In earlier blog posts we provided a general overview of construction project forecasting as well as a post about contingencies and trade reserves. To recap, forecasting is about what we know and what we expect. For example, as contractors, we expect that we will receive claims for subcontract variations. Some we will have to pay ourselves and we allow for that.
Hand in hand with a forecast is an assessment of our risk and opportunity. This is partly an extension of construction project forecasting, and partly a separate exercise.
There are risks and opportunities in everything we do. Managing risk and opportunity in construction is potentially the most important concept faced by project managers. No project is risk free. Most proficient construction teams are likely competent to formally identify risks, but they may not always be as disciplined in identifying opportunities. Although both are equally important, the tendency may be to accept what they have.
Risk can be managed, minimised, shared, transferred or accepted. It cannot be ignored.
The process of managing risk (and opportunity) is generally said to comprise (1) Identification, (2) Analysis and assessment, (3) Action, and (4) Monitoring.
So what are the typical risks and opportunities of a construction project?
Risks may fall into the following categories:
- Time – labour resources, productivity, weather, industrial, etc
- Procurement (purchases and contracts)
- People and resources
- Legal – contracts, litigation, security of payment, time bars etc
- Change of scope
Opportunities may fall into the following categories:
- Program – alternative (more efficient and timely construction processes)
- Change of Scope (variations)
Estimating or Forecasting Risk and Opportunity
An essential part of managing a project.
The first step (and a very important step) is to define ‘Risk and Opportunity’ as it applies to your business. Different companies have different views. For example, my opinion (and it may be different from yours), is that risk and opportunity is about the undefined factors which may impact the profitability of a project. Risk and opportunity is for things that are NOT allowed for in a forecast. It is about what can go wrong (risks), and what can we do to improve our position (opportunities).
In our forecast, we may have an allowance or a contingency for something that may very likely impact the project.
Risk and opportunity items are less certain and potentially not able to be defined or priced reliably.
We need to clearly identify – which things are correctly allowed for in our forecast, and which things are to be considered as risk and opportunity?
For example, the long range weather forecast is suggesting we will have three months of rain. That will no doubt delay the construction project and add costs – at least to our prelims. We think an inclement weather delay is somewhat certain so, do we include something in our forecast?
Maybe! Or maybe we say that it is not sufficiently certain to be part of a forecast, and so it belongs in risk and opportunity. Or maybe we allow something in the forecast (there will be at least 3 weeks of time lost) and an additional amount (for a delay greater than the three weeks) entered as a risk.
But where do you draw the line in your business? Company guidelines should be developed for this so that the project teams are clear on what is required and where the boundaries lie.
What does Cheops provide?
As part of the cost forecasting process, Cheops provides the facilities to enter risk items and opportunity items, and to make an assessment of the worst, best, and most likely outcomes for each, thus guiding the project team to earnestly consider each item in turn.
Action may then be taken to minimise or mitigate the risks and maximise the opportunities for the best project outcome.
Until next time, happy building!
23rd June 2023