PROJECT RISK MANAGEMENT

Assignment For the successful implementation of a project it is essential that the people involved in its implementation be sensitive to the risks involved in the project and formulate the most suitable structure for the management of such risks. There are certain variables and uncertainties in common to most of the infrastructure projects. Many risk mitigation techniques are applied to infrastructure projects. Discuss in details the risk management to construction with special reference to a project currently in progress with your company. STUDY Risk Management of Construction Industry Managers, the lesson book complied by NICMAR KEY < !--[if !supportLists]--> i. <!--[endif]-->Describe scope of project in short < !--[if !supportLists]--> ii. <!--[endif]-->Explain type of project < !--[if !supportLists]--> iii. <!--[endif]-->Note down important points of perceived construction risk, project risk, risk economic risk, insurance. < !--[if !supportLists]--> iv. <!--[endif]-->Risk mitigation is done in construction infrastructure development projects. STRUCTURE i. ii. iii. iv. v. vi. vii. Name of project Scope of work Important details project, cost, time, type risk involved, risk mitigation etc. Important points from contractors project managers point of view to be monitored/resolved. Method followed for administer and monitor risk Recommendations / Conclusion Bibliography / Readings

TYPE OF PROJECT XYZ IMPLITZ LTD is a design consultancy providing tower design solutions to the telecom and power sectors.

The scope of our work includes the following:

Tower design Design checking Preparation of Structural Fabrication Drawings Building analysis for installing a roof top tower. Preparation of structural drawings of existing buildings (if building structural drawings are not available) Supporting beam design for installing roof top tower. Foundation design of ground based tower Estimations during tender stages Dynamic analysis and Non Linear Analysis. Design Checking and strengthening of towers Preparation of as built drawings

One of the cellular service providers by the name of TELESERVICES MH LTD asked us to design a ground based tower. It was a 60 metre tower based on a piece of land that the client had acquired from the landowner by entering into a contract with him. The agreement was for a valid consideration and for a definite period of time. After the lapse of the period the client would either have to dismantle the tower or renew the agreement with the landowner for a further period. The parties involved in the project were the client, the consultant, the contractor and the outsourcing companies who accomplished the work of acquiring the land for the client. The modus operandi was thus: The outsourcing agent would acquire the land shortlisted by the client from the landowner by doing the necessary groundwork and entering into necessary legal agreements for a valid consideration. The client

would then summon the consultant and give his requirements of tower height and load of antennae coming on the tower, etc. Based on this the consultant would prepare layout drawings after conducting a prelimnary survey whether the piece of land would be enough for a tower of that height. He would then furnish the layout drawings and then conduct the soil investigation of the proposed site to ascertain the safe bearing capacity of the soil. Depending upon the recommendation of the client, and the data gathered from the soil investigation and from the client the consultant would then design the tower for the required load coming on the tower along with its foundation system. He would also design the supporting beams for the shelter and the diesel generator. On receiving the design drawings the client would then pass them on to the contractor earmarked for the project and he would then order the material required for the erection depending upon the bill of materials furnished by the consultant's drawings. The consultant would also give the fabrication drawings based on which the steel sections would be fabricated in situ. Based on the erection drawings of the consultant the contractor would then start erection of the tower and its accessories namely the shelter and diesel generator. Once the erection has been done then commissioning would commence in which the client's engineers would cross check the contractor's work by simulating conditions similar to those that would prevail under normal working of the tower. Once the commissioning is over then the site would be handed over to the client by the contractor. The client would then ask the consultant to prepare as built drawings of the site showing the views of the tower as it is standing. In all these works there are a lot of risks that each of the parties have to bear and find out ways to mitigate. Following are the list of risks that each of the parties have to bear.

RISKS HANDLED BY EACH OF THE PARTIES TO THE PROJECT Risks from the perspective of the cellular service provider Revenue Risk Revenue risk is the uncertainty in relation to the revenue that a project would actually generate. The uncertainty of the revenue of an infrastructure project (as opposed to other industrial projects) is because of its public nature, which carries with it the uncertainty in the ability and willingness of consumers to pay for the benefits arising from the project. In this case the client will be bearing the risk of spending on the facility and then hoping that he gets some other operators to share the tower with him. Also that people in that region will subscribe to mobile telephones so that he can recover the costs of his erecting a tower in that region. Design Risk This risk relates to any defect in the design of the infrastructure facility or the design requirements stipulated for the project. This is an inherent risk in the project as it is very difficult to conclusively ascertain that the damage to the facility is actually caused due to the defect in the construction or design assumptions made by the consultant or design data supplied by the client or the very design itself. Generally, it is the design contractor who is responsible for the design aspects of the project. In the case of the project the client has to indemnity himself from any damage that may be caused by the accidental falling of the tower due to wind pressure or any other reason. In design risk itself the cellular service provider has to indemnify himself vide his purchase orders that he is not responsible for any standard laws that the design contractor may violate, whether they are labor laws or laws governing structures in that region and national building codes. He also indemnifies himself against injury to any of the workers of the design contractor during the process of conducting the survey. The client also indemnifies himself against any false assumptions that the consultant may make in the designing of the project facility. In our project the consultant had to make various assumptions based on the standard facts regarding the land strata as the land was such that it was not possible to collect site data using normal methods. Costs as the main risk The main risk involved in the gestation stages relate to the costs being incurred on the narrowing down on a suitable land for erection of a mobile tower. There is a high probability that the land may be dropped from the list of approved sites by the client due to practical considerations like lack of proper approach road, etc. Even if a decision is taken to develop and implement the project further, there is a possibility that the costs incurred at this stage may simply keep an increasing and may occur again at the developmental stage. There may be instances where the landowner may back out of the proposal given to him by the client. Social impact

A prelimnary study should be undertaken regarding the impact of the installation of the tower in a particular area, the extent of hardship it may cause to people living there. There is a possibility that the owner of the building or land where the tower has been installed will not allow access to the cellular service provider for maintainance purposes in spite of the fact that he is receiving rent for the piece of land occupied by the client. This he does as he suffers harassment when the client's engineers come for maintenance work. He faces the risk that the building or landowner may discontinue the arrangement due to adverse effects of the tower on human beings. Technical feasibility A prelimnary study of the engineering requirements and feasibility of the project being sought to be undertaken should be made. There may be a possibility that a ground based tower may not be suitable on the land earmarked for the same. The soil conditions on the land may not be conducive to erection of a tower of a particular height. The orientation of the tower that is required to be provided by RF point of view may not be obtained due to practical conditions prevailing at site. Financial Risk This risk is the totality of all risks that relate to the financial developments external to the project that are not in the control of the clients. This risk is common to all the parties to the project. These risks include: 1)risks associated with the fluctuations of foreign exchange rates. 2) risks associated with the devaluation of the local currency. 3)Risks associated with the non-convertibility or non-repatriation of foreign exchange from India, and 4)Risks associated with the fluctuations in interest rates. In our case this risk was prevalent as foreign investment was brought in by the client for the project. Political Risk Political risks are a bundle of distinct risks that can include not only political factors but also administrative, social and economic factors. Political risks associated with a project are closely evaluated as they are generally outside the control of the parties to the project, other than the government to a certain extent. But even the government fixing the policies of the telecom industry do not have control over all the categories of political risks. It should be kept in mind that many of the political risks arise from the possibility of arbitrary action by the government and altering the framework on which the very foundation of the project rests. The main categories of political risks include

Risk of political instability such as riots, revolutions, coup d'etat, terrorism, guerrilla warefare War, whether declared or undeclared. International sanctions Expropriation Nationalization

Creeping expropriation (discretionary regimes, excessive taxation, import restrictions, refusal to allow or provide for collection or review of tarrifs, etc) Failure to grant or renew approvals and Excessive interference in the implementation of the project, thereby causing severe prejudice to the concessionaire. (in this case the TRAI)

Force Majeure Risks These risks are regarding the events that are outside the control of any party and cannot be reasonably prevented by the concerned party. These risks generally arise due to causes extraneous to the project. The defining of force majeure events include:

National force majeure events comprise all events that can be submitted to natural conditions or acts of god such as earthquakes, floods, cyclones and typhoons. These risks shold be shared equally among the parties. Direct political force majeure events are attributable to political events that are specific to the project itself such as expropriations, nationalization Indirect political force majeure. Events are those that have their origin in political events but are not project specific such as war, riots, etc. In our case this risk was considered to the extent that a storm could disrupt operations of tower erection during the construction stage and that would lead to loss of life and property.

Construction risks The construction risks are essentially a bundle of various individual risk factors that adversely affect the construction of a project within the time frame and costs projected and at the standards specified for the facility. Construction risks generally relate to:

Risks related to the availability of land for the project Suitability of the land for the construction of the project facility Delay in completion of the construction Cost overruns in supplies, transportation, machinery, equipment, new materials, etc. Availability of the basic infrastructure required for the construction of the facility such as water, electricity, etc. Availability of workforce Occurrence of force majeure events, and Failure of the facility to meet the performance criteria and standards specified.

In our project this risk was very important as all the above mentioned factors could go wrong during the project.

Operating risks Operating risks are similar to the construction risks. They are a bundle of risks associated with the operation of the infrastructure facility. Operating risks generally relate to:

Operating cost overruns Risks related to obsolescence Risks associated with compliance of specified performance criteria, quality and quantity (as the case may be) Force majeure risks and Risks associated with the inability to comply with the maintenance standards and availability of funds required for the operation and maintenance of the facility

Risks from the perspective of the contractor Ability to implement the project in a commercially viable manner The main concern of the project contractor would be to ensure that the contract for lease of the piece of land between the client and the landowner are without any legal hindrances i.e. the title of the land is clear and no other claimants will come when he is carrying out the erection work of the owner. He is concerned about the fact that he does not become a basket for storing all the risks simply on the basis that it is obtaining a commercial return. In our project there was a constant danger that the land acquisition team had not done their work properly and that the title of the land was not clear but still the client had to choose it as his radio frequency team had shortlisted it. Certainty of Costs Each obligation each risk and each uncertainty has an attached cost. The aim of the contractor should be to ensure the project can be determined and controlled in a certain manner. In our project the contractor was not paid any initial amount for mobilization and he had to do all the initial investment on his own. Hence it was very necessary that he controlled the costs that he incurred. Return of investment The project and the documentation should be capable of providing an adequate return to investors in the project. This is a universal necessity in order to justify any private investment in any venture. In our project the contractor had to arrange for finance on his own at a certain cost to him and hence he would expect that he earn a certain percentage more in doing the work than the rate of interest he has to pay funds to execute the work. Distribution and Management of Risks The documentation in relation to the project should be such so as to enable the passage of various risks that are not within the control of the contractor but it has been allocated to it under the main concession or license. The contractor should not be straddled between the various documents with risks it has no control over or is not capable of absorbing. Thus the risk allotted under the contract to the contractor should flow down to the various sub-contractors under the relevant documents with the subcontractors. In our case there were no sub-contractors and hence the contractor had to bear the risk on his own. Force Majeure Risks This risk is not in control of any party to the contract and the contractor like the client is exposed to the same risks as the client. This risk is similar to that faced by the client. Providing a level playing field Here the contractor is exposed to the vagaries of competition. Since there would be many contractors interested in doing the work for the client, it is necessary that the tendering and bidding process be as

transparent as possible. The contractor is however at times exposed to nefarious dealings of a coterie of contractors who collude with the clients for the purpose of getting the work thus leading to rigging of the tendering process. In our project there was a great deal of transparency in the tendering procedure and three aspects were considered important by the client in awarding the contract, one being the contractors past experience in doing such works, secondly, his price bid and thirdly, his financial strength. Financial Risk This risk faced by the contractor is similar to that faced by the client. In our case, the contractor was paid after the work was carried out and he was given no advances for his mobilization, etc. This resulted in him resorting to taking finance from lenders at a cost. He would then pay off the debts when he got paid by the client. In such cases the timing of payment made by the client plays a very important role and the contractor must make the payment terms clear before he can take up the contract. Physical Risks Physical risks relate to the ground conditions, natural conditions, adverse weather conditions, physical obstructions and other physical conditions that would adversely affect the implementation of the construction activities at the project site. It happens at site that the ground conditions are not what the consultant has assumed in his design. In our project this risk was not faced by contractor as things were laid to rest in the consultant's report. Construction risks The construction risk relate to the factors affecting the very ability to undertake construction activities like availability of resources, industrial relations, safety during construction, quality of raw material, workmanship, delay in supplies, strikes by transport operators, shortage of material required for the project construction techniques, failure to comply with construction milestones, cost of construction, etc. Design Risks The design risks relate to, as the term itself suggests, the risks associated with the design of the project facility. These relate to incomplete design, design life, availability of information, compliance with standards, completion of design, viability of design, etc. In some cases even there may be a change of the standards being followed in designing such project facilities. The contractor in his contract with the client indemnifies himself against any errors made by the consultant by stating that the erection has been done based on the drawings supplied by the contractor.

Risks from the perspective of the consultant Risk of revenue In this type of risk the consultant may give the total design to the client, but may not get paid for it due to the inability of the client to pay up. In certain cases the client may get insolvent and the consultant may have to make do with whatever he offers as payment. In our project we had no such risk as the client was very strong financially and this risk did not arise. Risk from the contractor The contractor may misinterpret the drawings given by the consultant and consequently do erroneous work of erection of tower. In our case the consultant had to guard against this risk as the client had given work to contractors who were not experienced in erection of tower. This led to more consultant visits on the site to inspect the erection. Force Majeure Risk This risk affects the consultant also and covers all the risks explained earlier in case of client and contractor. Risk of change in standards The consultant may have to face the risk of change in standards by the statutory bodies like national building codes, Indian standard codes, etc. Risk of wrong data from clients In the project of tower erection the consultant has to perform a survey to collect site data for incorporating into the design. At this time the consultant is also given data from the client like load of the batteries placed in the building, etc. This data may be erroneous and the consultant has to guard against such an eventuality. Risk against statutory bodies The consultant faces the risk of cancellation of his license by statutory bodies like the Municipal Corporation, etc for violating general standards of design. The consultant had obtained the ISO 9000 certificate for quality work and there was a necessity to document whatever the consultant did. The quality council could cancel the award for non conformance with its laid out standards.

RISK MITIGATION IN CONSTRUCTION PROJECTS. Risk response and mitigation is the action that is required to reduce or eliminate the potential impact of risk. There are two types of response to riskOne is an immediate change or alteration to the project, which usually results in the elimination of the risk, second is the contingency plan that will only be implemented if an identified risk should materialize. The risk manager is responsible for identifying the risks that arise, taking suitable action to mitigate or avoid them and evaluate the consequences of his actions. Using adequate contingency plans risks that are unavoidable are mitigated thus ensuring that the overall project objective of time, cost, and quality is not jeopardized. The options of responding to risk are the following:

Risk avoidance Risk reduction Risk transfer Risk sharing Risk retention Insurance Allocation of risks

Risk avoidance This is perceived as the ultimate mitigation strategy implying that the project may be aborted. This may be caused by eliminating the cause of the risk. Alternative courses of action are examined. Other examples of risk avoidance include the use of exemption clauses in contracts, either to avoid certain risks or consequences of risks. In certain cases the project may be aborted. An example of risk avoidance in our projects is that the client who gives work of as built drawing to the consultant mentions on his purchase order to the consultant that he be indemnified from any wrong assumptions made by the consultant or any wrong policies followed by the consultant and which are against standards laid out by the statutory bodies. Risk reduction This method adopts an approach whereby potential exposure to risks and their impact is alleviated. Here one considers alternative solutions for risk reduction, examining in detail and obtain more information. Take management or design action. In our projects the client used to employ this strategy by giving other cellular operators the use of the tower installed at his cost by charging a monthly fee for

the same from the operator. This will reduce his risk to the extent that his cost of maintaining the facility will become less to that extent. Risk transfer This method involves the transfer of risk to other project participants. Commonly, risks are transferred through the placement of contracts, the appointment of specialist sub-contractors or suppliers or by taking out an insurance policy. In our projects the cellular operator used to transfer the risk on the project company, by not paying it any mobilization charges or advances for the work commencement. The project company in turn was transferring the risk to the contractors by paying them when they completed the work on a particular tower site. Thus they used the method of risk transfer to mitigate the risks. Secondly the client used to transfer the risk of damage to his expensive tower equipment by taking out an insurance policy for the same. Risk sharing Where a portion of the risk is transferred whilst some risk is retained this is known as risk sharing. This approach may be adopted where the risk exposure is beyond the control of one party. In such instances it is imperative that each party appreciates the value of the portion of the risk for which it is responsible. In our project of tower erection once the tower erection and commissioning was complete then the cellular service provider would share the facility with some other operator so that he could earn some money in the bargain and thus share the risk that he bears against the owner of the land. Risk retention Once all the risk mitigation strategies are exhausted and there are still some risks remaining, then this method is adopted to nullify this risk. This means that when the estimate is being done for tower erection then some contingencies are always considered in the estimates to eliminate the residual risks that remain after applying all the risk mitigation strategies that are elaborated earlier. In our project the consultant employed this strategy to mitigate the risk that he faced from his staff i.e. he used to bear the burden of wrong design and assumptions made by one of his employees in designing the tower. The consultant paid compensation to the client for any such eventuality. Insurance This is a technique of risk transfer or risk reduction depending upon the nature of the contract between the insurer and the insurance company. This is a technique to minimize the cost of loss due to specific risks for a certain consideration. This technique was adopted by the cellular services providers to transfer the loss due to damage to their towers to the insurance company for a specific consideration. The contractor who was executing the projects was also resorting to this method of risk management for covering his loss due to any damage to his equipment used for execution. Allocation of risks

This would entail a third party to undertake the measures to control or mitigate a risk, and bear the adverse consequences, if it is not able to redress the risk, thereby insulating the other parties to the project from the direct impact of the risk. The main principle for evaluating an adequate allocation or risks is that the party which is best placed to control or redress the risk or the circumstances that may arise if the risk occurs should be allocated the risk.

CONCLUSION Thus we see that risk can be managed, but to do so, requires a deliberate and structured approach. A pragmatic approach to risk management should be followed depending upon the project success depends ultimately on a combination of honest intention, rigorous analysis and professional judgement

References: 1. Project financing in corporate sector by C.G. Karandikar / G.M Dave 2. Construction Finance management ( NCP 29 ) by NICMAR 3. Project formulation and Appraisal ( PGPM 21) By NICMAR 4. Website: http:/indiabudget.nic.in 5. Website: Census of india 6. NSS 63rd Round ( July 2006 June 2007)