Risk (hazard or threat): This is what managers often mean when talking
about risk. It is referred to as a negative event or threat to the organization.
Managing risk in this context means using management techniques to
reduce the probability or impact of the negative event without undue cost.
The goal of risk management is to measure and assess risk, with the
ultimate goal of managing that risk. Risk management falls into the arena of
Project Planning. Over time, Over Budget, Environmental Impacts etc.
Specific standards and methods have been developed with respect to risk
This Chapter discusses the various definitions of risks and its relationships
with uncertainty and its causes. The chapter also includes the risk
categorization and classification.
In the end the Risk management cycle will be covered in order to introduce
the risk management processes.
The objective of this chapter is to make the student to have a good
understanding in the following topics:
Definition of risk and its importance in construction projects,
Concepts of risk management process,
Processes of Risk Management
Various strategies of uncertainty reasoning in construction events
Risk Management Cycle
Definition of Risk
A situation involving exposure to danger.
Expose to danger, harm, or loss
The possibility that something bad or unpleasant (such
as an injury or a loss) will happen.
WHICH ARE LIKELY TO BE SUBJECTED TO
RISK & UNCERTAINITY
Uncertainty & Risk
Uncertainty: It can be described as the chance of
occurrence of some event where the probability is
not known. This means that uncertainty relates to
the occurrence of an event about which, little is
known, except the fact that it may occur.
Risk: Being where the outcome of a event, or each
set of possible outcomes, can be predicted on the
basis of statistical probability.
Uncertainty is a subset of risk and involves situations
when no probability distribution can be established for
the risk variable. If the nature of a risk is unknown or
unpredictable it comes within the bounds of uncertainty.
Events that are very rare also tend to be classified as
uncertainty. The key test is usually is that if the risk is not
insurable then it is uncertainty.
For a risk to be insurable requires data to compile
actuarial tables. This ensures that there is no objective
approach to dealing with uncertainty and things will
depend on prejudice or preconceptions.
Risk Categories / Types of Risks
Risk Categories / Types of Risks
Known Risks : Which include minor variations in productivity and
swings in material costs.
These occur frequently and are inevitable in all construction
Known Unknown :
These are the risks whose occurrence is
predictable or foreseeable. Either their probability of occurrence
(or) their likely effect is known.
Unknown Unknowns : These are events whose probabilities
of occurrence and effect are not foreseeable by even the most
Definition of Risk Management
Risk Management is about understanding your project
and making a better decision with regard to the
management of your project.
Risk Management Decision Process
THE RISK MANAGEMENT PROCESS
It is important to recognize the root cause of risks. Risks can be
frequently be avoided if their root causes are identified and
managed before the adverse consequence occurs.
To achieve the above aims, it is suggested that a systematic
approach is followed.
- To identify the risk sources
- To quantify their effects
- To develop management responses to risk
- To provide for residual risk in project estimates
THIS 4 STAGES COMPRISE THE CORE OF THE PROCESS OF RISK MANAGEMENT
The Risk Management Process
Step 1. Identify Hazards
Step 2. Assess the Risks
Assess the Likelihood & Consequences
Classify the Risk
Step 3. Control the Risks
The hierarchy of risk control can be used as a guide
Step 4. Monitor / Review Control Measures
Benefits of Risk Management
• Project issues are classified , understood from the start.
• Decisions are supported by thorough analysis.
• The definition and structure of the project are
• Clear understanding of specific risks associated with a
• Build up of historical data to assist future risk
Risk analysis and risk management in construction
Risk analysis and risk management policies are
particularly difficult to apply in construction due to the
structure of the construction industry, the nature of
the product and its vulnerability to the state of the
The lack of effective strategies over the years has
manifested itself in, failure to keep within the cost
estimate, failure to complete on time, failure to
achieve the required quality and operational standards.
Risk Management Cycle
Risk management Cycle in construction is best viewed as 3 distinct
•Risk identification: This involves the identification of the risks that
may be encountered on a project or process. This process should lead
to a schedule of potential risks liable to affect the out-turn of the
project, or to jeopardize the objectives of the project.
•Risk analysis: This in concerned with the assessment and analysis of
the risks identified. This involves the understanding of the likelihood of
occurrence and the possible impact of potential risks.
•Risk response: This is concerned with the action taken in response to
risks identified and analysed.
About Risk Manager
• Risk managers advise organizations on any potential risks to
the profitability or existence of the company. They identify and
assess threats, put plans in place for if things go wrong and
decide how to avoid, reduce or transfer risks.
• Risk managers are responsible for managing the risk to the
organization, its employees, customers, reputation, assets and
interests of stakeholders. They may work in a variety of sectors
and may specialize in a number of areas including enterprise
risk, corporate governance, regulatory and operational risk,
business continuity, information and security risk, technology
risk, and market and credit risk.
Role of Risk Manager
Planning, designing and implementing an overall risk management process for the
Risk Assessment, which involves analyzing risks as well as identifying, describing and
estimating the risks affecting the business.
Risk Evaluation, which involves comparing estimated risks with criteria established by
the organization such as costs, legal requirements and environmental factors, and
evaluating the organisation's previous handling of risks.
Risk reporting in an appropriate way for different audiences, for example, to the board
of directors so they understand the most significant risks, to business heads to ensure
they are aware of risks relevant to their parts of the business and to individuals to
understand their accountability for individual risks.
Carrying out processes such as purchasing insurance, implementing health and safety
measures and making business continuity plans to limit risks and prepare for if things
Conducting audits of policy and compliance to standards, including liaison with internal
and external auditors.
Providing support, education and training to staff to build risk awareness within the