Risk Management System

위험도 관리 및 의사 결정론

Risk Management

- Attention to Risk is essential at company, project or a work package• Few analyze the risks in practice other

than intuition in experience• Should we

- Just be aware of risks?- Try to quantity them and build mathematical

model?- Use sophisticated computer software?

Risk Management

- Not new, nor does it employ magical techniques

- It is a system or a systematic approach which aims to identify and quantify all risks to which the business or project is exposed

- So that a conscious decision can be taken on how to manage risks

Risk Management system

- Must practical, realistic, cost effective- Need not be complicated nor require the

collection of vast amounts of data- Matter of common sense, analysis,

judgment intuition, experience, a willingness to operate a disciplined and/or structured approach

Risk Management Framework

RISK IDENTIFICATION

RISK CLASSIFICATION

RISK ANANYSIS

RISK RESPONSE

RISK ATTITUDE

Identify the source and type of risks

Consider the type of risk and its effect on the person or organizationEvaluate the consequences associated with the type of risk, or combination of risks, by using analytical techniques.Assess the impact of risk by using various risk measurement techniquesAny decision about risk

will be affected by the attitude of the person or organization making the

decision

Consider how the risk should be managed by either transferring it to

another party or retaining it

RISK IDENTIFICATION

• Identified Risk It is not a risk, it’s management problem• Factor to be considered in the risk

identificationSource Event and Effect of Risk

Controllable

IndependentDependent

Uncontrollable

Partial dependenc

eTotal

dependence

SOURCES OF RISKSource Event Effect

Possible Sources

Event Possible Effects

Lack of safety

Inadequate safety checks

on site

Specialist contractor not familiar with the system of

working

Defective equipment

Inexperienced workforce not

suitable for the type of work to be undertaken

Unforeseen weather

conditions

Lack of care by the workman

Injury to workman on

site

Death of workman

Serious injury to workman

Project being stopped by the Health and Safety

Officer with the issuing of a prohibition notice

Project being delayed

Loss of morale and poor labour relations amongst

the workforce

Prosecution and fine by statutory authorities

Cost of loss production and welfare payments to

injured workman

Future increased cost of insurance provision

SOURCES AND EFFECTSThe sources of risk must be distinguished from the effects of riskThe sources of risk can be : inflation rising above the allowance in the estimate ; unforeseen adverse ground conditions ; exceptionally inclement weather ; late delivery of crucial materials, for instance after a fire at a suppliers’ works ; incorrect design details, such as the wrong size beams being shown on the architect’s drawings ; insolvency of the main contractor ; no co-ordination, for instance between the mechanical services contractor’s drawings and the suspended ceiling specialist’s drawings.

The most serious effects of risk are : failure to keep within the cost estimate ; failure to achieve the required completion date ; failure to achieve the required quality ; failure of the project to meet the required operation needs ; damage to the property as a result of fire or flood ; injury to a worker due to an inadequate system of working.

Controllable vs. Uncontrollable risk

- Driving a car (Controllable risk)• Increased risk of injury relative to rail travel• We have come control over the outcome of the journey

-Weather conditions (Uncontrollable risk)• Entirely beyond control of decision maker• Adverse effect may be integrated by taking appropriate action in scheduling and in the organization of the site

Controllable risk

• Decision-maker voluntarily accept the increased risks associated with new technology Performance risk is financial risk• This risk may be tolerated if additional benefits ( prestige accumulation of expertise, favorable financial outcomes) are likely to occur• By exploiting available expertise and through careful planning, we may be able to control the eventual outcome

Uncontrollable ( Involuntary risk )

• Usually emanate from the external environment, the political, social or economic• Weather conditions, Inflation, Taxation changes• Cannot be influenced by the decision maker but usually degree of exposure to such risks can be reduced

- Financial consequences of increased gas prices can be reduced by the design of a more efficient plant or one can ‘design out’ the risk by using alternative fuel source.

Uncontrollable ( Involuntary risk )

• Dependency Expected life of a building component

Dependent on its design, the standard of workmanship, quality of materials.

Aging and physical wear is tear poor maintenance

Technological obsolescence and fashion

Three types of dependence

• No dependence (Mutually exclusive)

• Total dependence

• Partial dependence

-EX. Overall sq. m price of gross floor area

vs. Number of stories

RISK CLASSIFICATION

RISK CLASSIFICATION

IMPACT OF RISKTYPES OF RISKCONSEQUENCE OF RISK

Pure risk (specific risk) – no potential gain

Speculative risk(market risk) – possibility of lossor gain

Company

Environment

Market/Industry

Project/Individual

Frequency

Severity/Impact

Predictability

Asset related or business risk

Capital related or financial risk

RISK CLASSIFICATION

Event Type of Risk

Onerous conditions of contract Speculative risk Company risk

Exceptionally inclement weather occurring during the project Pure risk Company risk

Project riskInflation causing a dramatic increase in the price of land Speculative risk Market/Industry

risk

A national strike of all building workers Pure risk

Market/Industry risk

Failure to find tenants for a speculative development

at an economic rentSpeculative risk Company risk

Failure by a building surveyor to identify a structural defect

Speculative risk Company riskIndividual risk

Injury caused by an accident at the work place Pure risk Individual risk

• The various types of risk relating to the construction industry

IMPACT OF RISK

• The risk hierarchy

The environment

The market/industry

The company

The project/individual

Risk and the general environment

• Physical vs. Political, Social, Economic• Physical

- Weather is Natural phenomena- Cannot control, but their effects can be mitigated (Rescheduling particularly vulnerable operations)

• Political, Social, Economic- Partially controllable (National vs. International- eq. Laws regarding development controls on office building- Recent Real Estate Market Crash - Speed of change

• Environmental risk- Most events are uncontrollable by individual or company- Attention on evaluation of risk exposure

The market/industry risk

- Any event that might affect the complete industry (eq. National strikes of all building workers or unions)- All companies want to maintain their market share- Must constantly evaluate competition and price levels This is subject to market risk

The company risk

- Company operates within a market

- Company must ultimately bear the consequences of a risky project

- Company in project risk are intrinsically linked

Project risk and individual risk

- Many risks are easiest to see at the working level (Work package)- Impractical for people operating at work package level to have a well developed overview of total project- Risk management system should ensure bottom-up and top-down approach equally

CONSEQUENCE OF RISK

Consequence the maximum probable loss the most likely cost of the loss the likely cost of servicing the loss if no insurance has been effected the cost of insuring against the event occurring the reliability of the prediction about the event

CONSEQUENCE OF RISKEvent-likelihood of damage to adjoining buildings as aresult of pile driving

Improbable Rare Possible Probable Very

likelyNegligible

(up to ￡ 100) Retain Retain Retain Retain Retain

Small( ￡ 100- ￡ 1,000) Retain Retain

Partial Insurance

Partial Insurance

Partial Insurance

Moderate( ￡ 1,000-￡ 5,000)

Retain Partial Insurance Insure Insure Insure

Large( ￡ 5,000-￡ 50,000)

Insure Insure Insure Insure Insure

Disastrous(over ￡ 50,000) Insure Insure Cease

activityCease activity

Ceaseactivity

LikelihoodSeveri

ty

RISK ANALYSIS

- Integral part of risk management system‘ To try to eliminate risk in business enterprise is futile. Risk is inherent in the commitment of present resources to future expectations. Indeed, economic progress can be defined as the ability to take greater risk.’ Hertz and Thomas (1984)

RISK ANALYSIS

EX. - $ 1,600,000 Remodeling of school bldg- 8 work packages of $ 200,000- Design not finished, ±10% cost variance (Total $1,440,000~$1,760,000)- Each of the packages needs to be analyzed to identify risks- Risks analysis gives an insight into what happens if the project does not proceed according to plan

RISK ANALYSISRISK ANALYSISIdentify alternative

optionsTake risk attitude into

accountRisk measurement

Quantitative Qualitative

Probabilityanalysis

ObjectiveSubjective

Directjudgment

Sensitivityanalysis

SingleMultiple

Rankingoptions

Scenarioanalysis

BreakdownCombination

Comparingoptions

Simulationanalysis

Type of distribution Estimates Number of

simulations Relationship with

other items

Descriptiveanalysis

Correlationanalysis

Linear/non linearSingle/multiple

RISK ANALYSISAn example of risk analysis The effect of varying weather conditions is considered upon the excavation of isolated column bases in clay

The probable cost is ￡ 5.46 with a probable time of 23.7 minutes. The difference between the very wet and very dry unit price rates is considerable. The contractor must ask what premium should be added to the base unit price rate at which he still remains competitive in the market place yet gives some comfort that if the worst eventuality happens the loss suffered can be sustained. The example assumes the contractor has no knowledge of the ground conditions, which is often not the case. The analysis has not solved the problem, but it has highlighted the option. A discerning interpretation of the results is required.

WeatherCondition

sProbabilit

yUnit Price rate( ￡ )

Probable cost

Time in minutes

Probable time

Very dry .10 2.60 0.26 12 1.20Fairly dry .20 3.00 0.60 15 3.00

Wet .50 6.00 3.00 25 12.50Very wet .20 8.00 1.60 35 7.00

Probable cost 5.46 Probable time 23.70

RISK RESPONSE

Fg. Pricing for an underground construction project - Contractor will have available site investigation data - Incomplete knowledge of the site geology and the possibility of unforeseen ground conditions poses great risks to contractors - Contractor adds risk premium and inflate the unit price rates - Some transferred risk and some retained

RISK RESPONSE

Risk retention(sometimes called risk absorption)

Risk reduction

Risk transfer Risk avoidance

RISK RESPONSE

Some fundamental considerations which govern the allocation of risk which party can best control the events that may lead to the risk occurring ; which party can best manage the risk if it occurs ; whether or not it is preferable for the client to retain an involvement in the management of the risk ; which party should carry the risk if it cannot be controlled ; whether the premium to be charged by the transferee is likely to be reasonable and acceptable ; whether the transferee is likely to be able to sustain the consequences if the risk occurs ; whether, if the risk is transferred, it leads to the possibility of risks of a different nature being transferred back to the client.

Risk retention

- Risk that produce small, repetitive losses are suited to retention eg. Deductible for motor insurance-Retention is dictated by the financial circumstance and likelihood of loss- Full coverage or limited excess provision of insurance for claim- Factors to be considered for retention

the cost of the insurance premium ; the maximum probable loss ; the likely cost of the loss ; the likely cost of paying for the loss, if uninsured.

Risk reduction

Four categories of risk reduction- Education and training to alert the staff to potential risks- Preventive protection to reduce the likelihood of loss ( eg. Quality assurance company)- Systematic approach to ensure consistency and to make people ask ‘what if’ questions- Physical protection to protect people and property

Risk transfer

- Removes it to another party- Risk transfer may increase risk eg. General imposing liquidated damage clause for late completion- Commonest form of risk transfer Insurance

Risk avoidance

- Refusal to accept risks• Refusal to contract• Associated with pre-contract negotiations • Use of exemption clauses