1© Graham M Winch

I compare fortune to one of those violent rivers which, when they are enraged,

flood the plains, tear down trees and buildingswash soil from one place to another……

She shows her power where there is no force to hold herin check: and her impetus is felt where she knows

there are no embankments and dykes built to restrain herMachiavelli.

13 : Managing Uncertainty and Risk on the Project

2© Graham M Winch

Managing Uncertainty and Risk on the Project

• what is risk?• project risk management• risk management practice• elicitation of subjective probabilities• strategic management of project risks

3© Graham M Winch

What is Risk?

• uncertainty and the absence of information regarding occurrence

• risk and the probability of an occurrence– understanding risk requires some information

• risk and reward– this includes safety

4© Graham M Winch

Decision-Makers’ Risk Preferences

• risk-seeking• risk-averse• risk neutral

– transaction cost adjusted risk neutrality

• factors affecting preferences• risk preference profiles

5© Graham M Winch

Risk Preference Profiles

p(x) risk event 100 %

100 %

p(y) < p(x)

p(y) * m(y) - t = p(x) * m(x)

p(y)

= p

(x)

p(y)

> p

(x)

p(y)

rew

ard

even

t

6© Graham M Winch

Project Risk Management

• the features of projects and their clients– project large proportion of client’s total assets– projects tend to be one-off– clients tend to be bureaucracies– lack of managerial capabilities

• the uneven distribution of risk and reward– client’s risk profile– project manager’s risk profile

7© Graham M Winch

The Client’s Risk Profilepr

obab

ility

%tender

price £10.5m

expected NPV @ 20% ROCE £12.6m

negative ROCE

income stream

- variations +

out-turn price

expected ROCE

positive ROCE

8© Graham M Winch

The Construction Project Manager’s Risk Profilep

rob

ab

ility

% out-turn price

- variances +

out-turn cost

expected profit

cost estimate= budget

= £10m

tender price

£10.5m

- variations +

loss

£ m

profit

Riding the Project Life-cycle 9© Graham M Winch

Risk Management Practice

• the risk management process– identify and classify the risk– analyse the risk– respond to the risk– monitor the risk

• the risk management process• the probability/impact matrix

10© Graham M Winch

The Risk Management Process

identify & classify the risk

analyse the risk

respond to the risk

monitor the risk

11© Graham M Winch

The Probability / Impact Matrix

probability

impact

insure /mitigate

accept

mitigate /cancel

externalise

high

low

low high

rare catastrophe

probable disaster

bad luck management challenge

12© Graham M Winch

The Elicitation of Subjective Probabilities

• attempting to solve the problem of inadequate data

• mobilising expert judgement• the importance of methodology• the value is in the process, not the outputs

13© Graham M Winch

Strategic Management of Project Risks

• the broad categories of risk– market risks– completion risks– institutional risks

• project shaping• project governability

14© Graham M Winch

Project Shaping

• information search• network building• incentives• design• influence

15© Graham M Winch

Project Governability

• aligning incentive through equity participation• incentive contracts• flexibility and modularity• deep pockets and project portfolios• partnering arrangements