Management

Advanced Risk and Uncertainty Management

Introduction

It is identified that uncertainty has huge potential as it is an unpredictable situation which offers uncontrollable outcomes (Skorupka, Górski, & Kuchta, 2013).  At the same time, risk can be stated as a consequence of action which takes place in spite of uncertainty. Risk perception is the subjective judgment people make about the severity and probability of a risk, and may vary person to person.

This report is based on real life project and has supported to analyse the risk and uncertainty. For this purpose, in this report a case related to construction industry has taken by the researcher which has supported to offer in-depth knowledge regarding the research topic. Moreover, this study has focused towards offering thorough understanding regarding the complexities, risks, and uncertainty of construction industry while focusing towards advanced risks and uncertainty modelling, analysis and interpretation method. For this purpose, designing of risk responses have taken place on the basis of application of various strategies to handle the risk in an effective manner. In this study, application of computer-based simulation has taken place which has supported to quantify the risks and uncertainties in the given project. This research paper discusses about risk analysis components and when to use risk analysis parameters. Furthermore, it has also supported to identify the risk of the construction live project in the context of financial risk while utilizing fishbone and fault tree diagram. At the same time, example of financial issues in the UK has also explained in the study. After that uncertainty and knowns and unknowns are discussed while explaining the risk assessment approach. In like manner, this study also discusses the source elements of uncertainty and the risk management process.

Risk

Risk is considered as an intentional interaction with the uncertainty. The uncertainty could be defined as an unavoidable and some risky activity which has a strong power to influences others (Taylan, et al., 2014). At the same time under the risk, there are huge complexities that are presents that generally affect the functioning of organization. Likewise in the construction industry, the complexities are occurred in the form of data inaccuracy or in form of information uncertainty. Moreover, the major risk which is faced in the project is the financial risk. The financial risk that was present in the project includes inflation, fluctuation in the currency and lack of solvency risk. The main reason of the risk is the frequent changing in market demand, raising price of the equipments. This risk affected the final outcome of the project which proved to be vulnerable for the company.

Risk is also calculated in the following manner:-

Risk= Probability of Risk Factors * Consequence of Risk (Dempster, 2014)

Figure 1: Financial Risk in Construction Industry

From the above diagram, it can be analysed that cost overruns in the construction industry takes place due to various reasons, such as insufficient planning and inaccurate estimating, poor project controls, design errors and omissions leading to scope growth and re-work. Moreover, inexperienced management team, skilled labour availability, imposed cash and delayed payment, poor risk identification, management and response strategy also creates the situation of risk (Vieider, et al., 2015). On the other hand, this diagram reflects that ineffective decision making process, weak or ambiguous contract terms and lack of incentives to control costs, inadequate communications and slow decision making, late design or poor project definition and unanticipated site conditions also create the situation of financial risk and creates the issue towards the successful accomplishment of the project (Maguire, & Hardy, 2013).

Risk Analysis Components

Risk analysis is considered as a process in which certain decisions is taken in order to analysis the uncertainty. For this, it includes the risk management, risk assessment and risk communication.

  • Risk Management: – The main process of risk management is to identify the problems through collecting information. It also involve in evaluating the risk and initiating for the modifications in actions (Pouzo, & Presno, 2016).
  • Risk Assessment: -This is considered as a systematic process of providing information about the nature of risk, size of risk and the level of factors which affects adversely. To measure the risk, there are two method are used i.e. quantitative and qualitative etc. (Maguire, & Hardy, 2013). Risk should be assessed in an effective manner as it remains supportive to collect the information related to the risk.
  • Risk Communication: – Risk communication is the process of exchanging the information in the form of two-way communication. It includes risk assessors, risk managers, affected groups, individuals and interested parties etc. (Pouzo, & Presno, 2016). Therefore, through following these elements, the risk is analysed by the organization. There should be effective communication as it enables to decrease the frequency of the risk however ineffective communication increases the issue of risk.

Furthermore, in context to construction project, it is vital to undertake the risk analysis components because risk factors have an adverse impact on the final outcome/ result of the project. In constriction project, the following components are used to analyse the risk:-

Risk Management: The risk which is identified under this study is the financial risk and it occurs due to inflation and fluctuation in currency.

Risk Assessment: Through use of statistics, it is identified that the financial risk has a high range which affects the results in adverse manner. So to compensate the financial risk, project manager has taken various mitigation strategies (Maguire, & Hardy, 2013). However, project manager fixed the exchange rate with the suppliers so that in future no problem occurs because of fluctuation in currency. In case of inflation, project manager decide to introduce new materials and automated construction process for bringing productivity improvements.

Risk Communication: The problem which is occurred because of financial risk is discussed and communicated to other stakeholders in meeting. It is also identified the areas that are affected such as unavailability of raw material which result in delay in completion of project and expenses is also generated high which influences the estimated budget (Serpella, et al., 2014).

When to Use Risk Analysis

There are four factors that are used in risk analysis which are extensive risk analysis, risk analysis is routine, modest level of risk analysis and no risk analysis required. In context to construction project, financial risk is one of the major risks. So, this risk can be considered as an extensive risk and highly impact the construction project (Jato-Espino, et al., 2014). In this context, natural environment can also create risk such as earthquake, floods and cyclone etc. which can delay the project. On the other hand, frequently changing rules and regulation of government like, tax rate, exchange rate, labour wages, etc. which increases the construction cost. In like manner, changing prices of the resources also create a big hurdle towards the accomplishment of the product in budgetary form and due to which the delayed problem get occurred (Osipova, & Eriksson, 2013). Moreover, need of latest technology equipments, enhancing of high price of the raw materials and changing consumer perception are also the major factors which create the situation of risk. So these all risk are determined under the construction project which impacts the accomplishment of the project in a timely manner.

Figure 2: Consequences of Being Wrong

Extensive Risk Analysis                                   Grave                          Risk analysis is routine

 

Much                                                                                                                             Little

 

Modest level of risk analysis                                                     No risk analysis required

 

 

Minor

As per the above chart, it is identified that the risk taken in the project lies in extensive risk analysis segment where, the risk parameter is higher and it lies under grave and much parameters. Financial risk is the major risk of the construction project as it has a potential to stop the project (Zhang, et al., 2014). In this context, our project has faced the issue of extensive risk as the cost of the project has highly increased as compared to the budget which was set prior in the pre-planning segment.

Fishbone Diagram

Harty, Themsen, & Tryggestad (2014) defined that fishbone diagram enables to identify many possible causes for an effect or problem. It supports to offer a structure of brainstorming session which enables to immediately sort ideas into useful categories. Due to this reason, this framework is used in this study as it has supported to offer detailed understanding regarding the issues related to the risk.

Figure 3: Fishbone Diagram                       

(Source: Researcher)

Above fishbone diagram remained highly assistive to offer in-depth knowledge regarding the issues faced in the project related to financial parameters (Joos, Piotroski, & Srinivasan, 2016). It has also assisted to analyse the reasons behind the issues. From this diagram, the issues faced by the construction project can be easily understood. In like manner, the reasons behind those issues can also be analysed.

Fault Tree Diagram

Fault tree diagram remains highly assistive to explain the risk and the parameters involved in the risk in a structural manner (Saunders, Gale, & Sherry, 2015). Due to this reason, this study has involved fault tree diagram. From the below mentioned diagram, the risk and the reasons can be understood in an effective manner.

From the fishbone diagram and fault tree diagram, it can be analysed that the live project has faced different financial risks. The major risks which are defined in figure 1 and figure 2 are change in consumer perception, change in government policy, natural calamity, demand of eco-friendly constructions, and increase cost of raw material were the major risks which were found in the project (Kuo, & Lu, 2013). There are various reasons behind these issues.

These risks can be defined through below explanation:

Change in consumer perception:

In this context, it is identified that there are majorly two parameters which are impacting the consumer perception, i.e. increase in option availability and increase in demand of latest design. Due to fierce competition in the market, lots of option available in the construction industry. Due to this reason, consumers prefer to buy the apartments with various amenities which have created the issue of increased cost (Heckerman, & Mamdani, 2014). In like manner, advancement in the technology has increased the demand of latest design in construction. These parameters have increased the demand of high investment as well as created the risk of selling the apartments.

Change in government policy:

In this context, it is identified that changing government policy is one of the major risks which directly impacts the business of the construction project. In this project, government policies have impacted on the basis of increase in tax rate and increase in wages which has created the financial risk. In like manner, these risks have a power of creating the issue in the context of the budget which are pre-decided and allocated to accomplish the overall project (Zhang, L et al., 2014).

Natural Calamity:

In the area, where the project was undertaken, the major natural risk was cyclone and rainfall. However, the intensity of this risk was low (Nelson, & Katzenstein, 2014).

Demand of eco-friendly construction:

In this project, eco-friendly construction has also increased the risk as in the current scenario, due to ethical consumerism, consumer focus towards ethical parameters have increased. It has increased the company cost which has created the risk of increased selling price. It has created the issues in the context of selling concern (Polisson, Quah, & Renou, 2017). In like manner, government has also made strict policy which is essential to be followed and to be adhered while dealing in the global market.

Increase raw material cost:

Raw material cost is also one of the major risks of this project. In this context, it is identified that due to inflation and demand of high quality raw material, the project has faced the issue of financial risk (Poff, et al., 2016).

 

 

Figure 4: Fault Tree Diagram

(Source: Researcher)

Example of Financial Issues in the UK

Figure 5: Increase in Personal Allowance since 2010

(Source: Gov.UK, 2017)

From the above graph, it can be analysed that personal allowance and effective tax rate directly impacts the construction projects and create the situation of risk for the firm (Gov.UK, 2017). This graph has supported to analyse that financial risk directly impacts the construction project and creates hindrance towards the successful accomplishment of the project. Above graph reflects that average effective tax rate is showing decrease trend from the year 2010. It has also supported to analyse that personal allowances also increasing in the given time span in the UK.

Uncertainty

Uncertainty can be defined as lack of information or unknown and imperfect information (Poff, et al., 2016). Uncertainty provides the reason for analysing the risk and it takes place at two fundamentally different levels, i.e. macro and micro levels. Macro level uncertainty is related to the environment decision making however, micro level uncertainty enables to relate with specific decision contexts while involving relevant knowledge, data, and models. Every decision problem has some knowns and unknowns.

Separating Knowns and Unknowns

In the context of construction industry, there are various known and unknown variability which create the situation of risk. In this context, following diagram remain assistive to get in-depth knowledge.

 

 

Figure 6: Knowns and Unknowns

Knowns

There are various knowns which create the issues while taking the decisions such as government rules and regulations. In like manner, increase trend of eco-friendly practices, penalties for polluting the environment, etc. are the known variability (Zinn, 2016). So, while taking decisions, all these parameters need to be taken into consideration to eliminate the situation of uncertainty. In the context of project, it was analysed that there was strict government rules and regulations regarding wages, working hours, taxation and many other government rules. Additionally, changing market needs of eco-friendly construction practices was also one of the known arenas of the project manager (Amoroso, et al., 2017). Due to this reason, in the project manager has given huge focus towards plantation, waste management and greenery. Moreover less energy consuming electric appliances and elevator are planned to install. Additionally, water harvesting system was also planned to save water. Although all these parameters have increased the project cost.

Unknowns

Natural Variability

Natural variability is one of the major unknowns. Rainfall, thunderstorm, earthquakes, etc. are the major natural variables which are uncertain in nature and can create the situation of risk towards the successful completion of the construction project (Shortridge, Aven, & Guikema, 2017).

Knowledge Uncertainty

Knowledge uncertainty takes place due to utilization of incomplete theory and understanding regarding the project which arises due to modelling limitations, or limited data. In the context of the construction project, it is identified that there were several Knowledge uncertainties which have created the situation of risk towards the completion of the project in a well-defined manner (Vahlne, et al., 2017). In this perspective, it is analysed that the project manager was unaware about the upcoming change in government rules and regulations regarding taxation and interest rate. In this context, it can be interpreted that the manager has shown the practices of incorrect assumption and poor understanding regarding political and legal parameters.

Increase in the taxation and interest rate has created the situation of risk towards the successful accomplishment of the project as it is identified that it will increase the construction cost (Poff, et al., 2016). Due to which, selling price will also increase which could create the situation of decrease in the sale of apartments, which can adversely impact the project and can create the big loss for the firm. This has caused due to improper resource allocation and inadequate forecasting of resource requirement. There were measuring errors and incorrect assumptions which has created poor understanding regarding the raw material required. In like manner, it was also analysed that the project cost was highly increased from the estimated cost which has created the issue of raising the funds. Moreover, delay in the completion of the project has also risen (Zhang, et al., 2014). It is identified that the project was going to be delayed by 3 months. The reason behind it is lack of knowledge of the project manager in the context of checklist and the work done by the labours and employees on a daily basis. Moreover, it is identified that contractor has given vague and conflicting information. Not only this, but also project manager was maintaining manual checklist which has lots of shortfalls which reflects that manager was using faulty method.

Risk Assessment Approach

To handle the uncertainty in the construction project, risk assessment approach can be utilized as it remains supportive handle the uncertainty in an effective manner _. For this purpose, initially there is a need of assessing the well-defined decision problem in a figurative manner (Kuo, & Lu, 2013). Furthermore, there is a need of making a pile of known and unknown things while developing additional piles of scenarios, theories, models, and quantities. For this purpose, there is a need of focusing towards utilizing trick and to use several modifications to come up with a good model. In like manner, there is a need of focusing towards simplicity as a good model should be simple and easy to understand with minimum variables, straightforward and captures. It enables to develop the important features of the problem as well as situation in an adequate manner (Harty, Themsen, & Tryggestad, 2014). Moreover, there is a need of defining various uncertain quantities too which can give significant effects on model outputs. It supports to communicate the nature and offers the relevancy to handle the uncertainty towards the risk manager towards the other decision makers. While assessing the risk, in this construction project, it is identified that it is identified that it was certain that the risk related to government policy change in the taxation and exchange rate would take place (Joos, Piotroski, & Srinivasan, 2016). However, the risk related to natural constraints was uncertain. In like manner, change in consumer perception was also known parameters (Saunders, Gale, & Sherry, 2015). At the same time, the issues related to delay in project has taken place due to less knowledge of the project manager regarding the checklist. All these certainty parameters have increased the risk criteria and has created issue towards the accomplishment of the project.

Source Elements of Uncertainty

In the context of the uncertainty, in the live construction project, it is analysed that there were probability and consequences based risk elements (Hwang, Zhao, & Toh, 2014). These uncertainties can be foreseen on the basis of knowledge uncertainty and natural variability. In the undertaken construction project, it is identified that there were knowledge uncertainty and natural variability both the uncertainties were seen. In like manner, Padalkar, & Gopinath (2016) depicted that there is a need of focusing towards the source of uncertainty as it remain assistive to increase the firm productivity and enables to eliminate the situation of risk. In this perspective, in our construction firm it is identified that the uncertainty of the risk probability was higher in the context of government policy, changing consumer perception and increase cost which have a chance of adverse consequences (Haimes, 2015). It has shown that there are high consequences of these risks as these risks have a potential of creating adverse situation within the organization. In like manner, natural calamities also a big risk, however in the area in which the project was working, the probability of climatic risk was low.

Risk Management Process

Milner-Gulland, et al. (2016) depicted that risk management is a process of identifying, monitoring, controlling, responding and analysing the risk. It supports to manage the potential risks while minimizing the chances of negative impact of risk over the organization. Risk management process remains highly assistive to analyse the research risk in a systematic manner and enables to handle the situation in an effective manner. Implication of risk management process can remain supportive to handle the construction project and can enable to eliminate the frequency of the risk.

Figure 7: Risk Management Process

Problem Identification:

To identify the problems of the project, it is essential to focus towards problem recognition, problem acceptance and problem definition. In the undertaken project, project manager needs to recognise the problematic areas, such as government policy, increase infrastructure cost, delay in completion of the project, natural calamities, changing consumer perception and increase concern towards eco-friendly practices (Skorupka, Górski, & Kuchta, 2013). Furthermore, there is a need of accepting these problems as the effective steps to control the risk can only be taken after the acceptance of the problem. Additionally, there is a need of defining these problems on the basis of various parameters.

Risk Estimation:

_ determined that risk estimation process supports to establish the risk analysis process and individual risk management activities. Under this process, project manager should analyse the risk in a structural manner to analyse the risk in different stages such as while making the checklist, while pre-deciding the budget, while calculating the delay due to natural calamities, etc. In like manner, there is a need of focusing towards the risk at individual level and the way of handling the risk in an effective manner.

Risk Evaluation:

In this stage, project manager should utilize principles for establishing acceptable risk and tolerable levels of risk, while will enable to bifurcate between the risks that on the basis of the level of acceptance and tolerance level _. Risk evaluation remains supportive to evaluate the risks while focusing towards various parameters. So, utilization of this strategy will remain supportive for the manager to evaluate the intensity of the risk factors to create effective strategy for handling them.

Risk Control:

For the purpose of risk control the project manager should formulate the RMOs. After that there is a need of evaluating, comparing and choosing the RMOs (Serpella, et al., 2014). In like manner, identifying the decision outcomes and implementing the decisions also come under this stage of the process.

Risk Monitoring:

The last stage is a need of monitoring and evaluating the planning to analyse its effectiveness. Moreover, there is a need of iteration which will remain supportive to repeat the mathematical or computational procedure which is applied for the purpose of better result of a previous application while obtaining successively closer approximations to the solution of a problem (Taylan, et al., 2014).

In the context of the undertaken project, if the project manager has employed the risk management process in an effective manner then the project has not face the situation of failure. The reason behind the failure of the project is that it is not handled in an adequate manner due to which financial risk has increased and ultimately there is a need arise of stopping the project.

Conclusion

From the above report, it can be concluded that while undertaking the project it is essential to give concern towards uncertainty and risk as it can create the situation of hurdle in the context of successful accomplishment of the project. Moreover, there is a need of focusing towards the utilization of risk management process. This report remained highly assistive to analyse the risk factors and the reason behind those risks. In like manner, it has also supported to evaluate the uncertainty on the basis of knowns and unknowns while explaining the source elements of uncertainty.

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