Managing Risks of Large ScaleConstruction ProjeetsQr. Prasanta DeyAn,S7K/\CI,- The m;iin purpose of this article is to develop an integrated framework for manag-ing risks of large-seale eonstruetion projeets. Conventional project risk management franie-\^orks emphasize managing business risks and often ignore operational risks. There areiristances of project failure because of operational risks (e,g., failure of project leadership, con-tractors' and suppliers' incapability, technical complexities etc), A hierarehical approach dealswith such shortcomings by analyzing risks in different levels (e,g,, projeet, work package andactivity). It helps identify the least risky project alternative through project level risk analysis andsbsec|uent work package and activity level risk analysis to help identify both business and oper-ational risks. The proposed framework has been applied to a 17000 km long oil pipeline con-struction project in India in order to demonstrate one effective example of its use.

KEY WORDS: Analytic hierarchy process, construction, pipeline projects, and risk management

Ar I 1

Ithougli today's organizationsappreciate the benefits of managingrisks in construction projects,

formal rjsk analysis and managementtecliniqucs are rarely used because of a lackofjknowledge and doubts on tlie suitabilit)'ofi these tecliniqiies for constructionindustry activities [1],

Managing risks is one of the mostiniportant tasks for the constructionindustry as it affects project outcomes.Today's project managers believe that aconventional approach to projectmimagement is not sufficient, as it does notenable the project management team toestablish an adequate relationship amongall| phases of the project, to forecast projectachievement for building confidence of theproject team, to make decisions objectively\vit:b tbe help of an available database, toprovide adequate information for effectiveproject management and to establish closecooperation among project team members,

"^ riie current literature on eonstruetionrisk management consists of empiricalresearches on risk management practices ofthe construction industry and conceptualframeworks of risk management usingvarious tools and techniques. The ProjectManagement Body of Knowledge,(PiVlBoK) introduces a six step method ofrisk management [5], Although, these stepsar very generic and act as a guideline formanaging the risk of projeets, they fail toprovide a risk management framework for aspcific project.

The conventional project riskmanagement approaches in the project

feasibilit)' stage emphasize on managingbusiness risks and often ignore operationalrisks. However, there are instances ofproject failures because of operational riskssuch as technical complexities, contractors'and suppliers' incapabilit)', government redtape etc, which remain unidentified untilthey occur,

Prasanta Dey reported time overrunbecause of implementation issues of a rivercrossing section for cross-country oilpipelines in the eastern part of India [2],S,0, Ogunlana and others reported eostoverrun in high rise building projects inThailand because of contractor's failure[4], Social and environmental issuescaused prolonged postponement of theChand-Cameroon oil pipelines [3],Several projects in the Vietnam oil industrywere delayed because of governmentapproval [7],

Risk management approaches in thefeasibility stage, although helping tomitigate business risks (external in nature),however fail to identify operational risks.Although they are valuable to identify' theleast risky projeet, but fail to provide aframework for managing every risk acrossvarious levels of the project.

The integrated bierarehical approachto risk management not only combines therisk management processes (identification,analysis and development of responses) inan analytical framework, but also integratesthe risk management processes in everylevel of tbe projects that helps identifyingall the possible risks in tbe early planning

phase of tbe projeet enabling the projectteam to make decisions on their responses.

The objective of this study is todevelop a framework for managing the riskof large construction projects using anintegrated hierarchical framework with theaetive involvement of the concernedstakeholders.

There are two approaches toconstruction risk managementprojectlevel risk analysis and work package levelrisk analysis, which are carried out duringtbe feasibilit)' analysis and implementationpbases respectively. Both the approacheshave limitations.

The project level risk analysis revealsmostly tbe business risks, which areexternal in nature covering market,economical and political factors. Althoughit helps identify the least risky project, itfails to identify' operational risk factors.

On the other hand work package levelrisk analysis reveals operational issues,which in many cases are too late to addressand the responses are constrained by thebusiness risks. Moreover, the currentliteratures demonstrate applications ofvarious tools and techniques in managingproject risk, but none of the researclireports risk analysis across various levels,which help identify the least risky projectalternative, eritical work packages andactivities along witb the assoeiated risksduring tbe early project phase.

Therefore, the contemporaryapproaches to risk analysis lack establishingan integrated risk management frameworkcovering every level of tbe projeet, whicbhelps to manage the projeet effeetively.This study is for bridging this gap.

Proposed Risk Management FrameworkTbe proposed risk management

framework has tbe following ste]3s:

Identify'ing tbe alternative projects, Analyzing project level risks and

selecting the least risky project, Developing tbe work breakdown

structure of the seleeted project, Analyzing work package level risks, Developing risk responses, Analyzing activity' level risks. And, Developing risk responses.

This study uses the analytic hierarchyprocess for analyzing risks in tbe project,work package and aetivit)' levels [6],

Cost Engineering Vol. 51/No, 6 JUNI 2009

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Risk ofenvironmentalDegradation

Risk ofncgalivesocial impact

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Pipeline route 3

Technological

1 Availability

; Complexity

Adaptability

'Throughput' achievement

Political

Change ingovernmentpolicy

Internationalpolitics

Global economy

'I'crrorism

Pipeline route 4

Figure 1 Project Level Risk Analysis Using AHP

ApplicationThe proposed framework has heen

applied to a newly conceived cross-countryoil pipeline transportation project in theWestern part of India. A t)'pical oil pipelineproject consists of laying oil pipelines,constructing pumping and deliverystations, constructing tank farms,constructing communication and acathodic protection infrastructure. A riskmanagement group consisting of nineexecutives with more than 15 years ofproject experience was formed. Theyperformed the following steps to analyzerisk of the project under study.

Step 1: Identifying the alternativeprojects

In the oil pipeline industry, alternativeprojects are identified through feasibleroutes. The geological information systemhelped identif)' a few alternative feasibleroutes.

Step 2: Analyzing project level risks andselecting the least risky projeet

The risk management group in abrainstorming session first identifiedproject level risks. They were market,financial, economical, environmental,technological and political risks. A fewsubfactors were also identified against eachfactor. The likelihood of the risks were thenderived using the analytic hierarchyprocess (first, the likelihood of risk factors

and subfactors were determined throughpair wise comparison at each level usingthe verbal seale [6]. Second, the likelihoodof failure of each alternative with respect toeach risk subfactor was determined by pairwise comparison and subsequently, theresults were synthesized across thehierarchy to determine the overall risk ofeach work package).

Figure 1 shows the project level riskanalysis in an AHP framework. Theanalysis revealed that the likelihood ofenvironmental and technological riskswere very high and the project withpipeline route 2 was the least risky.However, the selected route (2) wasvulnerable from both environmental andtechnological risks. The group decided tomitigate the project level soeial andenvironmental risk by acquiring statutoryapproval from relevant governmentauthorities and technological risk bycommunicating with the concernedcontractors and consultants. The groupdecided to further analyze in order tomitigate the risks of the selected pipelineoption.

Step 3: Developing the work breakdownstructure of selected project

The entire projeet had beenhierarchically classified to form a workbreakdown structure (WBS). Figure 2shows the WBS of tbe project under study.

Step 4: Analyzing work package level risks

The risk management group decidedto analyze only pipeline laying, stationconstruction and the tank farm workpaekage risk after a short brainstormingsession. They identified various technical,organization and environmental risks.

Risks related to selection ofappropriate technology, site selection,implementation methodology selection,information and communicationteehnology selection, and operational riskwere identified under teehnieal risk.Similarly, risk created by project team,operating team, consultant, contractors,suppliers and communication frameworkwere considered as organizational risk andenvironmental damages duringimplementation and operations, negativeimpact on societ)' during implementationand operations and statutory clearance forimplementation and operations wereidentified as environmental risk.

Figure 3 shows the work package levelrisk analysis in an AHP framework. First,the likelihood of the risks was derived bypair wise comparison in faetor andsubfactor levels using the verbal scale.Second, the likelihood of failure of eachpackage with respect to each subfactor wasderived through pair wise using sameverbal scale. Finally, the results weresynthesized to determine the overall risk oftbe work package.

The analysis revealed that the pipelinestretches had the highest risk followed bytank farm and stations. Technical andenvironmental risks were more likely to

24 Cost Engineering Vol. 5I/No. 6 JUNE 2009

hippen compared to organizational risk, hithe subfactor level, risk related toimplementation method selection,environmental damages and negativeimpact on society were most likely.

Step 5: Developing risk responses in workpackage level

Tlic group decided to take the followingresponses to mitigate work package levelrisks. They were selection of quality

contractors for each work package,selection of appropriate implementationmethodology for every pipeline section,appropriate environmental impactassessment and social impact assessment ofpipelines package and dynamic operationalrisk analysis of stations package.

Step 6: Analyzing activity level riskThe risk management group decided

to further analyze risk of pipeline workpackage by classifying it to four stretches.

They identified four major risks in thislevel. 1 hey include the following.

design risk (design quality andcommunication framework);procurement risk (procurementmethod, quality consultants,contractors and suppliers, andcommunication framework);implementation risk (specification,organization, natural hazards,environmental and social impact, andcommunication framework); and.

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anding over and

2 Work Breakdown Structure of Oil Pipeline Constrnetion Project

Goal

Factors

Work package level risk

Technical risk Organizational risk Enviroiimenial risk

Subfactots

Selection of appropriatetechnology

Site selection

Implementationmethodology selection

Infonnation andcommunication technology

Operational risk

Project team

Operating icam

Consultant

Coniractoi's

Environmental damageduring implementation and operations

Negative hiipact on societyduring implementation and openilions

Statutory clearances forimplementation and operations

Suppliers

Communication framework

Altemalives Pipelitie stretches Pipeline Statiotis latik fartn

Figure 3 Work Package Level Risk

Cost Engineering Vol. 51/No. 6 JUNE 2009 25

Goal Activity level risk

Factors Design risk Procurement risk Implementation risk Operations risk

Subfact )iDesign quality(specifications,manpower,equipment etc.)

Communicationframework

Procurement method

Quality consultants,contractors and suppliers

Communicationframework

Specification

Organizational

Natural hazards

Environmental and social impact

Communication' framework

Throughput

Inspection

Maintenance

Knvironinental andsocial impaet

Communicationframework

Alternatives Pipeline stretch 1 Pipeline stretch 2 Pipeline stretch 3 Pipeline stretch 4

Figure 4 Aetivity Level Risk operations risk (throughput,

inspection, maintenance,environmental and social impact andcommunication framework).

Subsequently, they derived theriskiness of each factor and subfactor andcalculated the likelihood of failure of eachpipeline stretch using the AHP framework(as demonstrated in step 2 and 4). Figure 4shows the risk structure for activit)' levelrisk analysis. The analysis revealed thatimplementation risk was most likelyfollowed by procurement risk and pipelinestretch 3 is the most vulnerable.

As pipeline stretch 3 was routedthrough the most difficult terrain, it waslikely to experience risks in relation toprocurement method selection andpossible poor performance of consultants,contractors and suppliers. Additionally, thisstretch was vulnerable from poorimplementation method specification andorganizational issues for implementation.

Pipeline stretch 1 was vulnerable fromenvironmental and social impact as itmostly traversed through normal terrain.The pipeline streteh 4 was exposed tomainly operational risk as it was connectedto an offshore terminal.

Step 7: Developing risk responses inactivity level

The risk management group throughbrainstorming developed the followingresponses (see table 1) for each stretch.

C onstruction projects often failbecause of wrong teehnologyselection, poor environmentalmanagement plan, political red tape, poordesign specification, wrongimplementation methods, poorperformanee of eontractors, and lack ofmaintaining materials delivery schedule bythe suppliers along with many otherreasons.

The causes of failure could beclassified into business risks (external) andoperational risks (intemal). Unless they areaddressed in the early project-planningphase and adequate responses are plannedand implemented, projects inevitably failto achieve their objectives.

In the conventional approaehes toproject appraisal and planning, quite oftenonly business risks are addressed in order tojustify the investment. Therefore, as theprojects progress with added learning,there is need for additional resources andknowledge in order to aecomplish projeetoutcomes as planned, which beeomeimpossible in many cases.

Analyzing project risks hierarchicallyhelps prioritize activities, which arevulnerable for not achieving time, cost andquality. Thereby it helps achievingsuccessful completion of the work packagesand in turn projects. Additionally, it helpsidentifying risk in each level (project, workpackage and aetivity).

Analysis of project level risk helpsidentify the least risky project alternativeand calls for additional planning formitigating the risks that are present in theselected project option. Work package levelrisk analysis firstly, identifies the risky workpackages and prioritizes work packages onthe basis of risk vulnerability for additionalplanning.

Seeond, it analyzes risk factorsassociated with each work package andderives the mitigating measures for eachrisky work package. Activity level riskanalysis on one hand identifies the riskyaetivities within the risky work packagesand on the other hand, identifies riskfactors, analyzes them and derivesresponses. Risk analysis using ahierarchical approach not only justifiesadditional planning and resourcerequirement at the early project phase, butalso helps achieving project schedule,budget and specification. This study revealsthat the project level is affeeted by externalrisks, work package level is affected by both

26 Cost Engineering Vol. 51/No. 6 JUNE 2009

ActivityPipetine stretch 1

Pi pet i ne stretch 2

Pipetine stretch 3

Pipeline stretch 4

Risk factorEnvironmentat and sociatimpact duringimptementation

Environmental and sociatimpact during operations

Environmental and sociatimpact duringimptementation

Environmental and socialimpact during operations

Procurement method andstatceholders' performance

Imptementationspecification andorganizing theimptementationThroughput non-achievement

ResponsesThorough impactassessment with theinvolvement of the projectaffected peopleMonitoring environmentaland sociat parametersthroughout the services tifeThorough impactassessment with theinvolvement of the projectaffected peopleMonitoring environmentaland social parametersthroughout the services lifeConsultants, contractorsand suppliers selection onperformance basis andselecting contract type,which enhances qualityInvolving contractor todevelop specification forimplementation method

Hi-tech instrument controlto avoid operationat error

Table 1 Risk Responses in Activity Level

external and internal risks and activit)' levelis affected by internal ristcs.

I Ttie proposed ristc managementframework using the analytic liierarehyprocess helps project executives to makedqcisions dynamicatly during the projeet-planning phase with tbe involvement of tbeproject stakebolders. 1 bis provides aneffective monitoring and controlmecbanism of projects across various levelsof| management of the organization. Tbcproposed framework uses Expert Cboice toanalyze tbe decision situation.Additionally, the sensitivity utilit)' of AHPprovides an opportunity to tbe riskmanagement group to observe tbe natureofj the model outcome in differentalternative decision situations.

REFERENCES1. Akintoyc, A.S. and M.J. MacLeod,

Risk Analysis and Management inConstruction, International Journalof Project Management, Vol. 15, No.1,(1997): 3 1 - 3 8 .

2. Dey, P.K., Decision Support System forRisk Management: a Case Study,Management Decision, Vol. 39 No. 8.(2001): 634-648.

3. Ndumbe, J.A., The Chad-CameroonOil Pipeline Hope for PovertyReduction?. MediterraneanQuarterly, 13 (4), (2002): pp. 74-87.

4. Ogunlana, SO, H. Promkuntong, V.jearkjirn, Construction Delays in aFast Crowing Economy: ComparingThailand With Other Economies,International Journal of ProjectManagement, 1996.

5. PMBOK, A Guide to ProjectManagement Body of Knowledge,Project Management Institute, US,2004.

6. Saaty, T.L., Ttie Analytic HierarchyProcess, McCraw-Hitl, US, 1980.

7. Tbuyet, N.V., S.O. Ogunlana, andP.K. Dey, Risk Management in Oiland Cas Construction Projects inVietnam, International Journal ofEnergy Sector Management, Vol. 1,3, 2007.

ABOUTTHE AUTHORDr. Prasanta Dey is witb the University

of West Indies, Department ofManagement Studies, Bridgetown,Barbados. He can be contacted by sendinge-mail to: pdey@uwicbill.edu.bb

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