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Construction Project Risk Management

May 2010

There must have been some form of project management in use since early civilization. It is hard to imagine the Seven Wonders of the Ancient World being built without some form of project management. Nor is it conceivable that past wars or mega projects were successfully carried out without planning, organizing, and controlling. What leaders from the past managed to accomplish without the present knowledge and understanding as well as project management tools available today, is downright amazing!

by Peter G. Furst
Author, Public Speaker, University Lecturer

In the past century, prior to the 1950s, projects were managed on an ad-hoc basis using mostly Gantt charts or informal tools and techniques. Henry L. Gantt, a mechanical engineer, developed Gantt charts in the second decade of the 20th century as a visual tool to show scheduled and actual progress of projects. Gantt charts became an accepted planning tool in the 1920s, and are still used today.

Modern project management came into its own in the 1950s. Two important tools were developed at this time, the Critical Path Method (CPM) and the Program Evaluation and Review technique (PERT). These tools quickly found their way into various industries. At the same time, cost management, cost estimating, and engineering economics were being developed. The International Project Management Association (IPMA) was founded in Europe in 1967, followed in 1969 by the Project Management Institute (PMI) in the United States.

Project management is the art and discipline of planning, organizing, controlling, and managing human and material resources throughout the life of a project so as to achieve the successful completion of it. It involves dealing with constraints both organizational and human as well as uncertainty and complexity. The project manager also has to deal with the project requirements, the project team, as well as other stakeholders or interested parties. By their nature, projects are a temporary endeavor with definitive start and end dates. Directly or indirectly, the project manger is responsible to ensure that the project is a success. This entails motivating and working with the team members, as well as other stakeholders, to get the resources necessary for project success. This then also requires effective 360 degree communication.

Click here for Figure 1: Basic Project Management Elements

Construction projects are complex and require a general understanding of design, construction, and management techniques. They involve processes, procedures, goals, objectives, both human and other resources, expectations, promises, contracts, schedules, budgets, plans, coordination, supply chains, stakeholders, and the list goes on! The systems created to manage the flow of information, resources, and decisions are rife with potential risk. The project plan has to be realistic as well as flexible to allow for agile response to change. Variability, uncertainty, and change are a project constant! Coordination and communication among the parties is critical to project success. Projects are also complex, and complexity increases risk.

Some basic project management success axioms are:

  1. Lead and manage.
  2. Define the vision and strategy.
  3. Articulate the goal and objectives.
  4. Select and build the "right" team.
  5. Know the stakeholders.
  6. Design the "right" process.
  7. Plan the work.
  8. Coordinate and communicate.
  9. Execute.
  10. Manage change.
  11. Align, integrate, and iterate.
  12. Be focused and tenacious.
  13. Question and test often.
  14. Be flexible and agile.
  15. Exceed expectations (promise low, deliver high).

The greatest risks are with the human elements!

Key Players

The three key parties participating in the construction process are the owner team, the designer team, and the contractor teams. The owner team may consist of the owner, the users, the facility managing personnel, and other interested parties. The design team is usually headed up by an architect, who engages a number of primary as well as secondary consultants. These consultants may have a few subconsultants as well. The contractor team involves a primary contractor (usually the general contractor) who engages a number of subcontractors who are going to have vendors and suppliers. Some of the subcontractors may also have sub-subcontractors as well.

This process by its nature involves many organizations that have business and financial goals that may not necessarily be totally compatible. They also have internal practices and procedures that also may not necessarily be compatible and aligned with the overall project goal. The complexity of the situation requires a holistic approach to identify and eliminate workplace, process, and system risks where possible. If elimination is not entirely possible, then the reduction of the impact of these risks should be addressed so as to reduce them to an acceptable level. To this end, we need to look at the process from inception (the decision by the owner to build a facility) through the completion of the construction process.

The complexity of this endeavor can be increased by the owner through the introduction of a construction manager into the process. As more and more people are added to the mix, more communication interfaces are created. This increases the potential for miscommunication or hinders the free flow of it. Two people have 1 interface, 3 people have 3 interfaces, 4 people have 6 interfaces, 5 people have 10 interfaces, 6 have 15, 7 have 21, 8 have 28, 9 have 36, and 10 have 45. And so on. All these parties have to communicate, coordinate, and cooperate to achieve a successful outcome.

Click here for Figure 2: The Key Players

People are an important element of this mix and their capabilities, motivation, and proficiency can either increase of decrease the associated risk. The stakeholders also play an important role and their influence, involvement, and agendas impact the risk picture. The more people added to the mix, the greater the potential for broken communication links and possible barriers. As you can see, this puts a burden on the flow of communication to all the people who need information so as to function effectively and contribute positively to the project outcome. This is not to mention the critical role of the project manager, whose leadership, communication skills, ability to motivate, persuade, and actuate, judgment, decisiveness, problem solving, conflict resolving, and people skills are vital to project success.

Click here for Figure 3: Relational Model.

To effectively address and manage these risks, basic construction project management elements need to be reviewed for potential embedded risks. An understanding of the systems and people risks will facilitate the identification, evaluation, and mitigation of these risks, leading to a more effective project delivery process.

The primary risk associated with project management is the ability to put work in place in accordance with the project schedule. Project management has systems to ensure the building will get built within the contractual timeframe. These systems include tools to control the flow of information among the parties to ensure the adequate and timely availability of material, manpower, and equipment.

The types of information requiring oversight and control include:

  • Cash flow and procurement activity
  • Planning and design effort and analysis
  • Drawings, specifications, and clarifications
  • Shop drawings, samples, and mock-ups
  • Change management and control
  • Construction schedules and cost information
  • Production, efficiency, coordination, and barriers
  • Quality assurance tests, inspections, and records
  • Project files including correspondence, logs, memoranda, approvals, etc.
  • Construction field activity reports, inspections, and logs
  • Contracts, insurance, and regulatory documents

The Project Manager

Success in today's competitive business environment means project managers have to deliver results. This means accomplishing the project objectives, timely delivery, within budget goals, and at the predetermined level of quality, or scope. And they pretty much have to be able to do this all the time, every time! The project manager may be seen as an orchestra conductor who has to make sure that every instrument plays at its designated time at the appropriate volume and in harmony with the other instruments in order to make music. Absent that, only noise will result, and no one rewards or will pay for "noise."

Every endeavor starts with a vision. The project manager must have a clear idea of the project's goal and objectives that are necessary for success, and articulate this to the team members. To facilitate the vision's success, the project manager must devise a robust strategy. This entails setting objectives, establishing key success factors, setting progress goals, and devising metrics to manage the process.

Project management involves people. These folks have defined roles and responsibility within the project team. The project manager is responsible for the project's success. Therefore, the project manager must get the "right" people assigned to the project, at the "right" time, as well as assign them to the "right" positions.

At start up, setting the tone, reiterating goals, defining roles and expectations all will start things off in a positive vein. Project success depends on the project team working together effectively. But it also depends on relations developed with people outside the project who are stakeholders. In construction, there are a number of key groups. These are the owner and the project users, the designers and consultants, the subcontractor group, and the workers. Everyone must work cooperatively to ensure the project is completed on time and within budget. The project team's main office and their personnel are another group that has some impact on project success.

Click here for Figure 4: Project Team

To ensure project success, the project manager must effectively manage commitments. This means getting them in the first place and ensuring that the parties are willing and able to deliver on their promises. In other words, the project manager must effectively manage the supply chain and the various teams and their members, as well as the project and the organization's supporting functions and stakeholders.

Determine Project Constraints

Constraints are a part of any project. To guarantee success, constraints have to be identified and effectively addressed. It is constraints that have not been identified and planned for that crop up during the project to cause challenges and problems.

The first, and most important, step in any project is defining the scope and objectives of the project and understanding the inherent constraints. There are potential conflicts between the stated objectives with regard to scope, cost, time, and quality, and the constraints imposed on human, material, and financial resources. These conflicts must be identified and resolved at the onset of a project by making the necessary tradeoffs or creating new alternatives solutions. Equally important is defining what is not included in the scope of the project. If there is no clear understanding and definition at inception, the project is doomed to diversions and wasting time and other resources throughout the life of the project. One activity that should happen early in the process is the development of the budget, but it is preferable that should happen after the project objectives and workflows have been finalized.

Assemble the Project Team

To ensure project success the project manager must try to influence the selection and assignment of the project team members. Getting the "right" people with the "right" skills, at the "right" time is crucial! The project manger's responsibility is to provide the team members with the resources necessary for them to be able to function effectively as members of the team. Understanding and managing team dynamics, development, and evolution is another area that may either improve or hinder the project outcome. Besides the project team, there will in all likelihood be a group of people working in various departments within the organizations whose project-related activities may be critical to the overall success. Integrating their efforts into the overall project plan in a seamless manner is also a key responsibility of the project manager.

Teams naturally develop and go through a series of developmental stages. These are described as forming, storming, norming, and performing. Ideally, this evolutionary process starts with a group of individual and evolves in a cohesive, high performing well-functioning team. However, really high performing teams are somewhat rare. Team basics include commitment, skill, and accountability.

Click here for Figure 5: Team Basics

The team leader (project manager) can facilitate and enhance this process. The team works best when it reaches the performing stage. The team leader can make sure that everyone understands the capabilities, skills, and values every member brings to the team. The leaders can encourage open dialogue, sharing of information, making the environment safe to foster participation, ensure fairness, engender trust, etc. The team leader must also ensure direction is maintained, that momentum is sustained, problems are resolved, and goals are achieved.

At the beginning of a project, there invariably is a lack of clarity and structure. People usually are in a rush to get started. This may prove counterproductive as without clarity and structure, the project limps along, creating inefficiencies, mistakes, and waste of time and resources. Spending the time up-front to clarify things, establish systems, and develop procedures eventually allows for accelerated achievements. Successful teams have a clear understanding of boundaries and expectations. They have an operating understanding or charter.

Planning begins with breaking the project down into units of work. These are then further broken down into activities, which are then further broken down into tasks. The next step is to determine the sequence of these activities and their logical interrelationships/interdependencies (logic ties). This is followed by determining the amount of time necessary to accomplish the activities. The next logical step is to determine the relationship between the activities. Can the following activity start with the previous one, sometime after the start of the previous one, or can it not begin until the previous one is completed? This sets the stage for determining the string of activities/events that cannot be shortened. This path becomes the critical path though the project schedule. The activities along this path have to be completed to get to the end.

This is followed by resource loading the activities to determine the manpower and equipment needed to build the project. This process will also identify the skills required of the people involved in the activities, supervisory needs, as well as determining milestones for procurement money and information. Hopefully, the times meet the contract requirements, and the resource costs fall within the budget parameters and meet the operational plan.

Since projects have multiple supply chains and are subject to external vagrancies, they are prone to variability. To successfully respond with agility, there have to be planned buffers for common variations and risk management for special ones. Some common buffers include project, feeding, capacity, and cost buffers. These variations usually result from people failing to properly plan, diligently execute, or deliver on their promises. So, understanding the human element, and effectively dealing with it, will substantially make managing the project easier and more effective.

Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.

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