The Simplar Institute
Project risk in construction is defined in basic terms as unplanned cost or schedule changes that crop up during a construction project. Unplanned cost and schedule changes are ubiquitous in construction and have led to a universally negative perception of the industry. In data collected from 557 members of the National Institute of Governmental Purchasing and the Institute of Supply Management, researchers stated that “construction projects have more problems than any other goods and services purchased and are the most likely to experience problematic consequences” (Davison and Sebastian 2009).
We Took a Look at Risk
We launched a longitudinal study of 229 construction projects completed during a 7-year period at a university’s capital projects department. During the projects, 1,229 risks were identified and communicated to the project clients.
First – We Asked a Question
Was there any way to better identify and manage impending cost and schedule changes that inevitably crop up in construction projects? We reasoned that a better understanding of the distribution of risks during a construction project could improve risk management. Early identification and communication of risks throughout the construction phase would allow project teams to manage and minimize cost increases and schedule delays thereby increasing customer satisfaction. We examined the data collected to determine whether any correlation existed between the characteristics of the identified risks and the timing of the risks being communicated to project stakeholders.
We examined the typical lifecycle of the 1,229 project risks (unplanned changes in cost or schedule) to determine the nature of project risk timing. We identified five sequential steps that characterize every project risk:
- An uncertain event is identified as a risk.
- The likelihood and impact of the risk are assessed.
- Depending on the risk assessment, the risk is communicated to all stakeholders.
- A solution is developed to resolve or exploit the risk.
- The risk is resolved or exploited.
Third – We Determined
Whether the characteristics of risk affect the timing (distribution) of risks during a construction project. Our results indicated that positive relationships did indeed exist between risk characteristics and risk distribution. For example, risks with large cost impacts were typically identified by project teams earlier in the project schedule and risks that caused greater schedule delays were identified toward the end of the project schedule. This information could help the construction industry improve predictability and awareness of specific risks at different stages of construction projects.
Fourth – We Coined a New Term
After analyzing the data, the authors introduced a new indicator, risk encounter, to quantify the point in the schedule at which a risk was identified and communicated to all project stakeholders. The data shows that risks continue to occur throughout the construction phase and often occur past the original completion date. The researchers also found that risk categories have different mean risk encounters, that is, the type of risk was correlated with the point at which this risk was actually communicated during the construction phase. The mean risk encounter for all categories was 0.79 (79%) of the original schedule. The risk characteristics examined in this study included magnitude of cost impact, magnitude of schedule impact, and risk category.
- Risks with large cost impacts are typically identified early in a project schedule; risks with smaller cost impacts typically occur later.
- Risks that cause greater schedule delays were identified toward the end or past the original project completion date.
- Risk category was found to have no relationship with risk encounters.
Risk management is becoming a core competency for construction firms. Often, firms win the project not because they come in low but because they demonstrate to owners the best risk management program. More research is needed to identify and quantify project risks and create effective risk management tools. Watch this space for further discussion.