Unit-06Risk Management

Risk has been defined as a measure of probability, the severity, and the exposure of all hazards of an activity. (Osama Jannadi)

Hertz and Thomos (1983) defined risk as uncertainty and result of uncertainty. It refers to lack of probability about the structure, outcome or consequences in planning or decision or situation.

Risk analysis involves estimating the probabilities needed as input data for the evaluation of decision alternatives. (Lifson and Shaifar 1982)

Risk= Probability of an accident x Losses per accident. (or)

Probability of an event occurring x Impact of event occurring

Risk versus uncertainty

Uncertainty: The lack of complete certainty, that is, the existence of more than one possibility. The "true" outcome/state/result/value is not known.

Measurement of uncertainty: A set of probabilities assigned to a set of possibilities. Example: "There is a 60% chance this market will double in five years"

Risk: A state of uncertainty where some of the possibilities involve a loss, catastrophe, or other undesirable outcome.

Measurement of risk: A set of possibilities each with quantified probabilities and quantified losses. Example: "There is a 40% chance the proposed oil well will be dry with a loss of 12 million Rs. in exploratory drilling costs".

Factors responsible for Risk and uncertainty 1. Place - Ground strata Dewatering conditions at site beyond control

Vastu shastram etc 2. Entrepreneur/management/organization - Relation ship between

Contractor / engineer-in-charge and ownerFrequent changes in designs/planning/execution instructions etcFinancial and economical risk (e.g. inflation, unavailability of funds)Change in orders) (Al Bahar 1990)

3. Construction machinery/labor - Availability or paucity of Materials of construction / labors/ machineryFluctuation in cost of material or laborTheft of materials at crucial timeRun away of labor at crucial timeInjury & failure

4. Construction activities/processes/environment- Environmental conditions / Seasonal restraints and constraintsRehabilitation

5. X factor -Act of God, (e.g. Earthquake, Flood, Fire, Cyclone, & Unknown factor)International / local market conditionsPolitical risks. (e.g. changes in rules and regulations, War or political uncertainty).

Type of Risk

Risk can be of different types. They may be

1. Physical Causing direct harm or damage,

2. Psychological Causing damage to self-esteem

3. Social Causing loss of reputation

4. Contagious Causing infectious, communicable, transmittable losses

Risk management

Risk management is concerned with identifying risks and drawing up plans to minimise their effect on a project.

A risk is a probability that some adverse circumstance will occur Project risks affect schedule or resources; Product risks affect the quality or performance

of the software being developed; Business risks affect the organisation

developing or procuring the software.

The risk management process

Risk identification Identify project, product and business risks;

Risk analysis Assess the likelihood and consequences of

these risks; Risk planning

Draw up plans to avoid or minimise the effects of the risk;

Risk monitoring Monitor the risks throughout the project;

Risk identification & Methods for identifying risks Risk identification(What they are, when, what effect and what measures) Technology risks.- The RCC design, Quality of materials, New

Technologies used People risks: Skill level of people. Organisational risks: Requirements risks. Estimation risks. Methods for identifying risks Brainstorming- session attended by the client, PM, RM and design team Interviews- The Delphi technique Questionnaires- Combination of previous experience and specific project criteria. Use of specialists Pervious experience

Risk Assessment

Qualitative assessment• Classification of reference- environmental: site condition health

and safety contractual: client, contractor, third party. Design: planning permission

• Description of the risk• Relationship of risk to other risks• Potential impact• Probability of occurrence • Response/ mitigation strategy- Avoidance, Transfer, Reduction,

Risk responsibility

• Risk responsibility/ owner

Risk Assessment

Quantitative assessment-• Simple assessment• Probabilistic analysis• Multiple estimating using risk analysis• Sensitivity analysis• Decision trees• Monte Carlo simulation.

Risk management strategies (i)Risk Strategy

Organisational & financial problems

Prepare a briefing document for senior management showing how the project is making a very important contribution to the goals of the business.

Recruitment problems

Alert customer of potential difficulties and the possibility of delays, investigate buying-in components.

Staff illness Reorganise team so that there is more overlap of work and people therefore understand each other’s jobs.

Defective components

Replace potentially defective components

Risk Strategy

Requirements changes

Derive traceability information to assess requirements change impact, maximise information hiding in the design.

Organisational restructuring

Prepare a briefing document for senior management showing how the project is making a very important contribution to the goals of the business.

Database performance

Investigate the possibility of buying a higher-performance database.

Underestimated development time

Investigate buying in components, investigate use of a program generator

The Cost of Risk

The total direct and indirect cost of risk

Costs incurred in handling risk

Cost of losses that occurs

Cost due to the existence of risk

Private cost Social cost

The Nature of cost

The distribution of cost

Risk Handling CostInsurance premium, charges for loss prevention devices, and fees for consulting services.

Loss costDirect costs to a firm of industrial accidents include the compensation payable to injured employees, damage to machinery, loss of production

Indirect costs

Private and social costs

Role of Risk Manager