DEPARTMENT OF ENGINEERING

CECE 4270 & CEQS 3230

Miss Samira Said Al Esry

Conception

Feasibility &
Selection

Design &
Planning

Development

Decommissioning

Operations

Closeout

Fundamentals: Risk
Payment Methods
Lump Sum / fixed price
Time & materials - Unit Prices
Cost Plus Percentage
Cost Plus Fixed Fee
Guaranteed Maximum Price
Incentive
3

Involves identifying, analysing and responding

to risks throughout the project life cycle, in the
best interest of meeting project objectives
Can improve project success
Help in project selection, scope determination
and realistic development of schedules and cost
estimates

Schwalbe, 2006

Uncertainty inherent in plans and the possibility

of something happening that can affect the
prospects of achieving business or project goals
BS6079-3:2000

Risk is the likelihood of an event or hazard

impacting the project

In commerce, a high risk venture implies a

potential for large gains as well as potential for
large losses
Where there are opportunities there are risks
All projects require risk management, risk
monitoring and risk control

Table 3-1: Potential negative risk conditions associated with each knowledge area

Knowledge Area
Integration
Scope

Risk Conditions
Inadequate planning; poor resource allocation; poor integration management;
lack of post-project review
Poor definition of scope or work packages; incomplete definition

Cost

Errors in estimating time or resource availability; errors in determining the

critical path; poor allocation and management of float; early release of
competitive products
Estimating errors; inadequate productivity, cost, change, or contingency

Quality

Poor attitude toward quality; substandard design/materials/workmanship;

inadequate quality assurance program

Time

Risk

Poor conflict management; poor project organisation and definition of

responsibilities; absence of leadership
Carelessness in planning or communicating; lack of consultation with key
stakeholders
Ignoring risk; unclear analysis of risk; poor insurance management

Procurement

Unenforceable conditions or contracts clauses; adversarial relations

Human Resources
Communications

Source: Wideman, R. Max, Project and Program Risk Management: A Guide to Managing Project Risks & Opportunities, Upper Darby,
PA: Project Management Institute, 1992, II 4.

Technical / quality/ performance risks: include risks

associated with unproven technology, complex
technology, changes to technology, unrealistic
performance goals, etc.
Project management risks: includes improper
schedule and resource planning, poor project planning,
improper project management methodologies.
Organisational risks: include resource conflicts due to
multiple projects; unrealistic scope, time and cost
objectives; lack of funding.
External risks: include new laws or regulations, labour
issues, weather, changes in ownership, etc.

Records and other sources of historical data

Relevant experience
Reviews of research into project success and
failure
Market testing and research
Application of behavioural, financial, economic,
engineering and/or other relevant models
Use of specialist and/or external expertise
9

Medium

Big risk
Figure 3-1: Risk classification
based on likelihood of occurrence
and impact on project

Likelihood/
probability

Small risk

Medium

Severity of impact

Impact can be in terms of cost, time, quality, reputation,

safety
10

10

Table 3-2: Sample Impact / Effect for risk assessment

Cost(OMR)

11

Delay

Quality

Reputation

Major
Impact

Extra
100,000s

Medium
impact

Extra 10,000s A few

weeks

Some impairment
of a major
function

Some impact on
Goodwill

Low
Impact

Extra 1,000s

Some impairment
of a minor
function

Minor impact on
Goodwill

Several
months

A few
days

Severe
Negative publicity in
impairment or loss major news channels
of a function
Loss of public trust
Significant impact on
Goodwill

Response: Negative risks

Table 3-3: Basic response strategies for risks

Response/ treatment

Summary

Accept

Continue without altering the project goals or approach

Eliminating or avoiding Changing or abandoning goals specifically associated with

the risk in question, or choosing alternative approaches/
processes that make the risk no longer relevant

12

Risk sharing

Sharing risks in part or in full with another stakeholder who

could be involved solely to facilitate risk treatment, e.g. an
insurer

Reducing the
likelihood

Changing project approach, identifying causal links between

threat and impact, or causes of threats, and intervening to
mitigate occurrence, acting to reduce the threat

Reducing the impacts

Developing contingency plans for responding to the threat if

it occurs, even if other steps have been taken to minimize the
risk

Contractors are risk averse

Risks that can be controlled by contractor,
contractor will manage them rather than reduce
charges
Risks that cannot be controlled by contractor,
contractor will typically reduce charges so
owner assumes them
High contractor risks: higher price, more
chances for delays
13

Likelihood
(L)
1
2
3
4
5

14

Severity
(S)
Very unlikely
Unlikely
Likely
Very Likely
Probable

1
2
3
4
5

No impact or harm
Low Impact minor injury no lost time
Medium impact injury or ill health OVER 3 days lost time
High impact major injury or possible loss, including death
Very high impact multiple casualties or loss of more than one
life

10

15

20

25

12

16

20

12

15

10

HIGH
MEDIUM
LOW

Fundamentals
Payment Methods
Fixed price or Lump Sum
Time and Materials (T&M) -Unit Prices
Cost reimbursable
Cost Plus Percentage
Cost Plus Fixed Fee
Guaranteed Maximum Price
Incentive
15

Set a specific, firm price for the goods and

services.
Owner and contractor agree on a well-defined
deliverable.
Lower owner risks, biggest risk borne by the
contractor.
Typically used with traditional design/bid/build
Typically results in a desire to finish the project
in minimum time, with minimizes cost and
quality uncertainty.
16

Example:
Owner and contractor enter into a Lump Sum
agreement, OMR 20,000. The actual costs
incurred by the contractor are OMR 18,500.
Price charged to owner:
Contractor profit:

17

Fundamentals
Payment Method
Lump Sum
Unit Prices
Cost Plus Percentage
Cost Plus Fixed Fee
Guaranteed Maximum Price
Incentive
18

Time and materials contracts are a cross

between fixed price and cost-reimbursable.
The full amount of material costs is not known
at the time of contract awarding: the costs will
continue to grow during the contracts life.
Unit rates (agreement of charges per unit of
work) may be used to preset certain portions of
the project.
The owner bears the biggest risk.
19

Fundamentals
Payment Method
Lump Sum
Unit Prices
Cost Plus Percentage
Cost Plus Fixed Fee
Guaranteed Maximum Price
Incentive
20

21

Owner pays actual cost plus a percentage fee

Used if price cannot be determined in another
way and for urgency (e.g. ill-defined risky scope)
Maximum flexibility for owner (change orders)
High risk for owner
Little incentives for contractor to improve
efficiency
No consideration of quality in payment
Permits collaboration at early stages minimum
negotiation time, fear of commitment

Example:
Your company has entered into a Cost plus
Percentage contract with contractor X. At the end
of the project the contractors actual costs are
OMR10,000. The contract percentage is 2%. What
is the price charged to the owner? What is the
contractors profit?

Price charged:
Contractor profit:

22

Fundamentals
Payment Method
Lump Sum
Unit Prices
Cost Plus Percentage
Cost Plus Fixed Fee
Guaranteed Maximum Price
Incentive
23

Owner agrees to pay the cost of work

plus a fixed fee
Unknown cost up-front
Used if the price cannot be determined
in another manner
Fee is independent of project duration
Little incentive to reduce cost
High incentive to finish early
24

Example:
Owner and contractor enter into Cost plus fixed
fee agreement with the owner agreeing to pay
the contractor his costs plus an additional
OMR500. The actual costs were OMR3000.
What is..
The price charged to the owner:
Contractor profit:
25

100%

Lump Sum

0%

Owners risk

Contractors risk

CPFF
CP%
0%

100%

Figure 3-2: Risk sharing meter; comparing between lump sum, CPFF &
CPPC

26

Fundamentals
Payment Method
Lump Sum
Unit Prices
Cost Plus Percentage
Cost Plus Fixed Fee
Guaranteed Maximum Price
Incentive
27

Same as Cost Plus Fixed Fee (CPFF), but with a

Guaranteed Maximum Price (GMP)
Contractor assumes any risks of cost going
beyond GMP
Quality may be sacrificed to remain below GMP

28

Fundamentals
Payment Method
Lump Sum
Unit Prices
Cost Plus Percentage
Cost Plus Fixed Fee
Guaranteed Maximum Price
Incentive
29

Owner and contractor agreeing to a ratio for

sharing savings and overruns (e.g. 80/20)
If savings of 1000, owners cost is reduced by
800 and contractors profit is increased by 200
If overrun of 1000, owner shoulders 800 and
contractor shoulders 200
Can have limitations on price or profit
30

Target Estimate contract

2% basic markup
70/30 O/C sharing arrangement
Original estimate: 10,000,000 OMR
Owners payment?= Actual cost + [markup*estimate] +
[contractors share*(estimate-actual cost)]
Contractors Profit/loss?= Price charged to owner
Contractor actual cost
Owners savings/losses= Estimate + [markup*Estimate]
owners payment
31

Estimate
Mark-up
Contractor share
Owner Share
Actual cost
8000000
8500000
9000000
9500000
10000000
10500000
11000000
11500000
12000000

32

10000000
2%
30%
70%
Owner's Payment

Contractor's Gross
Profit

Owner's
Savings/Losses

Estimate
Mark-up
Contractor share
Owner Share
Actual cost
8000000
8500000
9000000
9500000
10000000
10500000
11000000
11500000
12000000

33

10000000
2%
30%
70%
Owner's Payment
8800000
9150000
9500000
9850000
10200000
10550000
10900000
11250000
11600000

Contractor's Gross
Profit
800000
650000
500000
350000
200000
50000
-100000
-250000
-400000

Owner's
Savings/Losses
1400000
1050000
700000
350000
0
-350000
-700000
-1050000
-1400000

References
Dr. Lee, S. (2007). Presentation to Project Management course in
MIT.
Project Management for Construction by Chris Hendrickson
available at http://pmbook.ce.cmu.edu/
Schwalbe, K., Information Technology Project management, 4th
Edition, 2006, Thomson Course Technology
Harold Kerzner, Ph.D., Project Management A systems approach
to planning, scheduling & controlling, 9th ed., 2006, John Wiley
& Sons, Inc.
Heldman, Kim, PMP: Project Management Professional, Study
Guide, 3rd edition, 2005, Wiley Publishing
Dr. Ammar Al Ojaili
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