Contrary to what many authors and papers mentioned about risks being Elements that are out of the control of the project, I want to focus your attention to the allocation side of risk. Risks can be treated. We need to know them, and we need to know what is our power to allocate risk, to transfer them. We've heard that lingo that says risk should be transferred to the party that is best suited to treat them. Well, what does that really mean and how do we get there? That's what our next part of this course will cover, and we'll call it risk allocation. And I want to make specific examples, so that when we talk about it, it's not a theory anymore, it's not a paper that we read. It can be related to real life examples. The context of the risk management process that I'm going to be talking about are referenced by ISO-31000. ISO-31000 defines a framework for it. There is other frameworks, like PMI has their own framework. Australia, New Zealand, they're similar framework as ISO, and others. I like ISO, because it provides a full cycle of how risk management should be approached. It starts with establishing a context. So every time we come and understand and try to understand the risks of the project, try to assess the risk and define how we're going to treat it, we need to understand what's the context. Who are our stakeholders? Who owns the asset? Who owns the development of the asset, and who is the final user of this asset? What is the functionality element at the end of the day of this particular asset or particular project that we're developing? What are the quality conditions? What are the constraints? Are we working in an urban area and traffic management during construction is a key element. We need to understand all the intrinsic points of this particular endeavor before we move into the assessing risks. Once we do that, and the way to do that is getting intimate with the project, reading all the documentation there is today, developing concept, talking to people that have done similar projects in the same location or different locations. They have projects that may not be similar but have worked in that particular location. Getting to know who are we interfacing with. Getting to understand our stakeholders and now users. Talking to them. So once we have established that concept, we moved towards the risk assessment process. Risk assessment process, in this context, has three major steps. One, we need to identify risks. And we do that by conducting a holistic process. Like I said before, we need start at the beginning, go through the entire life cycle, and look at the project as a holistic element. We cannot do it by phases. We cannot do it by chunks. We cannot deal with this risk now and deal with this later. We have to understand the entire life cycle. Then we have to do something that they call risk analysis. And that has to do with gauging how important each risk is with relation to the next one. There are many ways to do that. You can do it qualitatively, you can do it quantitatively, you can assess probabilities of occurrence for each one of the risk elements. You can understand what the impacts are in terms of cast, schedule, reputation, functionality and so forth, but you have to find a common process to compare risks to each other and engage which ones have the relative importance, more relative importance than others. And then we can [INAUDIBLE] something that is called the risk evaluation. And the risk evaluation is nothing more than understanding, what are my tolerances? What is the project willing to tolerate and how that tolerance plays with the assessment with this for risks. So from here down, from this list down, this point in the list down, we can deal with risks. We can understand them, we can take them, we are okay with them. From this point up, these are unsuitable risks, intolerable risks. We do not jeopardize our reputation, for instance. Therefore, any reputational risks have to be proactively acted upon. So we do a self-evaluation of how we ask an entity as a project or as a project owner deal with the risks that we identify and assess. And then, after we communicate among the team, we monitor the development of the risks, if they're steady, if they change, if they have fluctuations through the life cycle. We then move into the risk treatment step. And this is where I wanted to focus on. The entire process revolves into, what are we doing now that we know the risks of the project? How do we make sure we have a good handle, and how do we make sure we can influence the outcome of the project so that the project can be successful, and we have the where in the driving wheel of that success? The risk treatment options that we have available for a project can be boiled down to four. We can avoid risks, we can mitigate risks, we can transfer risks, or we can accept risks. Risk avoidance is a tool that is more efficient at the very beginning, at the conceptual phase of a project, because you can influence the outcome of a project by just changing elements of it. For instance, if you're building a bridge through a wetland, and driving piles in that wetland may have an impact on endangered species. And therefore, triggering additional environmental studies and delaying the project, you may have an option at the very concept, the sign of this project, to either deviate your alignment from that wetland so that you don't have to deal with environmental problems anymore. Or you have the option to create a long-span bridge so that you don't have to drive piles through the wetlands. And therefore, you don't have to deal with this risk. So those are very simply sculpt management options you have at the very beginning. And like I said, it's very effective at the conceptual phase of the project. Mitigation is when you recognize the risk that is not certain to happen has a probability of occurrence. And then if it occurs, has an impact and create an action that either lowers the probability or lowers the impact. Transfer a risk to the supply chain is what we can do when we allocate risk. We're going to talk in more detail about this in the next few slides. But basically, as a project owner and as a risk owner, after we realize nd we identify the risk, we have the power to allocate it and move it to the best party that has the best ability to manage this particular risk. And we'll look at an example, and a couple of examples that are very specific about that so that we don't stay in the academic concept. And then finally, the acceptance. If we accept the risk, we must budget for it. We must understand what our exposure is and how are we going to deal with the possibility that, that risk may happen. So let's look at the opportunities we have In the lifecycle of a construction project for risk treatments. If we look at the conceptual face of a project, we have an opportunity to select, how are we going to deliver that project? And as we have seen in other modules of this course, the delivery methodologies have different risk profiles to the different parties. For instance, in a design-bid-build structure, the owner retain the risk of the design and not the contractor, because the owner contracts the design development separately and then goes back with 100% design and hire a contractor to meet the design. So that changes once you move to a different or an alternative delivery method over the year, like design build. Because in a design build, now the contractor has ownership of the design, and the owner is only responsible for defining the criterias that they want the design to perform the functional performance of that design. So when we select the delivery methodology is when we have the first opportunity to allocate risks to the supply chain. Now, the second opportunity is once that's defined, we have to then develop a request for proposal and a project agreement. And this is applicable, again, as an owner of a construction project or as a contractor soliciting proposals for subcontractors and engaging in contractual or legal contracts with the supply chain vendors and so forth. Here's where we have the second opportunity to allocate risk. Because now, we turn into the legal aspects of this documents and how we direct the proponents to price the project. This is where we say, we have this project and this risk, and we want you to price it for us. And if you do it smartly and in a competitive way, you can get a better value for that risk that otherwise you would own regardless of the impact that that risk will have in the price. So what's important in risk allocation, whether you do it in the delivery method selection or in the contract documents, is that you very effectively and unambiguously communicate your allocation. Who owns what? Who's responsible for what? Now, that is an art by itself, but we'll go through some of the examples that will make that communication very effectively, and how the market, the contractors and the contracting community market, respond to that. And when you do this, you have to make sure that you have seen the project holistically, and then go back to that concept. Because if you only look at the design and go through a request for proposal that has only design risk allocation, the consequences of transferring a design risk to the market may translate in a more costly solution in the construction or in the maintenance or in the operation side of your asset. So you have to look at the project as a whole. You have to understand the entire functionality and how that project will survive whatever the life expectation is, 50 years, 40 years, and so forth. Now, at this point in time, we get to the point where we're hiring for the services of a construction. But there are risks that you were not able to allocate, or it's too costly to allocate, to the marketplace. And in those instances, you want to be able to accept those risks and budget them. And typically, what that takes form is either an allowance or a contingency. I'm talking now whether it is cost, budget, or schedule, and we'll talk a little bit more about how do we plan those budgets in schedule. But think about accepting risks and being prepare for the what ifs. What if this happen? How am I prepare for it?
