Risk analysis of specific project problems.

Kremljak, Zvonko

1. Introduction

Risk management is the process of identifying, analysing, responding to, and controlling project risks. Risk management is a proactive project management process, since you are trying to deal with potential future events before they occur. Risk management is performed in the initial project planning. The process includes the following steps [1]:

* create a Risk Management Plan (RMP),

* identify all potential risks,

* analyse the risks using qualitative techniques,

* utilize quantitative analysis for all high-level risks (optional),

* create a response plan for each high-level risk,

* move the activities associated with the risk response plans to the project schedule.

The remaining, follow-up steps are:

* monitor the risk response plan,

* periodically re-evaluate risks [1].

Risk management is not a one-time process. Project manager should always identify risks at the beginning of the project during the up-front planning process, but he should also periodically look at remaining work to identify any new risks.

Since risks are generally perceived as bad, it makes sense that the first instinct of a project manager would be to eliminate them. Mitigation is a risk response that tries to minimize the probability of a risk occurring or to minimize the impact of the risk on your project. However, there are a number of other options for responding to a risk, including: leave it, monitor the risk, avoid the risk or move the risk [2]. None of these options include ignoring the risk. Even the option to leave the risk is the result of a conscious decision.

When identifying risks on the project, the first place to look is the inherent risks, which are based on the general characteristics of a project rather than the specific circumstances of the project. Since they are general in nature, they can be identified and placed in a checklist for all project managers to review (tight deadlines, project size, new vendors, new technologies etc.). This should be the starting point for the risk identification process. On the other hand, risks are future conditions or circumstances outside the control of the project team that will have an adverse impact on the project should they occur.

This paper is focused to claims in construction industry as the potential problems related to risk and its control.

The management of claims is the greatest challenge facing with contractors in today's challenging business environments. Nowadays, construction projects become increasingly at risk due to a variety of factors which may cause to time extension and cost recovery [3].

Claim management is somehow similar to risk management procedure and consists of the following four processes: claim identification, claim quantification, claim prevention, claim resolution [4].

Reliable prediction of construction duration and consequently budget control is consolidated in decision making process and is an essential part of a successful management [5].

2. Overview of theory

2.1. Risk management

The risk management loop according to Fig. 1 is a guideline for establishment of a risk management system.

When risk identification and registration are completed, a probability of occurrence and consequence are assigned to each task. This assignment can be done through a quantitative assessment or a qualitative one or a combination of both [7].

2.2. Claim management

Claim was initially proposed in 1978 as a risk and probability and consequences of the various claims considered during a project life cycle [8].

While there is no a unique definition of this subject in the literature, a claim can be defined as "right given to the party who deserves a request for compensation and damages incurred by the other party" [9]. It may be also described as investigation of consideration or change by one of the parties involved in the project process. A claim happens when one party to the contract has suffered a detriment by the other party [10].

Claim management describes the processes required for elimination, prevention or reduction of construction claims when they are expected to occur [4].

2.3. Construction claims

No project can be considered isolated from a potential claim. Also much kind of claims can lead to financial damages [11]. Construction claims are observed by many participants as an unpleasant event in a project [12].

In general, claims are a common part in construction projects and may happen as a result of several reasons which can contribute delaying a project and/or increasing its relevant costs. On time accomplishing of a project is a difficult task to accomplish in the uncertain, complex, and dynamic environment of construction projects [10]. Claims may arise on a construction project due to number of reasons. Some well-known ones include as given below [13]:

* creep in scope of work (changes, extras and errors),

* inadequate bid / tender information,

* faulty and/or lately supply of equipment and materials by owner,

* low quality of drawings and/or specifications,

* insufficient time through biding analysis,

* interruptions through proceeding of the operations due to lack of coordination, design information or equipment,

* blocked work,

* re-schedule of works ordered by owner, etc.

The most influencing factors of claims are unclear documentations, weak instructions, variations initiated by the employer/engineer, measurement related issues, weather conditions, change and time extension assessment [14].

3. Claims of piping projects

Deterministic claims are not in our research focus. Probabilistic claims in piping construction projects may include [15]: material control, organizational communications, documents and piping plans.

Main approach of this research is to identify and study potential claims which are discussed in piping construction projects and by prioritization and ranking of the claims in a specialized form.

Two factors entitled "probability" and "impact" had been evaluated by questionnaire and required data were collected. To find out the importance or magnitude of a cause from a set of causes for occurrence of claims, two factors entitled "probability of occurrence" and "chance of claim occurrence" were examined and evaluated the most probabilistic causes of claims.

Thus, a questionnaire including 15 questions related to probabilistic claims in piping construction were prepared.

According to 5-fold Likert scale (very low, low, moderate, high, very high) rate of each index for each claim was rolled up and scored [16]. The statistical population's size was selected based on comments made by project managers, piping managers, planning and project control managers, contract managers with high executive experiences. Selection of people was performed based on communications and their involvements in projects. About 25 answered questionnaires were collected for claim analysis and monitoring stage.

3.1. Verification and validation

In the present study, to check the validation for questions of questionnaires, surface and content of questionnaire were examined by independent interviews and finally by comparison among conditions of the present and past projects, potential claims of the projects were evaluated. The Cronbach's alpha coefficient for questions about probability was 0.77 and for questions was 0.71 which are acceptable measurements.

First stage in project planning is to include claim through deterministic planning.

In a project plan along with risk analysis, different outcomes and ways were examined for the given project and impacts of claim risks on the project success were determined.

3.2. Risk analysis for cost and time of project

Through running risk analysis, three optimistic (minimum), the most probabilistic, and pessimistic (maximum) scenarios have to be considered instead of incorporating a deterministic cost and time analysis. By applying project claim analysis, more realistic scheduling is obtained. Before a cost is allocated with a risk, a resource should be defined so that the cost could be allocated. Cost allocation to an activity is the best cost estimation approach for the activity definition. In piping construction projects, once resource for an activity is defined, planned cost for any activity is determined and then triangular distribution has been used to estimate minimum and maximum costs for any individual activity (90% and 110% of the estimated cost), see an example in Fig. 2.

3.3. Claims identification and screening process

A check-list of potential claims were prepared for running a comparison between identified potential claims in current and in the projects completed in the past. Outcome of this stage was a list of potential claims for the present project with a certain range of influencing factors. To find the most important claims, two factors "probability of occurrence" and "claim's chance of success" (intensity of claim) were examined and evaluated by the questionnaire. Variables used in scoring include:

* Claim's probability of occurrence (P),

* Claim's impact or chance of occurrence (I),

* Claim's degree of risk (C).

To rank and classify claim risks, once average probability and impact of claim's risk is calculated, by probability of occurrence (P) multiplied by impact (I), claim's degree of risk (C) is obtained:

C = P x I (1)

According to prioritization of claims, 6 important claims that are likely to have the highest effect on the project were investigated.

According to the data entry of quantitative values for probability and impact of claims, those could be scored and finally ranked. Since it is possible that available resources in organization are not enough in order to deal with all claims presented in the project, ranking the risks based on the obtained scores could be very helpful to identify important claims of the project.

A risk could have positive or negative effects on the project [17]. If it has a positive effect on the project, it is called an opportunity and if it has a negative effect on the project, it is called a threat.

Claims could be mapped to an individual activity in the project to run an integrate analysis.

Once questionnaires collected, risk ranking matrix may specify position of each claim based on probability and its effect on Probability-Impact matrix (PI matrix), see Table 2.

By ranking of associated risks, we could specify the most important and effective claims. Since scores of claims are determined in terms of probability and risk impact, the ranking indicates the importance of risks as compared to each other properly. The most important claims are given in Table 3 by preference.

In this project triangular distribution is used to schedule activities (Fig. 3). Then triangular distribution is selected and applied for costs of resources. By doing risk analysis of graphs before applying claim, cost of the project can be registered.

3.4. Cost distributions

After completion of analysis, cost for any repetition (using random values from the triangular distributions) is displayed on a graph [18] which illustrates distribution of project cost (Fig. 4).

As can be seen from the Fig. 4, with a 90 % confidence interval, total cost of piping construction project is 17,424,568 USD (see the cumulative frequency) and the estimated probability for completing the estimated cost equals to 16,460,200 USD is only 51%.

Implementing claim risk analysis by application of claims after taking a preventive (post-mitigation) action, next distribution graph is registered.

As could be seen in Fig. 5, there is 43% probability the project is completed with the initial estimation 16,460,200 USD. Also, this figure shows with an 80% confidence the final cost of project could be considered 17,185,148 USD.

Handling claims efficiently and accurately is essential to keeping projects within acceptable time and cost limits and improving your overall performance. Decision management for claims enables the organization to combine predictive analytics with industry best practices and existing business processes. As a result, claims adjustors and others with indepth project knowledge can quickly and easily define how risk should be assessed and automate many routine decisions while retaining full control of the claims handling process.

Table 4 shows statistical values including minimum, maximum, mean, 90% confidence level, probability of occurrence, and project costs for both states before and after application of claims.

4. Conclusion

Analyses of claim risks in projects are very important. This paper, identifying common claims in piping construction contract was performed by questionnaire distributed among senior experienced managers and experts in this industry. Once the most important claims were determined by quantifying the claims project success rates before and after applying the claim were found and difference between the obtained values indicated impact percentage of claim risk in piping construction projects.

This study has important achievements for piping construction projects and the important results include:

1. Identification of actionable claims in piping construction projects and also ranking and prioritization of the most important claims.

2. Claims: impact on project success rate is 8% for project cost overrun.

3. Understanding cost sensitivity indicates impact of cost of an activity on the total cost.

Using this information, the project could be estimated and evaluated more accurately. Claims affecting aims of project are identified and documented according to expert judgments.

Project risk is one of those exciting topics that everyone (executives, functional managers, project managers or engineers) has an opinion about. Any good project has plenty of risk. The claim strategy depends on our answers to the questions about our relationship to the contractual partner, the policies of other involved units, project goals, business goals etc.

Future research work will be oriented to other types of industries too. It will include some improvements of the model, for example: more parameters for observation, related to specific branch, application of fuzzy modelling through project claim management, inclusion of decision support system, adopted methods of analysis etc.

DOI: 10.2507/27th.daaam.proceedings.011

5. References

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Caption: Fig. 1. Schematic Risk Management Circle according to [6]

Caption: Fig. 4. Cost distribution of piping construction project in uncertain conditions

Caption: Fig. 5. Cost distribution of piping construction project after application of claims Table 1. Impact and probability scoring factors Description Numerical score Very low (VL) 1 Low (L) 3 Medium (M) 5 High (H) 7 Very high (VH) 9 Table 2. Claims PI matrix Impact Probability Very low Low Medium High Very high Very high [%] 9 27 45 63 81 High [%] 7 21 35 49 63 Medium [%] 5 15 25 35 45 Low [%] 3 9 15 21 27 Very low [%] 1 3 5 7 9 Table 3. Most important piping construction claims Rank Claim event Factor Average score 1 Contractors' claims, in case of Probability 7.6 issuance of material issue Impact 7.3 voucher (MIV) and delay in delivery of material or Non- Issue (NIS) 2 Requirements for piping Probability 7.2 operations to be hold or not met Impact 7.1 3 Client delays in delivering Probability 6.6 isometric drawings Impact 6.5 4 Discrepancies and shortcomings in Probability 6.7 contract terms Impact 6.4 5 TQ (Technical Query) due to Probability 6.2 failure, inadequacy and Impact 5.9 deficiencies information plan 6 Delay in piping invoices payment Probability 5.8 Impact 5.9 Rank Score (PxI) x 100 1 55.48 2 51.12 3 42.90 4 42.88 5 36.58 6 34.22 Table 4. Comparison of costs before and after application of claims Deterministic Minimum Project cost with uncertainty 51% 14,827,485 taken into account before application of claims Project cost with uncertainty 43% 14,828,116 taken into account after application of claims Cost [USD] Mean Maximum Project cost with uncertainty 16,465,689 18,443,264 taken into account before application of claims Project cost with uncertainty 16,583,807 18,467,790 taken into account after application of claims 90% confidence level Project cost with uncertainty 17,424,568 taken into account before application of claims Project cost with uncertainty 17,565,661 taken into account after application of claims Fig. 2. Triangular distribution of activity cost Distribution Triangle Minimum 4,5 Most Likely 5.0 Maximum 5.5 Fig. 3. Project schedule with included claims (segment) Material Handling From Layd ... 30 Material Handling From Laydown ... 30 Delays in delivery of materials to ... 0 Cutting & Beveling & Fit up 60 Cutting & Beveling & Fit up 60 Employer delays in delivering iso ... 0 Claims of Technical Query (TQ) 0 Welding 100 Welding 100 Lack of preparation and holding r ... 0 NDT 35 FWHT 30 Final Certification 20 Final Certification 20 Differences and deficiencies in p ... 0 Transfer Mateiialto Site 40 Transfer Material to Site 40 Delays in delivery of materials to ... 0 Election & Fit up $0 Erection S Fitup 80 Employer delays in delivering iso. 0