“Risk is Measured by What You Choose to do more than How You Choose to do It”
In the growth markets we will be approaching, with a housing boom well underway and a $1 trillion infrastructure bill working its way through Congress, enthusiastic contractors are tempted to be aggressive when selecting and bidding for projects. At times like these, however, only careful project selection can control risk. 30 years of research into construction risk factors tells us that few construction projects have built-in, inherent risk. Rather, project risk is determined by an organization’s experience with similar projects.
The performance of an industrial process, such as manufacturing, improves with repetition. Construction enterprises, however, do not have enough repetition from project to project to bend the learning curve. The closer a new project represents the average of previous projects the more likely estimated performance can be achieved because there is some repetition in both the planning and execution.
The measurement of risk also depends on the experience of the team members involved in the project. Experience is accumulated institutionally but is captured individually so the number of members on a performance team with direct experience on similar projects impacts the likelihood of estimated (or improved) performance.
Other Risk Factors in Project Selection
The aspects (risks) that impact anticipated performance are primarily the following: (These aspects can be measured and weighted to produce a numeric scale of risk projections and can also be updated to measure project performance.)
- B – All construction organizations produce projects of varying size. Small projects, often performed as a service for good clients, are typically the highest profit as a percentage of sales, but numerically not enough to support the entire organization. Mid-size projects, which generally earn reasonable but less profit as a percentage of sales than small jobs, are the projects the company survives on. There are usually fewer large projects which earn less than the mid-size projects as a percentage of sales, but they help the company meet critical mass, they support growth appetites of contractors and/or management teams and support the interests of key employees. The key to controlling risk is deciding when and where each project size would best benefit the company.
- Type – The depth of the experience with similar type projects the greater the likelihood of a successful estimate, production, and completion at a profit. Experience with fewer similar projects translates to a lower level of confidence (recognized or not) and presents greater risk. In addition, unusual project features such as curved wall, roofs, or unique elements outside of the experience of most organizations are obvious risk triggers. These projects can and will be built but may have a steep and costly learning curve amplifying risk.
- Location – Any departure from the geographic area an organization is experienced in will generally involve a learning curve discovering potential differences concerning labor issues and skill levels, subcontractor availability, pricing, and other local customs that may impact how the work is managed or preformed.
- Performance team – Experience is accumulated institutionally but is captured individually so the number of members on a performance team with direct experience with similar previous projects impacts the likelihood of achieving estimated (or improved) performance. Institutional experience does not automatically impart the experience to individuals who did not participate in attaining the experience. A sub-set of project team experience is team members having previously worked together. If the project team has worked together in the past, the risk is further reduced.
- Owner – Every time a contractor goes to work for a new owner they have no experience with, they increase their risk of performance disputes, slow pay, resolution by litigation, etc. This, of course, is unavoidable, but it must be factored in when measuring the risk of projects under consideration.
The risks inherent in deciding on which project to go after can be measured in advance. The project attributes discussed can be weighted and placed in a numeric formula to provide an accurate measurement of project risk when combined with a contractor’s selection process criteria.
Next week we will discuss how to accurately measure project risk in advance.
For more information on project selection, read more at: https://simplarfoundation.org/category/built-environment/project-selection-built-environment/
For a broader view on risk management, read more here: https://simplarfoundation.org/category/built-environment/risk-management-built-environment/
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Please circulate this widely. It will benefit your constituents. This research is continuous and includes new information weekly as it becomes available. Thank you.