The Garrison Report #2006-3

Differentiate Your Business: Provide Value for Clients by Doing a Risk Analysis

Last month's report discussed doing a risk analysis without knowing anything specific about the project as a means to demonstrate the greater value offered by the contractor. This month's issue focuses on performing a risk analysis on the particular project. The question is: Why?

Last month the author defined client as "someone under the protection of". The risk analysis is designed to protect the client by reducing the risks related to budget, schedule and quality issues.

A risk analysis starts with how the Information Measurement Theory (IMT) describes an event as illustrated by Figure 1.   In his book, Best Value Procurement, Dean T. Kashiwagi states "IMT defines an event as "˜anything that happens that takes time'. An event has initial conditions, changing conditions throughout the occurrence, and final conditions". He further states that "the more information that is perceived of the initial conditions and laws, the more accurate the prediction of the final outcome". Therefore, doing a risk assessment on the critical initial conditions will provide greater value for the buyer of construction services and protect him from negative surprises.


Figure 1: Based on figures from Best Value Procurement by Dean T. Kashiwagi, Ph.D., at Performance Based Studies Research Group at Arizona State University


Project management theory describes the triple constraints of a project as costs, time and performance. Therefore, a risk analysis must focus on identifying any risks associated with finishing the project within budget and on time and meeting the quality expectations of the client. Don't panic! The risk analysis doesn't have to be complicated or lengthy. In fact, a quality risk assessment should be only a few pages long. It should be concise, be well organized and demonstrate an understanding of the project's true risks. A risk analysis is not about quantity, but quality. It should demonstrate the contractor's professionalism and forethought. The risk analysis should explain why the contractor believes that a risk exists; how that risk can be quantified in terms of cost, time or quality, and how the contractor intends to minimize that risk.

Since every project is unique, what makes the risk analysis so important is that it identifies whether or not the contractor understands the unique features of the particular project in question. This understanding is probably the most important consideration in predicting the contractor's performance.

In a performance-based process, Kashiwagi says, "If a contractor cannot satisfy the owner, the contractor should not accept the work". Therefore, it's critical for the contractor to identify the risks that stand in the way of delivering complete customer satisfaction. In other words, if the contractor can't "protect the client", she shouldn't accept the assignment.

The truth is every project has risks because no project has unlimited time or funding. Therefore, the contractor must understand the project's constraints in order to establish the priorities and minimize the risks. The contractor needs to understand how to trade time for money or money for quality. The contractor must know how to work within the user's constraints. In other words, the contractor must prioritize the risks.

The tools that contractor can bring to the effort include value engineering, alternate systems, innovation or simply taking greater control over the delivery process. It's the contractor's responsibility to use his expertise to optimize the triple constraints. While this approach may not guarantee that an owner will receive everything she wants, the risk analysis can identify when the owner's requirements can't be met. This allows the contractor to work with the owner to modify the requirements before the project starts. The biggest benefit for owners is they can actually start a project with confidence that the agreed-upon requirements will be met.

When owners are able to adjust their requirements before a project begins, they can achieve a better balance between the triple constraints than when they are forced to make concessions during the project when many options are no longer possible. This process also forces the owners to understand their constraints or requirements. Too often owners have unrealistic expectations, which simply leads to trouble. In essence, it's better to allow the contractors, who are usually more qualified, to use their expertise to minimize the project's risk.

The contractor can also add value by taking control of the process. For example, if the owner provides the required schedule and budget, then it's the contractor's responsibility to provide the greatest value within those restraints. The author was facilitating a debate when a homebuilder made a similar statement. He said that it's his responsibility to deliver the best possible house within the homebuyer's budget. After he made that statement, someone in the audience raised his hand and said, "My wife and I had him build our home, and we felt like we got more than we paid for." This system works when we let the contractor's expertise shine through.

 

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Next: The Garrison Report #2006-4

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