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RISK ANALYSIS
Upali Fernando
MRICS,MCIOB,MACostE,MASI,Arb,AIQS (SL)(Chartered Surveyor, Chartered QS,Chartered
Builder &Construction Cost Consultant)
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'No construction project is risk free. Risk
can be managed, minimised, shared,
transferred or accepted. It cannot be
ignored'
-Sir Michael Latham-
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There is risk and opportunity in
everything we do. As the environment in
which we operate changes, risks andopportunities change.
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Effective risk management is a means of
monitoring those changes and providing
remedies to eliminate/mitigate/minimiseprobable losses.
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Risk analysis allows you to examine the
risks that you or your organization face.
It is based on a structured approach to
thinking through threats, followed by an
evaluation of the probability and cost of
events occurring.
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Risk analysis forms the basis for risk
management and crisis prevention. Here
the emphasis is on cost effectiveness.
Risk management involves adapting theuse of existing resources, contingency
planning and good use of new
resources.
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Almost everything we do in today's
business world involves a risk of somekind:
Customer habits change,
New competitors appear, Factors outside your control could
delay your project.
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But formal risk analysis and risk
management can help you to assessthese risks and decide what actions to
take to minimize disruptions to your
plans.
They will also help you to decide
whether the strategies you could use to
control risk are cost-effective.
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How to Use the Tool:
Here we define risk as 'the perceived
extent of possible loss'. Different people
will have different views of the impact ofa particular risk what may be a small
risk for one person may destroy the
livelihood of someone else.
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One way of putting figures to risk is to
calculate a value for it as:
risk = probability of event x cost of event
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Doing this allows you to compare risks
objectively. We use this approach
formally in decision makingwith Decision Trees.
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To carry out a risk analysis, follow these
steps:
The first stage of a risk analysis is to
identify threats facing you. (Quantitative
Risk Assessment)
1. Identify Threats:
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Threats may be:
* Humanfrom individuals ororganizations, illness, death, etc.
* Operationalfrom disruption to
supplies and operations, loss of access
to essential assets, failures in
distribution, etc.
* Reputationalfrom loss of business
partner or employee confidence, or
damage to reputation in the market.
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*Proceduralfrom failures of
accountability, internal systems andcontrols, organization, fraud, etc.
* Projectrisks of cost over-runs, jobs
taking too long, of insufficient product
or service quality, etc.
* Financialfrom business failure,stock market, interest rates,
unemployment, etc.
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*Technicalfrom advances in
technology, technical failure, etc.
* Naturalthreats from weather, natural
disaster, accident, disease, etc.* Politicalfrom changes in tax
regimes, public opinion, government
policy, foreign influence, etc.
* Others
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This analysis of threat is important
because it is so easy to overlookimportant threats.
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One way of trying to capture them all is
to use a number of different
approaches:
Firstly, run through a list such as the
one above, to see if any apply.
Secondly, think through the systems,
organizations or structures you
operate, and analyze risks to any part
of those.
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See if you can see any vulnerabilities
within these systems or structures.
Ask other people, who might have
different perspectives.
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HAZARDCHECKLIST1. Equipment/mechanical
* Cutting
* Impact* Crushing
* ejection of parts
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2. Transport
* site vehicles
* mechanical handling* people/vehicle interface.
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3. Access
* slips,
* trips and falls* falling or moving objects
* working at height
* confined spaces
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4. Handling/lifting
* manual handling* mechanical handling.
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5. Electricity
* fixed installation* portable and tools equipment
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6. Chemicals
* dust/fume/gas* toxic
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8. Environmental
* noise* vibration
* light
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F E BIRDSWELL - KNOWN ACCIDENT TRIANGLE
MOST ACCIDENT ARE PREDICTABLE AND AVOIDABLE!
Source: Hughes and Ferrett(2008)
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One approach to this is to make your
best estimate of the probability of the
event occurring, and to multiply this by
the amount it will cost you to set thingsright if it happens. This gives you a
value for the risk.
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Low risk
Medium
riskHigh risk Extreme risk Catastrophic
Numerical: Historical: 1 2 3 4 5
Likelihood
>1 in 10
Is expected to
occur in most
circumstancesCertain 5 5 10 15 20 25
1 in 10 -
100
Will probably
occur
Likely 4 4 8 12 16 20
1 in 100
1,000
Might occur
at some timein the future Possible 3 3 6 9 12 15
1 in 1,000
10,000
Could occur
but doubtful
Unlikely 2 2 4 6 8 10
Risk Matrix Level of Risk
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Glossary of terms
Control:
An existing process, policy, device orpractice that acts to minimize negative
risk or enhance positive opportunities.
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Event:Occurrence of a particular set of
circumstances.
Frequency:
A measure of the number of
occurrences per unit of time.
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Risk:
The chance of something happening
that will have an impact upon theDepartments objectives. It is measured
in terms of likelihood and consequence.
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Risk analysis:A systematic process to understand the
nature of and to deduce the level of risk.
Risk Criteria:
Terms of reference by which significance
of risk is assessed.
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Risk evaluation:Process of comparing the level of risk
against the risk criteria.
Risk Identification:
The process of determining what,
where, when, why and how something
could happen.
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Risk transfer:
Shifting the responsibility or burden for
loss to another party through legislation,
contract, insurance or other means.
Risk transfer can also refer to shifting a
physical risk or part thereof elsewhere.
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Risk treatment:
Process of selection and implementationof measures to modify risk.
Stakeholders:Those people and organizations who
may affect, be affected by, or perceive
themselves to be affected by a decision,
activity or risk.
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SWOT analysis:
Provides an assessment of an
organization's Strengths, Weaknesses,
Opportunities, and Threats to provide a
snapshot of the present and a view of
what the future may hold.
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Once you have worked out the value of
risks you face, you can start to look at
ways of managing them. When you aredoing this, it is important to choose cost
effective approaches in most cases,
there is no point in spending more toeliminating a risk than the cost of the
event if it occurs.
3. Manage Risk:
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Risk may be managed in a number of
ways:
* By using existing assets:
Here existing resources can be used
to counter risk. This may involveimprovements to existing methods and
systems, changes in responsibilities,
improvements to accountability andinternal controls, etc.
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You may decide to accept a risk, but
choose to develop a plan to minimize itseffects if it happens. A
good contingency plan will allow you to
take action immediately, with theminimum of project control if you find
yourself in a crisis management
situation. Contingency plans also form akey part of Business Continuity Planning
(BCP) or Business Continuity
management (BCM).
* By contingency planning:
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Your risk analysis should give you thebasis for deciding whether to bring in
additional resources to counter the risk.
This can also include insuring the risk:
Here you pay someone else to carrypart of the risk this is particularly
important where the risk is so great as to
threaten your or your organization'ssolvency.
* By investing in new resources:
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Tools in Risk Analysis and
Management
a) Decision Trees
Decision Tree for Playing Tennis
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At the end of each line, consider the results. If
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the result of taking that decision is uncertain,
draw a small circle.
If the result is another decision that you need
to make, draw another square.
Squares represent decisions, and circles
represent uncertain outcomes.
At the end of node put Triangle.
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b) Plus, Minus, Interesting (PMI) Tool
Plus/Minus/Interesting'. It is a valuableimprovement to the 'weighing pros and cons'technique used for centuries.
ExampleA young professional is deciding where to live.Her question is should
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y g p g q
she move to the big city?
She draws up athe PMI table below:
PLUS MINUS INTERESTING
More going on (+5) Have to sell house (-6) Easier to find new job(+2)
Easier to get places (+3) Less space (-3) Meet more people (+1)
Easier to see friends (+5) More pollution (-3) More difficult to get own
work done? (-4)
No countryside (-2 )
More difficult to get
to work? (-4)
+13 -18 -1
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She scores the table as 13 (Plus) 18 (Minus)
1 (Interesting) = 6
For her, the comforts of a settled rural
existence outweigh the call of the 'bright
lights' it would be much better for her to live
outside the city, but close enough to travel inif necessary.
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c) Primavera based software
i) Monte Carlo Simulation
It is a method for iteratively evaluationa deterministic module using sets of
random number of inputs.
Ii) It is a sampling method for
uncertainty analysis.