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Ted’s Blog: Discussing critical industry issuesThe Garrison Report #2009-6
Risk Management
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Management of risk has always been important, but unfortunately too often contractors ignore the risks and place themselves in harm's way. During recessions, this situation gets even worse. The trend in the industry to force risk down on to others has only increased the risk throughout the industry. Assigning risk to an entity that can't manage it increases the risk to all project stakeholders. This practice is one of the biggest mistakes within the construction industry.
Instead risk should be assigned to the entity that can best manage it. Owners should demand that their contractors prepare a risk analysis of the project before starting. The contractor should identify all the risks that it can't control. Contractors should embrace this requirement and perform a risk analysis on all their projects whether required or not if they want to minimize their project risk.
This process can be performed on both negotiated and hard-bid contracts. It forces contractors to preplan. Preplanning is one most of effective ways to minimize risk because it eliminates surprises.
Professor Dean Kashiwagi, in his book A Revolutionary Approach to Project Management and Risk Minimization, writes, "Risk is defined by the authors as when someone perceives that reality does not match expectations. Expectations are created with incomplete information."
Kashiwagi further explains the problem is caused by owners making decisions that set expectations. However, because most owners are not experts with all the information, these decisions create false expectations that result in latent risk due to the gap between the expectation and reality. When owners make subjective decision in an effort to control the project, it doesn't take long before the latent defects surface. Worse, in this situation it's not in anyone's best interest to take responsibility for the risk, so it tends spiral out of control.
To avoid this problem, it is essential that initial conditions be identified to establish realistic expectations. The best entity to do this is a high-performing contractor that plans the project and can accurately identify the initial conditions. The creation of the risk assessment is really the process of identifying the gaps between the owner's expectations and the reality.
In contrast, when the owner isn't an expert and doesn't have all the information, its decisions are based on opinions or wishes. Since subjective decisions create the risk, these decisions should be minimized. In a perfect world, all decision would be objective and based upon accurate documentation and facts, not opinion.
Because unreasonable expectations create risk, it is essential that the experts who provide the service identify the gaps between expectations and reality so an entity can be identified as the one accountable for delivering the desired outcomes. To achieve this goal, the contractor, the construction expert, must be given control and responsibility for managing the process to ensure the desired outcomes are delivered.
In the end it is critical that all stakeholders understand the initial conditions and agree to be accountable for delivering what they agreed on during the development of the project's initial conditions. This is the only way to minimize the project risk.
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