3/11/2003 CVEN 349 - Maxwell 1

Construction Is A Complex and Risky

Business

Module 05-01 – Introduction to Risk

Contrasting the Three Points of View – Owner, Designer, Builder

Modified: April 10, 2023

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Purpose: To describe briefly the natural

competitiveness of traditional practices within the construction industry.

To illustrate how that leads to risk allocation – how risk is normally assigned to the various parties involved.

That is, who is liable for what?

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Learning Objectives: Students must be able to list

conflicts as seen by the Owner, the Designer, and the Builder

Students must be able to site the general risk allocation rule.

Students must be able to list the allocation of specific risks to the usual three parties.

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It is an Adversarial Process

As strange as it may seem, the EPC (Engineering, Procurement, and Construction) process is an adversarial process wherein each of the three main parties (the Owner, the Designer, and the Builder) tends to be at odds with the other two because of conflicting interests and objectives.

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The “People” Part Most of the “art” of construction

project management involves sorting out these external conflicts – partnering, negotiation, etc.

As well as external conflicts within your own organization – team and organizational problems

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What Are Some Examples of External Conflicts?

Schedule Changes Scope Creep / Design Changes Change Orders Local Building Codes and

Inspection Union Work Rules

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What Are Some Examples of Internal Conflicts?

Marketing – Sell the job, regardless of the technical feasibility.

Technical – Deliver the “Statue of Liberty” every time, regardless of the budget or client expectations.

Fiscal – Stay within budget regardless of the quality and quantity of the work.

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Exercise #5.1.1 Take out a piece of paper, put your

name and team # on it. Individually take 2-minutes to list

some conflicts you may have observed at work – regardless of where you worked.

As pairs take 3-minutes to discuss what caused these conflicts.

Ask several pairs to report.

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The “Science” Part This course involves the numerical

tools related to the Project Manager’s four major responsibilities: schedule, budget, work, and safety.

You have to be able to succeed at both to gain positions of great responsibility (and great reward) within the process.

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Types of Construction Houses & light commercial (30-35%) Buildings & heavy commercial (35-40%) Industrial – Chemical plants, paper mills,

power plants, etc. (5-10%) ** Heavy - Dams, bridges, etc. (5-10%) ** Transportation - Highways, railroads,

canals, etc. (15-20%) (linear) **

** Where engineers control things

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The Owner’s Point of View Project will be managed by Internal Staff

or CM Firm. There are Government (all three levels) to

be satisfied: EPA, Building Codes & Permits, Use Codes & Permits, Access Permits, Tax Assessments, OHSA, …

Project Funding: Internal Cash Flow, Banks, REITs, Other Lenders, Tax Abatements, …

Future Users: Internal, External, …

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Owner, Cont’d.

Risk Shifting: Bonding Companies, Insurance Companies, Contract Clauses…

Government Owners have Special Problems: Bidding Rules, Contracting Rules, Defaulting Rules, Labor Compliance Rules, Fraud Rules, Conflict of Interest Rules, … …

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Designer’s Point of View Engineering Staff will be internal or

external: Structural, Foundation, Environmental, HVAC, Other Special,

Architectural Staff: Building and Other Special

Regulators: Professional Boards, Building Codes

Risks: Financial, Management, etc.

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Designer Cont’d. Conflicts between plans and

specifications ** Faulty Design ** Shop Drawings ** Errors and Omissions**

**What you get sued for.

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Builder’s Point of View

General Contractor – Usually a specified minimum, say 40%. Primary responsibility

Suppliers: Steel, Concrete, Materials, … Trade Unions: Electricians, Masons,

Painters, Glaziers, Carpenters, Dry Wall, Roofers, Plumbers, Laborers, Truckers, Operators, etc.

Sub contractors: Electrical, Mechanical, Erectors, Conveyances, Masonry, Dry Wall, Finish, etc.

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Builder Cont’d. Regulators: OHSA, Owner’s

Inspectors, Code Inspectors, Labor Inspectors, Union Work Rules.

Major Risks: Safety, Budget, Schedule, Acts of God, Workmanship, Labor Strife,

Financial Partners: Insurers, Bonding Companies, Bankers

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Your Primary Objectives as PM

No matter who you work for, where you are in the organization, or what part of the process you “own,” your job is to deliver a product:

On Schedule, On Budget, On Scope (Work that meets or exceeds customer

expectations), While Maintaining a safe and non-threatening

work place.

All this and “have a life.”

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PAT# 5.1.2 Take out a sheet of paper and put

your name on the Right-Side, Top Corner.

Individually, take the next 3-4 minutes to list the usual parties involved in the construction process and the conflicts that may arise from their traditional relationships.

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What is Risk?

Risk is “the variation in the possible outcomes that exist … in a given situation.”

Types of risk: Construction risks. Physical and Environmental risks. Contractual and Legal risks. Performance risks. Economic risks. Political and Public risks.

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How is risk allocated to the usual parties?

1. All risks are rightfully the Owner’s unless they are transferred to or assumed by another party for fair compensation.

2. Subject to: whether the party assuming the risk has both the competence to assess the risk and the expertise to control it or minimize it.

3. And: the choice and allocation must take place before the loss occurs.

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How is it managed? You try to minimizing risk –

regardless of whose risk it is. You try to identify the exact nature

of the risk. You try to reallocate risk by

contract. You try for an equitable sharing of

the risks to all parties concerned.

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Who should accept which risk?Multiple Parties.

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Who should accept which risk?Owner.

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Who should accept which risk?Contractor

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Who should accept which risk?Engineer

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PAT #5.1.3 Take out a sheet of paper Individually take 3 minutes to list

the 3 rules in allocating risk. Pass to the aisles.

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Class Assessment Take out a sheet of paper and … Write 2 sentences on the topic that

you think you will have the most problem remembering for the next exam.