Although today’s organizations appreciate the benefits
of managing risks in construction projects, formal risk analysis and management techniques
are rarely used due to lack of knowledge and to doubts on the suitability of these techniques
for construction projects.

There are four alternative strategies – risk avoidance, risk transfer, risk mitigation, and risk
acceptance, for treating risks in a construction project. As stated by Hillson, risk mitigation
and risk response development is often the weakest part of the risk management process. The
proper management of risks requires that they be identified and allocated in a well-defined
manner. This can only be achieved if contracting parties comprehend their risk
responsibilities, risk event conditions, and risk handling capabilities.

Due to a lack of contractors’ responsibilities and control in various steps of a project’s


development, the time and quality performance levels of Risk Management – Current Issues
and Challenges construction projects in the Lithuania were generally inadequate or even
poor. In construction projects, many parties are involved such as owner, consultant,
contractor, subcontractor, and supplier. Each party has its own risks. Risk transfer means the
shift of risk responsibility to another party either by insurance or by contract. Contractors
usually use three methods to transfer risk in construction projects:
through insurance to insurance companies;
through subcontracting to subcontractor;
through modifying the contract terms and conditions to client or other parties.

Construction projects can be managed using various risk management tools and techniques.
Various techniques like context establishment, risk identification, risk assessment and
treatment can be used for development of risk management tools for engineering projects.
Application of risk management tools depends on the nature of the project, organization’s
policy, project management strategy, risk attitude of the project team members, and
availability of the resources. A risk assessor model (RAM) was developed to determine risk
scores for various construction activities. The model provides an acceptability level for the
risks and determines a quantitative justification for the proposed remedy.

Risks and uncertainties, involved in construction projects, cause cost overrun, schedule, delay
and lack of quality during the progression of the projects and at their end. Poor cost
performance of construction projects seems to be the norm rather than the exception, and
both clients and contractors suffer significant financial losses due to cost overruns. There are
also problems of managing risk and uncertainty in construction project due to the owner
dissatisfaction in project outcome and dynamism within agile construction environment. The
authors identified some areas in supply chain processes which are prone to greater risks and
uncertainty and propose an agile management principle based on the concept of integration
and fragmentation in product development and execution processes respectively.

Upon investigation and assessment of various problems on time performance in construction


projects, nine factor categories were identified including client-, contractor-, quantity

18
surveyor-, architect-, structural engineer-, services engineer-, supplier-, and subcontractor-
caused delays, and external factors (i.e. delays not caused by the project participants). Finally,
ten overall delay factors were identified, namely: contractors’ financial difficulties, client’
cash flow problems, architects’ incomplete drawings, subcontractors’ slow mobilization,
equipment break-down and maintenance problems, suppliers; late delivery of ordered
materials, incomplete structural drawings, contractors’ planning and scheduling problems,
price escalation, and subcontractors’ financial difficulties. Poor risk management is one of the
principal delay factors and concluded that actions and inactions of construction project
participants contribute to overall project delays.

The construction contractors highlight that delay in payments is common both in private and
public projects, with the public sector being the worse defaulter. Moreover, most types of
contracts presume compensation clauses for delay in payments, but clients rarely agree to pay
the interests due to the contract. Scheduled risks were analyzed and a comprehensive
construction schedule risk model referred as Evaluating Risk in Construction–Schedule
Model (ERIC-S) was developed.

The ERIC-S model provides decision support to project owners, consultants, and researchers
as a project delay prediction tool. Similarly, the Cost-Time-Risk diagram (CTR) which helps
project managers consider project risk issues while monitoring and controlling their project
schedule and cost performance in one diagram.

The performance by the project management team highly influences the success of a
construction project. Some of the incidental risks associated with poor project management
performance are:
Unclear or unattainable project objectives;
Poor scoping;
Poor estimation;
Budget based on incomplete data;
Contractual problems;
Insurance problems;
Delays;
Quality concerns;
Insufficient time for testing.

The value of trust within the project business is also very important. Trust is a critical success
element to most business, professional, and employment relationships. Trust is argued to
improve the inter-organizational relationships among principal actors in project development,
such as owners, contractors, and suppliers. Trust between project owners and a project
manager is crucial for project success.

In business relations, the global economic crisis brought about distrust of other stakeholders.
Trust reinforces the relationships of the critical stakeholder that often determine the success
of a project. Stakeholders are a major source of uncertainty in construction projects. Trust
provides an important resource for creating greater probability and certainty. Project
management companies need to overcome problems in their relationships with other
professionals on the project team and with the client. For the success of construction projects,
there is a need for alignment of the project owners’ interests and the project management
team's interests and trust between them.

19
Construction projects are tendered and executed under different contract systems and
payment methods. There is no possibility to eliminate all the risks associated with a specific
project. All that can be done is to regulate the risk allocated to different parties and then to
properly manage the risk. Contract choice decisions are central to both stakeholder
management and the management of risk and uncertainty. An integrated approach based on a
balanced incentive and risk sharing (BIARS) approach to contracting as well as a best
practice approach to risk management in terms of the whole project life cycle was derived.

Contractors generally aim to make an acceptable range of profit margin. Profit margins in the
industry have been low for most contractors on projects in recent years. Correct
understanding and allocation of risk helps for contractors to avoid erosion of the profit
margin. A new simulation-based model – the correlated cost risk analysis model (CCRAM) –
to analyze the construction costs under uncertainty when the costs and risk-factors are
correlated. The CCRAM model captures the correlation between the costs and risk-factors
indirectly and qualitatively. Global risk factors pose more challenges to contractors, which
are less familiar with them. The authors introduced a fuzzy decision framework for a
systematic modeling, analysis and management of global risk factors affecting construction
cost performance from contractor’s perspective and at a project level. Similarly, a ‘Level-
Severity-Probability’ approach was derived to determine the critical risk source and factors.
Fuzzy logic is used in the proposed methodology for evaluation of the risk level, severity and
probability. The application of fuzzy reasoning techniques provides an effective tool to
handle the uncertainties and subjectivities arising in the construction project.

The review of the literature revealed a wide range of risk types and sources in construction
projects, and that various risk management methods and techniques can be employed in the
management of construction projects in order to control potential risks.

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CASE STUDY: RISING CITY PROJECT – PUBLIC-PRIVATE PARTNERSHIP
(PPP) MODEL

PROJECT BRIEF:

Public Sector: PWD, Govt. of Maharastra

Developed By: Consortium of M/s. Hubtown, M/s. Terraform Realty, M/s. Marathon Realty,
M/s. Rajesh Lifespaces and M/s. IL&FS.

PWD Project Details:

Project Configuration: 10 Residential Buildings


(3 Nos.: 14 Storeys; 6Nos.: 21 Storeys; 1No.: 15 Storeys)

Ancillary Buildings: Rest House, Club House, Shopping Centre, Medical Centre

Construction Area: 10,77,756 sq.ft.

Handover Schedule:
Part 1: 3 Buildings – Handover Complete
Part 2: 4 Buildings – Handover Planned Date: 30.06.2015
Part 3: 3 Buildings – Handover Planned Date: 30.06.2016

Sale Residential Project Details:

Title: Rising City

Location: Chheda Nagar, Ghatkopar (E)

Project Configuration: Ph. I – 6 Residential Towers of 28 Storeys each

Construction Area: 25,00,000 sq.ft.

Saleable Area: 14,00,000 sq.ft. (No. of Apartments: 1143)

Initial Project Cost Estimate: Rs. 484 Crs. (6 Residential Towers of 21 Storeys each)

Revised Project Cost Estimate: Rs. 585 Crs.

Estimated Project Duration: 40 months

Conception Year: 2007 Project Re-Start: January 2014


Principal Contractors: M/s. J.K.Construction, M/s. Ashoka Construction Co. Pvt. Ltd.

Project Highlights:
- Strategically located
- Premium Apartments with Modern-day Township Amenities

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- Excellent Connectivity to Western Mumbai – SCLR (Santacruz - Chembur Link
Road), Mumbai Metro (Ghatkopar to Andheri) | Central Mumbai (Ghatkopar Railway
Station) | South Mumbai (Freeway, Chembur Monorail Station) | Eastern Express
Highway | New Mumbai | Pune | Industrial Hubs like Bandra – Kurla Complex
(BKC), Powai, etc.

LOCATION MAP:

22
Associated Risks:

Various risks are involved in the execution of a Construction Project from its Inception
stage to its Completion stage. Major types of risks are as mentioned in the above figure.

Risks associated with a Construction Project can be broadly categorized as below


depending upon the stage of construction:

STAGE ASSOCIATED RISKS IMPACT


I. PRE – CONSTRUCTION: Design Delay in Project Inception
Approvals Delay in Project Inception
Planning Unrealistic Project Plan
Cost Estimation Unrealistic Project Cost
Contract Management Incompetent Contractor selection
Procurement Strategy Poor Procurement Plan
Construction Strategy Wrong Methodology selection
Marketing Poor Marketing Strategy

II. CONSTRUCTION: Design Delay in Project progress


Approvals Delay in Project progress
Planning Project vision not clear
Execution Delay in Project progress

23
STAGE RISK CATEGORY IMPACT
FSI Availability Delay in Project progress
Material Availability Stock-out conditions
Contractor Delay in Project progress
Quality Rework scenarios
Safety Legal proceedings
Commercial Project delay due to lack of funds
Delay in Project completion
Force Majeure Cost Overrun
Legal proceedings

III. POST-CONSTRUCTION: Quality Delay in Project handover


Approvals Delay in Project handover

I. PRE – CONSTRUCTION STAGE:


1. Design:
Various stages are involved during the designing phase of a Construction project as briefly
mentioned below:

- Preparing Design Brief


- Concept Design
- Schematic Design
- Final GFC drawings

Nature of Risk:
Precision is required during Design stage for preparing and finalizing all types of drawings
which are provided to Project Management Team for execution of the Project.
Risks identified are as mentioned below:
 Delay in finalizing the design
 Changes in Statutory requirements midway
 Changes in Customer’s requirements

Impact of Risk:
Errors or revisions in drawings will result in delay in Design Brief approval by Management.
This will hamper the Project inception.

Risk Mitigation:
Experience and expertise are key parameters in Pre-Construction Design stage for preparing
and presenting drawings to Management for approval. Thorough checks need to be provided
by Design team for all the parameters involved to prepare a viable Design Brief satisfying all
aspects pertaining to Liaisoning, Legal, Construction, Budget and End Customer.

2. Approvals:
Enlisted below are the various approvals required from various Govt. authorities for
execution of a Construction project:

24
- Intimation of Disapproval (IOD)
- BMC Plans
- Commencement Certificate (CC)
- Plinth checking and approval
- Traffic NOC
- MoEF Clearance
- Tree NOC
- CFO NOC
- Civil Aviation NOC
- Highrise NOC
- NOC from MCZMA (Maharashtra Coastal Zone Management)
- NOC from Lift Inspector
- Solid Waste Management NOC
- Occupation Certificate (OC)
- Building Completion Certificate (BCC)
- Permanent Power Connection
- Permanent Water Connection
- Permanent Sewerage Connection

Nature of Risk:
Obtaining approvals from various Govt. authorities involves a lot of scrutiny of Project plans,
documents, etc. It also involves various discussion sessions and meetings between the
Developer and various Govt. authorities and is very time-consuming as well as is associated
with high cost implications.

Impact of Risk:
Availability of Approvals is critical for start of execution of a Construction Project. Delay in
receipt of Approvals can result in delay in Project inception and may subject it to future
amendments in rules and regulations, incurring additional cost and liaisoning processes.

Risk Mitigation:
Persistent follow-up should be done with concerned Govt. officials to ensure timely receipt of
Approvals. Proper Liaisoning dept. should be established consisting of experienced
professionals preferably having past work experience with Govt. offices.

3. Planning:
Project plan is very vital to get an overall picture of the Project to be executed. It gives
important data to the Management of the total timeframe required for construction of the
project wrt time and resources viz. Manpower, Material, Machinery and Money.
Project Plan should provide an overview of all attributes involved in the construction of a
Project for effective Project Management, Time Management and Cost Management. It
should mention Planned Timelines and Schedule for Approvals, Contracts Management,
Material Procurement and Delivery, Resources Allocation, Cash Flow & Revenue
Generation, Payment Milestones and Project Completion & Handover to Client.

Nature of Risk:
Ineffective Project Plan will not provide precise data to Management to take vital decisions
for the Construction Project, which may ultimately affect the Cash Inflow (Revenue
Realization) of the Organization.

25
Impact of Risk:
Ineffective planning may result in wrong anticipation for working our total duration of the
Project, improper Resource Planning and Allocation as well as hamper Project Management
and Cash Flow Management.

Risk Mitigation:
Project Plan should be prepared involving experienced and expert professionals prior to
Project inception to anticipate all the crucial factors impacting the construction of the Project
throughout its various phases. Proper analysis should be done to work out all the Resources
required at various stages of the Construction Project.

4. Cost Estimation:
Cost Estimate is very critical to work out the Cost Plan or Budget required for the
Construction Project. It provides vital data to the Management regarding total expenses
involved in the construction and enables to derive the Sale price of the to achieve the desired
revenue.

During Pre-Construction stage Cost Estimate, also known as Block Estimate, is prepared on
the basis of certain Engineering thumb-rules and by using unit rates for various items from
previously completed Projects. Drawings referred for preparing Block Estimates are
generally tender drawings (since GFC drawings are in process during the pre-construction
stage) and it is important to revisit the Block Estimate once the GFC drawings become
available to arrive at more precise Cost Estimate for the Project.

Nature of Risk:
Incorrect Cost Estimate may not give precise perspective of the total cost involved in the
Construction to the Management. Block Estimate prepared during pre-construction stage may
exclude certain work packages due to limited project information. Unforeseen expenses over
and above the Estimated Cost-heads can lead to cost overrun scenarios.

Impact of Risk:
Incorrect Cost Estimate will hamper Cash Flow Management and Project Management
during the Construction stage of the Project. It may also lead to work stoppage scenarios due
to non-availability of funds.

Risk Mitigation:
Cost Estimate should be prepared considering all the parameters involved in the Project
having cost implications. It should be consistently reviewed and revisited periodically and
presented to the Management to accord approval. Cost Planning should be precisely done to
work out realistic Cost Plan or Budget for the Construction Project so to accordingly plan the
availability of funds. Contingency Funds not exceeding 5% of the Total Project Cost should
be considered in the Cost Estimate to avoid cost overrun scenarios due to unforeseen
expenses.

5. Contract Management:
Contract Management plays a very vital role in Construction of a Project and comprises the
core of the Cost Plan for the Project. Contractor selection requires adept analysis and
adequate time for selection of a Contractor who is prime responsible for execution of the
Construction Project. Various stages involved in selection of a Contractor are enlisted as
follows:

26
 Floating of tenders
 Pre-bid Meetings with Contractors
 Negotiation Meetings with Contractors
 Final Negotiation Meeting
 Preparation of Comparative Statement (CS)
 Preparation of Note for Approval by Management
 Award of Letter of Intent (LOI)
 Award of Work Order (WO)
 Creation of WO in ERP System

Nature of Risk:
There may be a delay in preparation of tender documents comprising of Bill of Quantities
(BOQ), tender drawings, technical specifications, etc. which may postpone floating of tenders
and overall Contracts Management process. Contractor selected may be incompetent and not
capable of executing the Project. Contractor may lack adequate capital and resources in form
of manpower, construction material and Plant & Machinery, which will result in poor
performance. There may be cost escalation issues in future due to insufficient Contract
documentation.

Impact of Risk:
Incompetent Contractor selection will lead to delay in Project due to poor Project
Management, inadequate resources, poor planning. There may also be frequent disputes with
the Contractor. Prolonged inefficiency can result in termination of the Contractor which may
also involve legal repercussions like arbitration.

Risk Mitigation:
Enhanced analysis should be done by Contracts dept. for all aspects involved in all stages of
Contract Management prior to selection of a Contractor. Due diligence should be checked for
previous Projects executed (preferably similar type) by the Contractor identified for selection
in addition to other vital details like Working Capital, Assets, Resources, Status, etc.

5. Procurement Strategy:
Procurement Strategy is a very crucial document and governs the scope of procurement of
various services and material purchase involved in execution of a Construction Project. It
enlists down all the major items of works and elaborates on the Basic Rates associated with
purchase of various construction materials and defines who shall procure them, either the
Client or the Contractor. Procurement Strategy is a vital document governing the Cost
Estimate for the Project.

Nature of Risk:
Procurement Strategy has to be properly chalked out considering the cost, lead time,
availability, etc. parameters involved in procurement of various services and materials
required for the Construction Project. Basic Rates as mentioned in the Procurement Strategy
may not be realistic or too optimistic and not at par with current standard market rates. This
will result in wrong Cost Estimation for the Project.

Impact of Risk:
Erroneous Procurement Strategy may lead to confusion in deciding the scope for obtaining
various resources for the Project thereby creating a lot of confusion. Unplanned Procurement

27
Strategy may also result in wrong Cost Estimation and ultimately lead to cost overrun
scenarios, basically due to rate escalations.

Risk Mitigation:
Procurement Strategy should be documented by expert professionals preferably having close
association with Contracts and Purchase functions and should be prepared after performing
Cost – Benefit Analysis in defining the scope for procurement of various services and
construction materials. Data from previous completed Projects should also be referred to
while devising Procurement Strategy.

6. Construction Strategy:
Construction Strategy elaborates on the various Engineering aspects involved in the
execution of a Construction Project. It provides data on what type of methodology should be
adopted for executing the Project within stipulated cost and time parameters. It also mentions
vital details of class and category of Contractor to be appointed, specifications of materials,
Material Procurement Plan, Contracts Award Schedule, Drawing delivery Schedule, Type of
Formwork, Project Construction Plan, etc. It provides a macro-level Construction Plan to the
Management and provides vital data to visualize revenue realization.

Nature of Risk:
Construction Strategy can be erroneous if detailed analysis is not done. It may be ineffective
and may not represent the Construction Plan correctly if not properly devised.

Risk Impact:
Wrong Construction Strategy will not provide correct visualization to the Management and
will also misguide the Project Management Team. Ineffective Construction Strategy will lead
to many loopholes in the Construction Management.

Risk Mitigation:
Construction Strategy should be devised considering all the parameters having an impact on
Project and should be worked out with detailed analysis. It should give a sequential
Construction Plan and a rational view of the Overall Project execution and enable the
Management to anticipate various bottlenecks involved as well as the overall sequence of
various construction activities.

7. Sales & Marketing:


Project Sales and Marketing are directly responsible for cash inflow from Customers who
purchase the apartments. Proper Market segmentation and benchmarking needs to be done in
deriving the optimum psf Selling Rate. Sales strategy is very critical for earning maximum
gains and elaborates on the quantum of units to be sold and the associated timeframe
anticipating the movements in Real Estate Market. Marketing Strategy involves branding,
teaming up with various Channel Partners, advertisements in form of commercial ads,
hoardings, property exhibitions, etc. to increase prospective buyers.

Nature of Risk:
Project Sales can be hampered because of ineffective Sales and Marketing Strategy. It may
also be affected if the Sales staff is incompetent. Ineffective Branding of the Project will fail
to advertise the Project to prospective buyers and thereby reducing the potential sale of the
Project. Project Sale will also get affected if the psf Sale Rate derived is irrational.

28
Impact of Risk:
Prolonged delay in sale of apartments will result in proportional delay in cash inflow and
ultimately revenue realization. Cash Outflow will increase due to expenditure on branding,
advertisements and other marketing schemes in case of delayed sale of apartments and will
lead to cost overrun scenarios. Irrational psf Sale Rate will not encourage the potential buyers
and their referrals to invest in the Project and ultimately result in increased inventory of
apartments. Poor Marketing may also impair image amongst peers and competitors.

Risk Mitigation:
Sales team should be formed with expert and experienced professionals having good domain
knowledge. Proper Market segmentation should be done to derive optimum psf Sale Rate.
Branding should be done effectively using sophisticated mass media to communicate the
Project details to a mass of potential buyers.

II. CONSTRUCTION STAGE:


1. Design:
Delivery of various types of drawings – Architectural, Structural and MEP is very crucial
requirement of Project Management Team to ensure continuous Project progress. Quality of
GFC drawings governs the execution of the Construction Project.

Nature of Risk:
Risks associated with Design and Drawing Management during Construction Stage are
enlisted as follows:
- Delay in receipt of drawings by Project Management team. This will reduce the time for
studying a drawing as received from Architect dept. or from Consultant due to which
errors in drawings can be overlooked and ultimately result in faulty Execution.
- Too many revisions in drawings received.
- Inferior quality of drawings i.e. mismatch between different types of drawings. Ex.
Architectural drawing not in synchronization with Structural and MEP drawings.
- Revision of basic floor plan by Management due to market demand and customer
requirements in midway of Project execution.

Impact of Risk:
- Delayed drawing delivery will reduce the time for studying a drawing as received from
Architect dept. or from Consultant by Project Management Team due to which errors in
drawings can be overlooked and ultimately result in faulty Execution.
- Too many revisions in drawings will result in delay in execution of the Project. It will also
hamper the Design Management and drawing recording system. There are also chances of
the execution being carried out by the Contractor based on Superseded drawings, leading
to faulty execution and rework situations having cost implications and ultimately resulting
in cost overrun scenarios.
- Inferior quality of drawings may lead to delay in drawing delivery and may result in
overall Project delay.
- Revision of floor plans and layout when Project execution is already in progress may lead
to serious cost implication since it will involve various Consultants to rework the Design
Scheme from start and revisit all drawings. This will also result in stalling of the Project
for significant time period till all the GFC drawings are revised and published by all the
relevant Consultants for execution. This situation will have an adverse impact on the Cash
inflow for the Organization due to delayed receipt of payments from Customers.

29
Risk Mitigation:
- Drawing delivery especially from External Consultants and Architects should be closely
monitored by In-House Design Team.
- Drawings should be thoroughly scrutinized before stamping them as GFC (Good for
Construction) to avoid any revision and prior to issuing them to Project Management
Team for execution.
- Proper coordination should be done involving all the External Consultants and Architects
to work out a mutually synchronized drawing.
- Floor Plans and layouts should be finalized during Pre-Construction Stage and any
revision should be avoided.

2. Approvals:
Approvals are the vital essentials required for continuous execution of a Construction Project.
There has to be robust Liaisoning dept. in the Organization comprising of expert
professionals preferably possessing past work experience in Govt. offices to avail various
approvals on time.

Nature of Risk:
- Delay in Approvals leading to work stoppages
- Change in Rules and Regulations
- Non-availability of Govt. Officials postponing approvals
- Delay in submission of various reports and documents required for approvals
- Discrepancies in reports and documents submitted leading to re-submission

Impact of Risk:
Delayed approvals will lead to frequent work stoppages and ultimately delay in Project
execution. Work stoppages will also incur additional costs like payment of idle charges to the
Contractor. In case of major work stoppage, the resources need to be demobilized from
Project Site; which implies additional time loss required for mobilization of resources in
event of Project re-start. Delay in Project execution arising out of non-availability of
approvals ultimately affects the Cash Inflow of the Organization since the receipt of interim
Sale Payment Milestones from the Customers proportionate with the work progress are
stalled.

Risk Mitigation:
Robust Liaisoning dept. should be set up in the Organization alongwith expert external
Liaisoning Consultants. Effective coordination is required by the Liaisoning team with the
Liaisoning Consultant and Govt. Officials and a schedule should be prepared and monitored
for receipt of various Approvals for the Construction Project.
3. Planning:
Project Planning during Construction stage provides anticipated information based upon
technical analysis to the various functions involved in the execution of a Construction Project
viz. Project Management & Engineering dept., Contracts dept., Design dept. Procurement
dept., Liaisoning dept., etc. and acts as a common binding element between these functions. It
also provides anticipated timelines for collection of Sales Payment Milestones from
Customers. Planning and Scheduling of tasks, resources, approvals, etc. governs the entire
correlation and interdependencies of all the functions involved in the Construction Project. It
provides vital information to the Top Management about current work progress of a
Construction Project, Earned Value of the Project, Variances from planned timelines and

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budget, anticipated time-overrun for completion of the Project, anticipated cost-overrun after
completion of Project at any point of time.

Nature of Risk:
- Incorrect Construction Schedule
- Improper linking of various tasks
- Ineffective Resource Planning & Allocation
- Incorrect Drawing Delivery Schedule
- Ineffective Contracts Award Schedule
- Ineffective Material Procurement Plan
- Incorrect Schedule of Approvals
- Unrealistic Sale Payment Milestones

Impact of Risk:
Improper Planning will not provide correct data to various functions involved in the
execution of Construction Project leading to a confusion state. Variances between planned
and actual timelines or accomplishment of certain milestones won’t be analyzed. Bottlenecks
in the Project cannot be identified leading to delay in Project execution. There won’t be
proper synchronization between various functions. Improper Scheduling may lead to work
stoppage scenarios due to unavailability of various requirements viz. Resources like
Contractors, Materials, plant & Machinery, etc., Approvals, Payment collection from
Customers.

Risk Mitigation:
Effective Project Planning is very crucial to provide anticipated timelines for various
parameters involved in the execution of a Construction Project. Effective coordination should
be done by conducting periodic Project Review Meetings between all the stakeholders
involved in the Project. Project Plan and Cash Flow Report should be periodically revised
taking into considering the actual work progress to derive rational timelines for Project
Execution and Cost Management

4. Execution:
Execution of a Construction Project is directly proportional with the availability of resources
viz. Manpower, Materials, Plant & Machinery, funds, performance of Contractor, material
supply by Vendors, availability of approvals, availability of GFC drawings, etc. Proper
coordination between Internal stakeholders viz. Project Management, Liaisoning, Design,
Planning, Estimation, Contracts, Purchase, Quality, Safety, etc. and External stakeholders viz.
Architects, MEP Consultants, Structural Consultants, Liaisoning Consultants, etc. governs the
consistency of the Construction Project.

Nature of Risk:
The most important parameter governing the execution of a Construction Project is the
performance of the Principal Contractor. Other risks involved are as mentioned below:
- Non-conformance to quality standards
- Safety non-conformances and Accidents
- Rework scenarios
- Inadequate and inconsistent Manpower
- Unavailability of materials and stock-out scenarios
- Faulty Plant & Machinery
- Obsolete work methodology

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Impact of Risk:
Poor performance of the Contractor may lead to rework scenarios, quality discrepancies,
safety non-conformances, delay in Project execution, cost overrun scenarios. Obsolete work
Methodology will lead to delay in Project. Safety non-conformances and accidents may
involve legal implications leading to work stoppage. Inadequate and inconsistent Manpower
and unavailability of materials will hamper the Project progress and ultimately result in
Project delay.

Risk Mitigation:
Contractor appointment should be done precisely after proper due diligence to ensure
effective execution of the Project. Support functions should be actively involved to ensure
provision of their concerned deliverables to the Project Management team and there should
be effective interaction between all the Internal and External stakeholders involved in the
Project. Any bottleneck identified in the Project Execution should be subjected for
elimination through systematic problem solving approach. Periodic Project Progress Review
should be done to monitor the performance of the Project against Construction Schedule and
Cost Plan. Root causes should be identified for variances and an Action Plan should be
devised and standardized against these root causes. Quality and Safety parameters should be
strictly adhered to by creating general awareness amongst all the Project stakeholders.

5. FSI Availability:
In a Construction Project with PPP (Public – Private Sector Partnership) Model, FSI is
released to the Developer after execution of certain volume of construction at various stages
which is mutually agreed between the parties viz. the Government Entity and the Developer,
prior to entering into the Contract. The FSI released is utilized by the Developer for
construction of Sale Project.

Nature of Risk:
Risks associated are as mentioned below:
- Delay in Construction of Public Sector Project due to Contractor’s poor performance,
quality issues, rework, safety non-conformances; thereby leading to postponement in
release of FSI.
- Delay in approvals from Govt. officials.
- Due to non-availability of FSI, progress of Sale Project will be hampered.
- Work stoppage scenarios.

Impact of Risk:
- Progress of Sale Project will be hampered due to non-availability of FSI.
- Construction of Public Sector Project will get delayed due to delay in approvals.
- Payment of idle charges to the Contractor in case of work stoppage.
- Prolonged work stoppage due to non-availability of FSI may lead to staff reduction by the
Developer.

Risk Mitigation:
- Construction of Public Sector Project should be closely monitored and any bottlenecks
should be anticipated and resolved for consistent work progress.
- Proper follow-up should be done with Govt. Officials by Liaisoning dept. for providing
various approvals and ultimately release of FSI.

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6. Material Availability:
Consistency in Project construction is maintained by availability of resources out of which
material plays a very important part. Construction materials are procured from various
Vendors and involves a long lead time in procurement when it is done through ERP system in
an Organization which involves various stages for procurement from raising a PR (Purchase
Requisition) in the system to initiate material procurement process to recording GRN in the
system after receipt of material at Project Site.

Nature of Risk:
Risks associated are as mentioned below:
- Delay in raising of PR.
- Delay in Material Management at various stages involved in material procurement through
ERP system.
- Errors in PR / PO leading to repeating the entire ERP process.
- Quality discrepancies in materials received like for ex. In tiles there is shade variation,
warping, broken tiles observed.
- Erroneous Material Requirement Plan.
- Delay in material procurement from Vendor leading to stock-out scenario at Site.
- Production of required material having particular specification is discontinued by
Manufacturer.
- Damage to material stored in godowns due to improper storage.
- Theft of materials procured.

Impact of Risk:
Work stoppage scenarios may arise due to delay in material procurement or non-availability
of materials at Construction Project Site ultimately leading to delay in Project execution.
Theft of materials may lead to cost overrun due to repeated purchase of stolen materials.
Erroneous Material Requirement Plan will not provide realistic information to Purchase dept.
and may lead to ineffective Material Management. Rejection of materials received at Site due
to quality discrepancies will lead to non-availability of materials and ultimate result in
stoppage of work.

Risk Mitigation:
Material Management should be done effectively considering appropriate lead times for
various types of Construction materials. Material Requirement Plan as provided by Planning
dept. to Purchase dept. should be rational and should provide correct procurement schedule
based upon the Project progress and hence should be reviewed periodically. Proper watch and
ward should be provided at Site to avoid theft of materials. Proper storage should be done for
all types of materials received at Site. Materials should preferably be purchased from reputed
Vendors to prevent any prospective quality discrepancies and delivery concerns.

7. Contractor’s workmanship:
The entire Project progress of the Construction Project and its delivery to the end Customer is
critically governed by the performance of various types of Contractors executing the Project.
Nature of Risk:
Contractor’s performance is mainly affected by following mentioned factors:
- Lack of resources.
- Lack of funds and working capital.
- Lack of technical knowledge.
- Poor workmanship leading to quality discrepancies.

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- Delay in payments by the Developer.
- Delay in procurement of materials in Contractor’s scope.
- Safety non-conformances.
- Environmental conditions like monsoons, landslides, etc.
- Work stoppage conditions.

Impact of Risk:
Poor performance of Contractor will hamper the Project progress and quality of work. This
will result in delayed Project delivery and unsatisfied Customer. Poor workmanship will lead
to rework scenarios and finally cost overrun as compared with Cost Plan. Safety non-
conformances will result in accidents involving loss of material, time and even life; and may
have legal implications thereby stalling the Construction Project.

Risk Mitigation:
Proper due diligence and extensive investigation has to be done by Contracts dept. prior to
appointment of Contractors to ensure satisfactory performance and desired workmanship
during execution of Construction Project. Payments should be released to the Contractors
after proper scrutiny to maintain the Cash Flow of the Contractor and enable him to perform
and any unreasonable delay in payments should be avoided. Proper awareness should be
created within all Contractors to strictly adhere to Safety norms and Quality standards to
avoid any non-conformances.

8. Quality:
Quality of Construction is important for delivery of the Construction Project to the end
Customer. It is a very sensitive aspect pertaining to each and every activity involved in
execution of a Construction Project and any ignorance towards quality standards or technical
specifications can lead to quality discrepancies and ultimately lead to rework situations
associated with cost repercussions.

Nature of Risk:
Risks associated with quality parameters in a Construction Project are enlisted as follows:
- Non-conformance to quality standards in execution of various activities.
- Non-conformance of quality in various types of construction materials procured.
- Deterioration of materials due to improper storage.
- Deterioration of executed works due to various factors like labour movement,
environmental conditions like monsoons, heavy winds, etc., damage by working agencies.
- Breaking of fragile construction materials like glass, mirrors, etc. due to improper storage
or handling.

Impact of Risk:
Quality non-conformances may lead to rework situations and are always with cost
implications thereby leading to cost overruns. Quality discrepancies will cause delay in
Project completion and ultimately result in delayed handing over of Project and unsatisfied
Customer.
Risk Mitigation:
Quality conformances have to be strictly adhered to by all the agencies involved in the
Construction Project with reference to various Indian Standard Codes. Proper quality team
comprising of adept professionals having good domain knowledge and work experience
should be set up by the Developer and the Contractor to closely monitor the quality of all the
activities and materials necessary for the Construction Project to ensure timely delivery of the

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Project and delighted Customer. General Quality awareness should be created amongst all the
workmen of Contractors and regular events like Quality Audits, Quality Workshops, Training
Programmes, Quality Weeks, etc. should be conducted at Project Site to monitor and control
Quality at Project Site. Penalty should be levied to Contractors responsible for quality non-
conformances and penalty clause should be incorporated in the Work Order.

9. Safety:
Safety Management is he prime responsibility of all the agencies working on behalf of all
Contractors as well as the Developer to ensure ZERO accidents at Site to avoid any damage
or loss of materials, machinery and life.

Nature of Risk:
Risks associated with safety aspects in a Construction Project are enlisted as follows:
- Non-conformance to safety standards during execution of various activities.
- Lack of awareness about safety concepts and requirements.
- Poor hygienic working conditions and in labour camp.
- Ineffective safety precautions to save cost like no display boards, safety signages, etc.
- Workmen not using proper and adequate PPEs (Personal Protective Equipments).
- Fire hazards.
- Improper handling of chemicals.

Impact of Risk:
Safety non-conformances will result in accidents and other hazards resulting in loss of life,
damage to property and may also be associated with legal implications. Ineffective and
improper use of Safety PPEs will result in accidents leading to legal investigations and
proceedings which may result in work stoppage situation. This will defame the Contractor
and the Developer and may even be subjected to criminal litigation followed with a jail term
in case of major accident. Fire hazards will cause major damages to the Property and will
have higher cost repercussions.

Risk Mitigation:
Safety has to be strictly adhered to and all needful precautions as per OHSAS standards and
guidelines have to be undertaken by everyone involved in the execution of a Construction
Project without any compromise. Proper safety team comprising of adept professionals
having good domain knowledge and work experience should be set up by the Developer and
the Contractor to closely monitor the safety of all the activities and processes. General Safety
awareness should be created amongst all the workmen of Contractors and periodic safety
events like Safety Audits, Safety Workshops, Training Programmes, Safety Weeks, etc.
should be conducted at Project Site to monitor and control safety at Project Site. Use of
proper and adequate PPE should be made mandatory for all the workmen. Penalty should be
levied to Contractors responsible for Safety non-conformances and penalty clause should be
incorporated in the Work Order.

10. Commercial:
Commercials are the driving factors to ensure consistent execution of a Construction Project
and should be effectively monitored. Commercials are presented to the Top Management in
the form of various reports like Cost Estimates, Cost Plan, Budget, Cash Flow Reports,
balance Cost to Completion Reports, MIS Reports and should be monitored on a periodic
basis.

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Nature of Risk:
Risks associated with Commercial aspects in execution of Construction Project are as
mentioned below:
- Erroneous Cost Estimate having calculation mistakes and not considering all cost heads
involved in the Project.
- Erroneous Project Cost Plan / Budget.
- Ineffective Cash Flow Reports.
- Erroneous Cost to Completion Reports.

Impact of Risk:
Errors in Cost Estimates and Cost Plans / Budget will not provide realistic information to the
Top Management leading to faulty plan having serious cost implications. Irrational Cost Plan
will not serve its purpose as a reference for monitoring cost of a Construction Project and
there won’t be a valid comparison between Cost Plan v/s Actual Expenditure. Erroneous
Cash Flow Report will not provide correct information to the Project Management team and
other functions as well as Top Management regarding funds allocation required for the
execution and cash inflow to be collected. Erroneous Cost to Completion Reports will
provide vague information to the Management about total cost of the Project.

Risk Mitigation:
Cost Plan / Budget should be prepared considering all the parameters involved in the Project
having cost implications and should be consistently reviewed and revisited periodically as per
Project progress and presented to the Management to accord approval. Cost Planning and
Cash Flow Reports should be precisely done to plan the availability of funds. Contingency
Funds not exceeding 5% of the Total Project Cost should be considered in the Cost Estimate
to avoid cost overrun scenarios due to unforeseen expenses. Cost / Finance Management
should be conducted by expert and experienced professionals to avoid any mistakes.

11. Force Majeure:


There are many factors which may hamper the progress of Construction Project which are
mostly not anticipated. These factors are unpredicted and can cause major damage to the
Project and may sometimes even involve loss of life.

Nature of Risk:
Environmental factors affecting the Project progress are mentioned as below:
- Heavy rains and landslides.
- Earthquakes.
- Floods.
- Heavy winds.
- Riots.

Impact of Risk:
Damage due to force majeure risks is more and may even involve loss of life in addition to
damage to property. Sometimes it may even involve legal investigations and proceedings.
These may also lead to work stoppage and have a greater cost impact as well.

Risk Mitigation:
Structural Design should be made catering to the requirements of Earthquake Engineering
considering the impact of seismic forces as per the zone in which the Project is located. The
Project and all the associated workmen should be insured. Impact due to various

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environmental factors should be taken into consideration during designing stage of the
Project.

III. POST – CONSTRUCTION STAGE:


1. Quality:
Quality of all the activities executed in the Construction Project determines the handing over
of the Project to the Customer. Any quality discrepancy will result in dissatisfied Customer.

Nature of Risk:
Quality discrepancies identified in the snagging processes during the Construction stage.

Impact of Risk:
De-snagging of quality flaws involves significant time for rectification and are associated
with cost implications. This may delay the handing over of the Project to the Customer.

Risk Mitigation:
Quality norms and standards should be strictly adhered to by various Contractors responsible
for execution of the Project during Construction stage of the Project. Proper checks should be
provided and Checklists should be filled up by the Quality team during Construction to
reduce the number of snags and quality discrepancies.

2. Approvals:
Various Approvals are mandatorily required for successful completion of a Construction
Project and permitting the end Customer to take possession of his apartment. These approvals
mostly comprise of OC (Occupation Certificate) and BCC (Building Completion Certificate).

Nature of Risk:
Risks associated with Approvals are enlisted below:
- Delay in application for OC.
- Delay in accomplishment of OC compliances.
- Delay in approvals from Govt. officials.
- Ineffective coordination by Liaisoning Team with Govt. officials.

Impact of Risk:
Delay in receipt of approvals will delay the Project handover to the end Customer and
ultimately lead to dissatisfied Customer which may hamper the future referrals.

Risk Mitigation:
Application for approvals when the Project is nearing to completion should be done by
liaisoning team followed with effective follow-up with the Govt. Officials to ensure timely
receipt of approvals and successful handover of the Project.

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CONCLUSION

An effective risk management process encourages the construction company to identify and
quantify risks and to consider risk containment and risk reduction policies. Construction
companies that manage risk effectively and efficiently enjoy financial savings, and greater
productivity, improved success rates of new projects and better decision making. Risk
management in the construction project management context is a comprehensive and
systematic way of identifying, analyzing and responding to risks to achieve the project
objectives. To management the risk effectively and efficiently, the contractor must
understand risk responsibilities, risk event conditions, risk preference, and risk management
capabilities.
Qualitative methods of risk assessment are used in construction companies most frequently,
ahead of quantitative methods. In construction project risk management, risks may be
compared by placing them on a matrix of risk impact against a probability. Mitigation options
are then derived from predefined limits to ensure the risk tolerance and appetite of the
construction company. The risk management framework for construction projects can be
improved by combining qualitative and quantitative methodologies to risk analysis.

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BIBLIOGRAPHY:

 PMI, Project and Program Risk Management : a guide to managing project risks and
opportunities, The PMBOK Handbook Series - Volume 6

 Dale COOPER & Chris CHAPMAN, Risk analysis for large projects, Models, Methods & Cases,
Edition Wiley

 John RAFTERY, Risk Analysis in Project Management, Edition E & FN SPON

 Stephen GREY, Practical Risk Assessment for Project Management, Edition Wiley

 Vijay KANABAR, Project Risk Management : A Step-by-Step Guide to Reducing Project Risk

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