When evaluating risk, a project management team usually focuses on the project-related “micro” dangers; however, the project schedule and budgets are more often impacted by larger “macro” risks that are less controllable. In this article, we consider the two main types of risk that need to be considered holistically to get a true sense of a project’s overall risk exposure.
A great deal of effort and time is spent putting together a project schedule and estimate. One important aspect of completing both is an effective and accurate risk analysis. Risk has to be considered both as a financial contingency within the estimate and as float – allowances for time within the schedule.
While considering risk contingency to the estimate is the “start” of the process, project teams commonly fail to account for more significant problems that can impact the project’s bottom line. Part of this oversight is that our industry has relative stability regarding price escalation and productivity. This, however, has changed radically in the past five years as COVID-19, regional or national conflicts, supply chain issues, and inflation have all conspired together, resulting in the most significant increase in risks we have seen in a while.
The two main categories of risk
For a comprehensive (and effective) construction project risk assessment, two main categories must be evaluated: macro risks and micro risks. Both impact time and money and must be estimated and considered as part of the process. These two risks can also intertwine, with potentially serious impacts depending heavily on the project location.
Macro risk
Macro risks are the “big” risks, not necessarily in terms of impact, but because the project team has very little control over them. Some allowances can be made in terms of contingency and float, but beyond that, there is very little the team can do other than be aware of the risk and price it into the project.
Examples include:
• Supply chain risk
• Labor risks (escalation of national rates, as well as lack of resources)
• Geo-political risk (protests, riots, unrest, etc.)
• Conflict risk (wars and military actions)
• Large-scale weather risks
These risk factors are usually international or national events beyond the project team’s control. They should be observed, evaluated for impact, and incorporated into the budget and schedule.
Examining these events’ likelihood is more challenging than micro risks, which tend to be similar on most projects. Depending on the region, country, and historical events specific to that area, a risk register can be updated to include these typical macro risks.
A challenge with macro risks is their unpredictability, especially for multiyear projects. Predicting whether a currently stable area or region will undergo political strife or conflict in a year or two is near impossible. Unfortunately, Ukraine is an example of this. Four years ago, a project risk team could not have predicted, with any reasonable assurance, that Russia would invade the area. A team could not assign any quantitative value or contingency to this factor.
However, there are examples where macro risks can be examined and assigned. Political upheaval, regional political trends, or planned elections are just a few that can be analyzed using resources such as State Department or CIA reports. Examinations of political risk factors allow a management team to attempt to incorporate that risk factor into its outlook. This is especially important for asset owners or investors when looking at the long-term viability of a location.
Micro risk
Micro or project-specific risks are those that, to a large degree, the project team can take mitigative steps to protect against.
Examples include:
• Localized, short-term weather risks (such as storms and windy conditions)
• Site labor risks
• Safety risks
While consideration needs to be made regarding assigning time and schedule impacts, some mitigative actions can be considered in these cases. For example, risks in areas with a known possibility of rainy seasons and when they may occur are relatively predictable micro risks. A site’s situation near a flood plain could be an additional project-specific risk. While work can be scheduled to reduce the impact of the micro risk by ensuring buildings are as enclosed as possible at the start of the season, additional considerations could influence scheduling to address below-groundwork during dry seasons to reduce the risk of inundation.
Recognizing these risks as a strong likelihood and acknowledging that they are specific to the site allows the team to plan work to minimize potential impact. As part of the process, consideration of the mitigation costs can be assessed against the potential cost of the event.
Planning for micro and macro risks
The most effective risk mitigation plans include contingencies for both micro and macro risks. Regularly “expected” events, such as hurricanes for specific regions, are included in the schedule by examining the past 10-15 years of weather patterns in the site area. This information allows for assigning time for a drop in productivity or adding in float to account for this potential disruption. In addition, macro risks such as a prolonged or more intense hurricane season – arising from problems caused by global warming – also need to be tracked and registered as a risk.
Another example is considering regional risks—a major flooding event that may not directly impact a site may affect the availability of materials 100 miles away. Washed-out roads may affect logistics in the entire region. When the whole area is impacted, the site management team has no practical options other than to have contingencies available (time and money). From the perspective of investors or the project owner, micro and macro risks impact key decisions like site location or return on investment considerations.
In our experience, the risk register and process tend to focus on project-specific risks, with little or no consideration of the potential impacts of macro risks. These risks are essentially uncontrollable by the project but do drive financial and schedule considerations – therefore, they must have a place in any effective risk register.
An effective mitigation process must consider macro and micro risks as early in the project as possible and estimate float and contingency funds in a timely and accurate manner.
Establishing an effective risk register is complex and necessary, and an accurate, balanced reporting tool for the project management team is often lacking in many projects. If your project team has difficulty building an effective risk register, contact Aegis to learn how we’re changing the way the construction industry looks at risk. Our teams help customers prioritize schedule risks based on their impact, visualize risk scenarios, and stay ahead of challenges to ensure on-time and on-budget delivery.
Our cloud-based risk register integrates directly with your portfolio dashboard and project schedules to provide on-the-fly Monte Carlo computations for the projects and risks you’re tracking. We leverage historical data, predictive analytics, and scenario planning to identify potential risks before they appear. We proactively boost project performance through analysis of as-built data, identification of potential issues, and predictive insights. This approach allows project teams to implement preemptive measures, minimizing the impact of unforeseen challenges on the project timeline and budget. Contact us at info@consultaegis.com and learn more here.
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