Copyright to Kim Tremblay, © 2012.
This article is a repeat of an article of the same name first published on December 13, 2011
Reprinted with permission. Published here May 2012

Editor's Note | Introduction | Mistake 1 - Not Getting the Information You Need Up Front
Mistake 2 - Estimating at the Wrong Level | Mistake 3 - Hanging on to Old Technology and Systems
Mistake 4 - Not Using Current Rates and Costs |
Mistake 5 - Failing to Get Supplier/Contractor Quotes | Mistake 6 - Not Dealing with Project Risk
Mistake 7 - Failing to Review Before, During and After | Conclusion

Mistake 6 - Not Dealing with Project Risk

Many good project managers rely on intuition when estimating a construction project, building in a contingency reserve to deal with the inherent risk that comes with running any project. The problem is how far you can trust your intuition? It's human nature to be optimistic - no one wants to build up a large contingency reserve.

It's a delicate balance - too large a reserve and perhaps the estimating of the project itself is weak. If too small a reserve and perhaps the project manager is running the project too thin, the result of being too optimistic. The challenge is to determine how much contingency, or risk management, should be built into the project.

Estimating is a learned skill - and a key part of that skill is identifying and managing the risks and uncertainties in the project. Risk and uncertainty can never be completely eliminated but they can be managed.

How to avoid this mistake -
Identify and cost your known and unknown risks

There are going to be known risks in your construction project, and there are going to be unknown risks. It's important to understand both and decide how you want to manage both. Start with your known risks first and decide how you want to deal with these. If the risk can't be eliminated, then it must be quantified and estimated.

For instance, let's say that you've identified a potential risk with a key contractor not being available. Your risk strategy could be to eliminate the risk of not having this contractor available - perhaps you provide them with a commitment to guarantee work for them on your upcoming projects. Or perhaps you decide that you don't want to eliminate this risk, you'd rather determine the additional costs related to the risk of using a new or different contractor, and include that in your estimate.

After you've identified and managed the known risks in your project, the unknown risks need to be dealt with. There's a reason why we call them unknown - we simply can't predict when or if they will happen - but that doesn't mean we can't manage them. When it comes down to it, most unknown risks come from three areas: estimating mistakes in the project, errors in executing the project, and the overall difficulty in executing the project.

In any given construction project, you may forget to estimate a task and you may underestimate costs - so you build in a risk factor of say, 5%, for that. If you aren't confident you are using current rates (see Mistake #4 and #5), you may want to use a higher risk factor. As your project progresses, there may be errors and mistakes on the job, adding unforeseen cost and schedule delay - so include a risk factor for that.

If you have been performing project retrospectives (see Mistake #7), you will have a good idea of what your project error has been in your past projects. That should be close to the risk factor you apply in this project. And you may experience challenges in your project that affect cost and schedule; weather, location, labor issues, etc - so add a risk factor for that. The more difficulty you think your project will incur, the higher your risk factor should be.

Another risk management approach is to consider sharing the risk with the customer. With fixed price projects, such as above, you are assuming the risk - which means your contract had better clearly reflect how changes will be handled (see Mistake #1) and your estimates need to be as accurate as possible. But another way of managing the risk is to share it with your customer. Cost plus and Time and Materials projects all pass some of the risk in your project on to your customer. Of course, they still require accurate estimating and efficient project management - otherwise your customer might not be so willing to share some of your risk in the future.

And of course, your final risk management step - take a look at all of your unknown risks and the factors you have applied. This is where your intuition is absolutely required. If your unknown risk factors are high, and you have known risks that have not been eliminated - perhaps this is a project that, as it stands, is just too risky to take on.

Mistake 5 - Failing to Get Supplier/Contractor Quotes  Mistake 5 - Failing to Get Supplier/Contractor Quotes

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