CON 2001 & CVE 4070

Construction EngineeringRisk ManagementProf. Ralph V. Locurcio, PE

Views of risk taking…

What is risk??? An outcome different from what you

expected or estimated…

Or… different from what you bid!

Sources of risk in construction… Construction operations are hazardous Labor capacity, capability, competence… Subsurface conditions; physical factors Contractual provisions; timing, LDs… Economic conditions; prices, labor… Political & public; new laws, opposition

Basic premise… All risks accrue to the owner unless

assigned by contract to another party

Assigning risk to another they must be (a)able to assess the risk fairly, (b)competent to do the task, and (c) result in a better solution

Risk allocation… at start

Owner

Designer Builder

Not yet involved

Risk allocation… traditional

Owner

Designer Builder

Risk allocation… design-build

Owner

Designer + Builder

Risk Management Tools Best Value procurements

Two stage bid process Contractor helps finalize design Incorporates VE

Risk Management Risk identification Analysis Response

Pareto Principle 80/20 rule…

States that 80% of the value comes from 20% of the activities.

Therefore, we need a method to focus on the 20% of the activities that have the most influence on the outcomes.

And… we should avoid the 80% of activities that produce little gain

Risk identification Identify areas of risk intensity

1. Buildability, logistics, health & safety2. Environmental, permits3. Cost environment

Develop risk registers1. Catalog all risk factors2. Assign responsibility to team

members

Risk analysis Use decision & simulation theory

Quantify maximum effect of each risk Identify probability of occurrence Determine economic impact of each Determine impact of combinations

Risk response Plan mitigation strategies

Specific action to be taken Avoidance, sharing, protection, etc. Accountable team member Account for inter-relationships Account for multiple risk scenarios

Risk Management Strategies Avoidance Transfer or Sharing Mitigation Insurance Recovery

Construction Risk Management Avoidance Retention

InsuranceEducation & Training

Exemption ClausesRisk sharing

Protection Clauses Retention Money

Liquidated DamagesRescind contract

Contingencies

Basic risk management-1… Build a Risk Allocation Matrix

Identify all potential risk of loss Assign to Owner, Contractor or Designer Quantify your potential loss Develop a risk management strategy

Basic risk management-2 Management strategies…

Avoid the potential loss Transfer the risk Share risk with another firm Mitigate the potential for loss Recover any unavoidable loss

• Claim• Insurance• Litigation

Basic risk management-3 Keys to allocation of risk…

Must be a reward for any risk assigned Asignee must be able to control risk Must produce “best” solution Must have financial capability Must follow terms assigned

Avoidance… Careful estimating & bidding Study the contract terms Study the owner’s style & record Study limits of insurance Prior planning for construction

Examine the plans, specs & conditions Examine the contract requirements Examine the site for unknowns & hazards Examine each process & plan your method

Transfer or sharing… Reduce source & size of risk

Use the contract terms General conditions Plans & specs

Negotiate new terms May not work with government

Change strategic approach Merger or joint venture with another firm Hire subcontractor for high risk work Purchase additional insurance

Mitigation… Good planning & communication

Quality control processes Use/acquire the right skills

Use/acquire the right equipment Use your experience wisely

Act promptly if the unexpected occurs

Insurance… Covers unexpected situations

Situations beyond your control Your track record is important Cost is a factor Do not overuse

Recovery…if all else fails Read the contract Good record keeping… especially impacts Follow correct procedures Demonstrate mitigation efforts Make a convincing presentation Attempt settlement at lowest level Seek legal help

Cost recovery 101 Read the contract

Begin mitigation immediately to minimize loss Stay within contractor’s authority Determine risk allocation for each problem Comply with all notification requirements Request contract change when required Establish new activity code for all added work Track cost of new work Quantify delay to other work

Change Order Solution

Change Order Solution

Change Order Solution

Change Order Solution-1                     Student: _________________________________________

HW#7 - Solution to Change Order                    

Item to change Units L W/H Quantity  Price/unit Credit Charge Value Score

Add CMU walls - Wall B SF 5.66 8 45.28 $8.48   $383.97 5  

Credit CMU wall (@ door F) SF 5.66 8 45.28 $4.24 $191.99   5  

Credit CMU wall A SF 11.33 8 90.64 $4.24 $384.31   5  

Add CMU walls - Wall D SF 11.33 8 90.64 $8.48   $768.63 5  

Credit for windows EA     1.00 $310.00 $310.00   5  

Add Interior stud walls SF 11.33 8 90.64 $4.06   $368.00 5  

Credit Interior stud walls SF 5 8 40.00 $2.03 $81.20   5  

Add precast lintels LF     0.00 $28.00   $0.00    

Credit precast lintels LF 4.5   4.50 $28.00 $126.00   5  

Add foundation-wall D LF 11.33   11.33 $12.54   $142.08 5  

Change Order Solution-2Credit foundation - wall door F & wall B cancel LF     0.00 $12.54 $0.00      

Add downpours - wall D EA 4   4.00 $88.00   $352.00 5  

Credit downpours - wall A & door F wall EA 5   5.00 $88.00 $440.00   5  

Add stucco - wall D SF 11.33 8 90.64 $4.93   $446.86 5  

Credit stucco - wall door F & wall B cancel SF 0 0 0.00 $4.93 $0.00   5  

Add roof SF 11.33 24.33 275.66 $6.25   $1,722.87 5  

Add 4" floor slab SF 11.33 24.33 275.66 $3.42   $942.75 5  

Add tile floor SF 0 0 0.00 $3.42   $0.00    

Add carpet in FR SY 5.66 11.33 2.38 $13.55   $32.18 5  

Add carpet in LR & MBR SY 11.33 24.33 10.21 $13.55   $138.34 5  

                   

Subtotal charges             $5,297.68 5  

Subtotal credits           $1,533.50   5  

Subtotal job             $3,764.18    

Change Order Solution-3Labor @ 2x net materials             $7,528.35 5  

Add Extras @ 10%             $752.84    

Job Total             $12,045.37 10  

                   

                   

                   

                   

            Your score 110  

Percent score 100%  

Test-3 Review 200 points Mix of questions… T/F, short answer Calculations for estimates Be prepared to “think”

Review-11. Ethics

a. Know the 3 basic sections of the Engineer’s Code of Ethics b. Know what is the sub-parts of each section c. Be able to apply each section to an ethics case study

2. Estimating & Change Orders

a. Know how to calculate a conceptual estimate b. Know how to calculate a detailed estimate for a change order c. Know how to use location, sizing & quantity factors d. Know how to adjust cost factors for timing & escalation to the mid-point of construction e. Be able to make recommendations based on your estimates

3. Negotiations

a. Negotiating styles b. Benefits of each style c. Results in long term or short term solution d. What method achieves the best solution

Review-23. Dispute resolution

a. What is a dispute b. Actions the owner should take in a dispute c. Actions the contractor should take in a dispute d. Methods to resolve a dispute

7. Payments to contractor

a. Know the basis for payments to a contractor b. Know how to calculate the payment c. Know the meaning of “retainage” and how to use it

8. Construction Contract Review

a. Know the major types of contracts: Fixed Price, Unit Price, Cost Plus and Incentive Fee b. Understand the pros & cons of each c. Understand the different risks associated with each of these contracts d. Know when to use: Fixed Price, Unit Price, Cost Plus and Cost Plus Incentive Fee contracts

Ethics HW handout Due: December 1st Read instructions carefully Cases on my web site

Questions?

Best Value ProcessUnderstand

Client Requirements

&Intent

BrainstormPossible Areas

forAdding Value

Find & IncludeExperts in Key Areas

DevelopOptions

WithPros & Cons

ID PreferredSolution &

Obtain NeededDesign Info

Present toExec Team

ForDecision

PreliminaryDesign

DetailedDesign

DevelopmentPlans

&Specs

Final ReviewBy

Exec Team

Final ApprovalBy

ClientConstruction

Contractor

Cost recovery 101 (a)… Detailed Work Breakdown Structure

(WBS) for estimating List & code each activity & duration Establish start & finish dates & labor hours List materials required & procurement lead Labor hours for shop drawings & submittals Have accounting code for each of above

Cost recovery 101 (b)… Develop change/claim spreadsheet

Use bid data as base line List all estimated activities & costs in a WBS Calculate “actual” duration & costs for WBS Establish % triggers to identify problems Notify owner’s rep immediately of problems

Cost recovery 101 (c)… Use data to analyze source of problem

Defective plans & specs Differing site conditions Interruption of work flow Unusual weather conditions Delay in receiving EI or submittal response Problems with labor Bad bid