Project Risk Management Process Construction Projects
Project Risk Management Process Construction Projects
Project Risk Management Process Construction Projects
ABSTRACT
Projects delay and cost overrun have become general facts in the construction industry. Project
cost risk analysis considers the different costs associated with a project and focuses on the
uncertainties and risks that may affect these costs. An implementation of project risk
management (PRM) process on regional construction project has been carried out to maximize
the likelihood of project meeting its objectives within its constraints. Qualitative and
quantitative risk analyses have been carried out. The qualitative analysis is presented in a table
that shows top ranked risks in Libyan construction projects based on ProbabilityImpact grid
technique. In quantitative risk analyses, Mont Carlo simulation technique has been conducted
to quantify and evaluate the overall level of risk exposure associated with the project
completion cost. A project simulation uses a model that translates cost uncertainties into their
potential impact on project objectives. A frequency curve model that represents simulation
results of project completion costs has been constructed. The frequency curve model shows all
possible outcomes of expected project cost at different probabilities. Project manager or
decision maker can select the appropriate project budget. If a probability of 0.95 confident
project budget is selected that means cost overrun risk can be minimized to a probability of
0.05. It is very helpful for project manager to take decisions based on information that shows
project completion cost and its associated probability rather than using single information of
estimated cost.
Keywords: project cost risk analysis, Monte Carlo simulation, delay factors
1. INTRODUCTION
Change in project cost or cost growth occurs from many factors. Some of these factors are
related to each other, and all are associated with some form of risk. Determining the existence
and influence of cost overrun risk factor in construction projects can ultimately lead to better
control on project cost estimate and assist in identifying possible solution for avoiding future
estimate overrun. Construction projects are exposed to uncertain environments because of
many factors such as planning, design, construction complexity, resources (e.g. materials,
equipment, project funding), climate environment and the economic policies (e.g. custom
delay, inflation rate, taxes) (Greedy, 2005). Williams (1995) states that cost risk analysis is
important at the start of the project, and the use of this type of analysis for major projects, i.e.
capital budgets, is said to be very successful. However, due to the inherent risks in the
construction projects; the cost and time overruns become common facts in the construction
industry (Menesi, 2007).
It has been pointed out that there is a strong relationship between the application of project risk
management and the success of any project. When the project management is implicated there
will be a high chance of project success (Elkington and Smallman, 2002). This paper is an
attempt to implement project risk management process on Libyan construction projects to
show its impact on project outcomes to meet their objectives and to minimize project cost risk
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by constructing project cost model. A building project of 25000 housing units / Quarsha sector
in Benghazi was chosen as a case study.
This paper is a continuation work of schedule risk assessment (Hossen and Alubaidy, 2010)
and focuses on risks that face the construction projects which may lead to project delay and
cost overrun. The paper objectives were to: i) minimize project cost risk by delivering project
cost plan that highlighting all possible outcomes, ii) draw project managers attention to
contingency plan and project highest cost that may be occurred, and iii) explore different risk
factors that may affect project objectives.
Level 1
WPs
Level 2
Individual's work
Figure. 1 Work Breakdown Structure
3. DELAY FACTORS
Causes of delay and cost overrun in the construction industry lead to many negative effects
such as loss of productivity and revenue, lawsuits between owners and contractors, and
contract termination. Assaf et al. (1995) outlined the main causes of delay in large building
projects in Saudia Arabia and their relative importance. A survey of randomly selected sample
was undertaken. The survey included 56 causes of delay. The delay factors were grouped into
nine major groups and the groups were measured and ranked by their importance index. It was
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shown that financing group of delay factors was ranked the highest and that environment was
ranked the lowest. Lo et al. (1995) summarized some of the studies that took place from1971 to
2006 as shown in Table 1 (Menesi, 2007).
Table 1 Summary of previous studies of the causes of delay in construction projects
Researcher
Country
United
States
- subcontracting system
- shortages of resources
- financial difficulties faced by public
agencies and contractors
Turkey
- organizational deficiencies
- delays in design work
- frequent changes in orders/design
- considerable additional work
- increases in the scope of the work
Canada
- inclement weather
- restricted access
- slow preparation and approval of shop
drawings
- delays in payments to contractors
Arabia
Saudi
(1999)
Arabia
difficulties
- difficulties in obtaining permits
-lowest bid wins system
- change in orders by the owner during
construction
Saudi
Arabia
UAE
- poor design
- changes in orders/design
Al-Momani (2000)
Jordan
- inclement weather
- unforeseen site conditions
- late deliveries
- shortages of materials
Nigeria
Nigeria
(1990
Mansfield et al.
Nigeria
(1994)
arrangements
- poor contract management
- shortages of materials
- inaccurate cost estimates
- fluctuations in cost
- shortages of materials
Thailand
- changes of design
- liaison problems among the
contracting parties
- unforeseen ground conditions
- poor site management and
Hong Kong
Chan and Kumaraswamy
(1996)
supervision
- slow decision making by project
teams
- client-initiated variations
- inadequate resources
- unforeseen ground conditions
- exceptionally low bids
- inexperienced contractor
Lo et al. (2006)
For Libyan projects cost and time overrun is one of the biggest problems that construction
firms face in Libya. This is because most companies in Libya don't have any risk analysis and
management plans. Some of the problems that face the construction projects in Libya are in
common with other problems that face the construction industry all over the world which will
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lead to the cost and time overrun. Table 2 shows causes of time and cost overrun and their
associated problems in Libyan construction projects.
Table 2: Some of major causes of time and cost overrun in Libyan construction projects
NO
9
Name of risk
Lack of experience and financial
NO
Name of risk
91
02
project
3
09
than expected
00
03
Failure of equipments
04
05
06
07
project's activities
92
08
01
changes
99
90
32
Tendering mistakes
93
39
30
specifications
94
95
33
96
34
97
35
98
Custom delay
36
5. CASE STUDY
The 25000 housing unit project/ Benghazi which is composed of 800 housing unit, was
selected as a case study. This project composed of 100 building (block of flats), each building
consists of four floors and roof floor. Each floor is divided into two residential units (flats).
The total duration to complete this project should be (540) days with approved budget for the
project is (410680) L.D for each block of flats according to project's contract.
5.1 risk identification:
The PRM process should start with risk identification phase. This phase is to find out and
identify all possible risk factors that can threat the project objectives. A large number of tools
and techniques exist for risk identification such as check lists, interviews with individuals or
groups, questionnaires, brainstorming, or using Delphi technique (Chapman, 2001).
Interviews and questionnaire were used to identify risks factors. The questionnaire was
developed consisting of six sections. The first section contained general questions about the
respondent. The second section was to find out the experience of the respondent to ensure the
accuracy of the information obtained from him\her. The third section determines the
knowledge of the respondent regarding project risk management as a part of the project
management process. The fourth section focuses on the knowledge of the respondent to the
project's objectives and the risks surrounding them. The fifth section is to identify the risks
regarding the time schedule from the respondent. The last section is to determine the risk
factors, the probability of occurrence and risk impact.
The questionnaire was sent to 45 respondents (project managers, responsible engineers and
consultant engineers). From that 45, only 23 questionnaires had been completed and returned.
The results from using this technique was a List of 36 identified risks which will be used for
further analysis. These risk factors are shown in Table 2.
Impact
Low score 1
Medium score 5
High score 10
Low score 1
10
Medium score 5
25
50
High score 10
10
50
100
In the questionnaire the numerical scores from (1-10) had been used to represent the probability
and the impact of each risk, the probability-impact scores are assessed as: From (1 - 3) Low
(L), (4 6) Medium (M), and (7 -10) High (H). The rating is based on the calculated priority
score to indicate the class of the risk which considered being the highest, intermediate and
lowest importance respectively; however this rating score doesn't represent the actual
magnitude of risk.
Table 4 An example of prioritizing of project risk
NO.
Name of risk
Rank Score
Rank Type
100
High
Color
25
Medium
Low
The results from this analysis were prioritized risk's level in a table to determine the most important
risks and to apply appropriate resources for the highest ranked risks. An example is illustrated in
Table 4. Priority Rating may also be showed using colors such as Low (Green), Medium (Yellow),
High (Red)
project cost. 1000 replication can give smooth curve (Flanagan and Norman, 1993). Figure 3
shows an example of the simulation model for quantifying project cost/schedule risk.
After running the cost simulation model all combinations of possible project cost are developed
in a histogram. The histogram of all possible outcomes of project cost is produced by the
software as it shown in Figure 4. The result of the simulation is then represented using a
Cumulative Frequency Curve (or Empirical Cumulative Distribution Function, ECDF) as
shown in Figure 5 and 6. This curve demonstrates the project total cost at different
probabilities. These generated costs are more likely to represent the range of total project cost
to be expected (Nicholas, 2001).
The most likely estimated project cost, the project contract's cost, and the 50% confident project
cost will be compared, see Table 5. It can be observed, that the most likely cost for the project
is (406779) L.D and the approved budget for the project is (410680) L.D according to project's
contract. The cost risk analysis indicates that the probability of completing the project with
contract's budget is less than 0.01 (equivalent to 1%), see Figure 5 and 6. This means that there
is a probability of 0.99 risk (equivalent to 99 %) of not completing the project within this
budget as represented by the cumulative frequency curve. This cumulative frequency curve
shows the probability that reflects the risk of overrunning the sum of the most likely estimated
cost as illustrated in Figure 5 and 6.
Table 5 Comparing Project Costs
Most likely Cost
Contract's Cost
406779
410680
463554.368
Figure 5 and 6 show the project total cost at different probabilities. Project manager can select
project total cost with desired confidence level. If the company wants a 50% confident
(probability of 0.50) likelihood of success, then a budget of (463554.368 L.D) is required. The
cost contingency to the 50% is (56775.368 L.D), or about 14% versus (406779 L. D) the sum of
the most likely estimate. In addition from Figure 5 and 6, a 95% confident budget (probability
of 0.95) can be extracted and that means cost risk can be minimized to a probability of 0.05.
The cumulative probability distribution curve enables the decision maker to assess the
probability of completing a project within a specific budget. It is very helpful for project
manager to take decisions based on information that shows completion cost and its associated
probability rather than using one information of estimated cost.
6. CONCLUSION
For project manager, it is very helpful to take decisions based on information that shows
completion cost and its associated probability rather than using one information of estimated
cost.
Through the use of quantitative risk analysis of these risks to weigh up their effect on the
project, the risks affecting the cost of the project were quantitatively analyzed by the use of
Mont Carlo simulation. Mont Carlo simulation has been used to model uncertain factors by
generating a number of simulations that give an indication of the range of all possible
outcomes. A frequency curve (or Empirical Cumulative Distribution Function, ECDF) that
represents simulation results for project cost risk has been constructed with probability of 0.50
confidence. The model also shows project total cost with different probabilities. Using this
model, the project manager or decision maker can decide project total budget with a suitable
confident probability.
The 36 risks that considered the most common risks all over the world, which were listed in the
questionnaire, were confirmed by the responders.
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