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-Mortem Risk Management - Part 2


In Part 1 we discussed how unidentified and mismanaged risk for any project can be deadly and very costly for any firm. It is recommended 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. Pre-Mortem Part 1   

Part 1

  1. Project Objective – Different Risks
  2. The Entrepreneur vs. Dr. Doom
  3. Risk Identification
  4. Risk Assessment

Part 2 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

Risk Management Measures

It is important to note, that a design and construction professional retains all risks for services that are not avoided or transferred. When applying the following strategies, there are usually tradeoffs that must be considered. The objective is to identify the best methods in obtaining a risk vs. reward balance when making risk management decisions.

1. Risk Avoidance


Risk avoidance may seem like an easy method that could be applied for managing all risks. However avoiding risks means knowing what those risks are, and knowledge of how to effectively avoid the risk. It could also mean losing out on the potential reward that accepting the risk may provide if managed effectively. Not accepting a project to avoid the risk of loss also avoids the possibility of earning profits. Avoidance also includes not performing an activity or service that could carry risk. An example would be not working for a client that could not demonstrate their financial capability of paying for professional services, or having the finances available for completing a project. Specific practices applied by the firm can also be used as a method for avoiding risk. A good example would be requiring a retainer from new clients, and clients with financial challenges along with clear billing and invoicing practices including suspension and termination of service clauses in the contractual agreement.

2. Risk Reduction


Risk reduction or "optimization" involves reducing the severity of the loss, or the likelihood of the loss from occurring. For example, identifying different design options that will meet the owner’s objectives for fire protection to reduce the risk of property loss by fire. Options may include water sprinkler systems, however these may cause greater property loss due to water damage. A halon fire suppression system could be another option that would mitigate the water damage loss, but the cost of the system may not fit into the owner’s budget. Risks can be positive or negative, and optimizing risks means finding a balance between the risk vs. reward of the professional design service, and between risk reduction and the effort applied. Discussing various design options, identifying the pros and cons and having the owner make the final decision, and documenting that decision is a method of risk reduction.

3. Risk Sharing and Transfer


A good example of risk sharing and transfer is in purchasing insurance, however, insurance should be viewed as limited in certain perspectives. The firm will pay a premium, along with a deductible for each occurrence for the insurance policy limit. This is sharing the risk and transferring a portion of the risk to the insurance carrier. For every claim coved under the insurance policy, the firm will pay a deductible along with any amounts of potential loss or risk over the insurance coverage limits. Contractually, there are also methods for sharing and transferring risk. For example on a condominium project, developing a risk management strategy is advised and stating the duties and responsibilities of the parties in the contract is an effective method of doing so. Also, an owner may request a firm to accept more risk through a compressed project schedule, limited scope, etc. In these situations, the firm should transfer risk by including contractual language that protects the firm with a limited scope. For a compressed schedule, applying a shared risk concept and obtaining additional compensation for accepting higher risk usually strikes a good balance.

4. Risk Retention


Risk retention relates to accepting the loss, or gain from a risk when it occurs. Firms may consider this strategy when the reward outweighs the risk or the firm has the personnel, along with effective processes and practices for managing and retaining the risk. Firms can accept this risk contractually with clients, however great care is needed when considering risk retention. Risks accepted that would legally be the responsibility of another party, including warrantees or guaranteeing the performance of certain services may be uninsurable - meaning the loss would not be covered by the insurance policy and all costs would be paid by the firm. Risk retention is a viable strategy for smaller risks where the cost of insuring against the risk would be greater over time than the total losses sustained.


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Risk Performance Strategist

SmartRisk is a leading risk and practice management consultancy for design and construction professionals. Through firm specific risk assessments, training and consulting, services focus on improving overall performance, profitability and reducing insurance costs through tailored risk management solutions.

If you have any questions about our services, or would like dicusss how we could assist your efforts, please contact us.

Thank you,

Timothy J. Corbett, BSRM, MSM, LEED GA
Founder & President

Copyright and Information Only. This newsletter is for information purposes only and should not be construed nor relied upon as guidance, regulatory or legal advice. Readers should consult with appropriate counsel regarding their specific situations and circumstances. SmartRisk shall not be liable for any errors in content, or for any actions taken in reliance thereon.

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