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Pre-Mortem Risk Management
Introduction
When someone has died and a determination of the cause and manner of death is needed, a post-mortem examination is performed. Unidentified and mismanaged risk for any project can be deadly and very costly for any firm. I recommend applying what I call a
pre-mortem risk management process when considering a project. This includes upfront identification of what potentially could go wrong, and implementing risk management measures for avoiding such threats. Tackling this process effectively could mean the difference between a successful, profitable project or one that a leads to losses, claims and litigation.
Project Objective – Different Risks
Construction projects, like all complex activities, involve different parties; design firms, contractor, subcontractors, project owner, etc. The entire group has the same objective of completing the project. However, each party is subject to different risks, or understanding and perception of risk in reaching that objective. While the group is working as a project team, each party must identify and analyzes project risks specific to their objectives. However, it is just as important to include the potential risk related to the other parties and their services, roles, responsibilities and duties. There is a common project interest but also a difference in each parties risk perspective and methodology. This is the reason for most project difficulties and the cause for disputes between parties. A successful risk management process requires a solid knowledge and understanding of the business objectives of the project. During risk identification, a large volume of risks can be identified. Simply listing risks in a spreadsheet does not provide the in-depth understanding of the identified risks necessary to develop and plan a risk response. Project risk management and identification is a scalable activity and should be commensurate with the size, level of available information and complexity of the project. This process is iterative, since in each project phase, new information is available with predicted risks with others unpredictable based on changing risk characteristics. With that said, a iterative risk management process should be applied at all stages of the project life cycle to determine if changes in risk have occur. This allows the project risk management plan to adjust according to the particular and potential situations for each project.
The Entrepreneur vs. Dr. Doom
Identifying known risks based on past experience, as well as potential and unknown risk including “what if” scenarios is an important step in risk identification. If worse case scenarios are identified as potential risk, it allows the firm to consider options and prepare for those unique circumstances. Every company has the person with that entrepreneurial spirit, one with the grand ideas for expansion and growth, and if followed exactly, without precautions could lead the firm over the edge to disaster and bankruptcy. In contrast, each firm has the “Dr. Doom” that sees the problems in any new idea or project. This individual would be helpful in identifying what could go wrong. Ask them to create a list of 20 potential problems - they are just wired to spot problems.
Risk Identification
The first critical step in the risk management process is identification of risk. This is the process of identifying a known risk, a potential threat, or an action or event that could possibly cause problems on a project. To do this effectively, a design and construction professional with experience must be involved in the process with knowledge of where problems have historically occurred, or where they could possibly occur. Identification of potential risk could relate to the client, project type, services to be provided, project team, contractor, creative design, environmental issues, regulatory, community sensitivity or other factors. When identifying risk, certain source or events may be known that could trigger a risk based on previous experience, and project trends such as project claim or industry litigation on the project type. Risk managers can help identify areas of risk including developing risk identification categories and helpful tools for recognizing possible sources or risk.
Risk Assessment
Once potential project risks have been identified, they must then be assessed as to their possible impact and probability of occurrence on a project. These quantities can be either simple to measure, or difficult to know at the beginning of a project. Therefore, in the risk assessment process it is critical to make a best-educated decision at that time in order to properly prioritize the implementation of a risk management plan. As additional information is obtained as the project moves forward, the plan can, and should be adjusted accordingly. The best-educated decisions from risk managers, past experience by staff members, and other data will be the primary sources of this information. Risk assessments should produce information for the management of services so that the primary risks are easy to understand and that the risk management decisions can be prioritized.
Risk Management Measures
Once risks have been identified and assessed, techniques and strategies to manage risk fall into one of four categories:
1. Risk Avoidance
2. Risk Reduction
3. Risk Sharing and Transfer
4. Risk Retention
These techniques will be addressed in our next SmartRisk Report Newsletter.
You are welcome to forward this newsletter to others who may be interested.
Thank you.
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