trtr

1. © Graham M Winch 1
I compare fortune to one of those violent rivers
which, when they are enraged,
flood the plains, tear down trees and buildings
wash soil from one place to another……
She shows her power where there is no force to hold her
in check: and her impetus is felt where she knows
there are no embankments and dykes built to restrain her
Machiavelli.
13 : Managing Uncertainty and
Risk on the Project

2. © Graham M Winch 2
Managing Uncertainty and Risk on the
Project
• what is risk?
• project risk management
• risk management practice
• elicitation of subjective probabilities
• strategic management of project risks

3. © Graham M Winch 3
What is Risk?
• uncertainty and the absence of information
regarding occurrence
• risk and the probability of an occurrence
– understanding risk requires some information
• risk and reward
– this includes safety

4. © Graham M Winch 4
Decision-Makers’ Risk Preferences
• risk-seeking
• risk-averse
• risk neutral
– transaction cost adjusted risk neutrality
• factors affecting preferences
• risk preference profiles

5. © Graham M Winch 5
Risk Preference Profiles
p(x) risk event 100 %
100 %
p(y) < p(x)
p(y) * m(y) - t = p(x) * m(x)
p
(
y
)
=
p
(
x
)
p
(
y
)
>
p
(
x
)
p(y)
reward
event

6. © Graham M Winch 6
Project Risk Management
• the features of projects and their clients
– project large proportion of client’s total assets
– projects tend to be one-off
– clients tend to be bureaucracies
– lack of managerial capabilities
• the uneven distribution of risk and reward
– client’s risk profile
– project manager’s risk profile

7. © Graham M Winch 7
The Client’s Risk Profile
probability
%
tender
price
£10.5m
expected NPV
@ 20%
ROCE
£12.6m
negative ROCE
income stream
- variations +
out-turn
price
expected ROCE
positive ROCE

8. © Graham M Winch 8
The Construction Project Manager’s Risk Profile
probability
%
out-turn price
- variances +
out-turn
cost
expected profit
cost estimate
= budget
= £10m
tender
price
£10.5m
- variations +
loss
£ m
profit

9. © Graham M Winch Riding the Project Life-cycle 9
Risk Management Practice
• the risk management process
– identify and classify the risk
– analyse the risk
– respond to the risk
– monitor the risk
• the risk management process
• the probability/impact matrix

10. © Graham M Winch 10
The Risk Management Process
identify & classify
the risk
analyse the
risk
respond to
the risk
monitor the risk

11. © Graham M Winch 11
The Probability / Impact Matrix
probability
impact
insure /
mitigate
accept
mitigate /
cancel
externalise
high
low
low high
rare
catastrophe
probable
disaster
bad luck management
challenge

12. © Graham M Winch 12
The Elicitation of Subjective Probabilities
• attempting to solve the problem of inadequate
data
• mobilising expert judgement
• the importance of methodology
• the value is in the process, not the outputs

13. © Graham M Winch 13
Strategic Management of Project Risks
• the broad categories of risk
– market risks
– completion risks
– institutional risks
• project shaping
• project governability

14. © Graham M Winch 14
Project Shaping
• information search
• network building
• incentives
• design
• influence

15. © Graham M Winch 15
Project Governability
• aligning incentive through equity participation
• incentive contracts
• flexibility and modularity
• deep pockets and project portfolios
• partnering arrangements