Risk Management and Value Engineering _ Unit 4 _ Construction Management _ Final Year (BE) _ Department of Civil Engineering _ TAE _ SPPU _ by Shrikant R. Kate

SPPU
BE CIVIL ENGINEERNG
Construction Management
© Mr. Shrikant R. Kate 1
Unit :4A
Risk Management
Shrikant R. Kate
BE Civil, M Tech Construction Management

Syllabus
• Elements of risk management and value engineering.
• Risk management. Introduction, principles, types,
origin, risk control, use of mathematical models:
sensitivity analysis
• Break even analysis, simulation analysis, decision tree
analysis
• Risk identification, analysis and mitigation of project
risks, role of insurance in risk management
• Value engineering Meaning of value, value analysis,
value engineering and value management
• Energy resources, consumption patterns, energy cost
escalation and its impact.

Introduction
• Risk – possibility of exposing to danger,
hazard, loss, injury, etc.
• From investment point of view, RISK can be
defined as variability of returns
• Types:
Risk
Credit Risk
Interest
Rate Risk
Market Risk
Liquidity
Risk
Operational
Risk

Identification of risk
Risk Management
Risk Mitigation
Risk Transfer
Risk Deferred
Risk Reduction
Risk Acceptance
Risk Avoidance
Risk Sharing
Risk Monitoring and Control
S
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Benefits of Managing Project Risks
• All the issue/ problems of the project are classified,
understood and allowed for right from the start
• Pre planned contingency plan provides clearer
definition of the specific risk associated with the
project
• Risk response decisions are supported through analysis
of available data
• It will encourage problem solving and provides
innovative solution to risk problems with a project
• Creates environment for efficiently and effectively
manage the risk and it will be helpful to aware people
in risky situation well in advance

Role of Risk Manager
• To identify, analysis and evaluate the risk with
required effects and causes
• Categorised risk according to their severity i.e.
normal, insignificant and serious risk
• With the help of effective project management
tool find out suitable mitigation techniques
• Train the employees in organization i.e. provision
of safety
• Training programs
• Preparation of report which is effective in
decision making
• Review of risk throughout the project

Risk Management and Insurance
• Risk management includes insurance coverage
which is used to minimize the cost associated
with certain type of risk
• It deals with pure risk which may cause
financial loss
• Pure risk can again classified as:
Risk
Property
Risk
Liability
Risk
Personnel
Risk

A. Property Risk : loss of property from natural
causes or fire, loss in business during
repairing work
B. Liability Risk : Injury or death of employees,
violations of law and regulations,
mistreatment to employee
C. Personnel Risk : loss of key personnel

Tools for Risk Analysis
1. Break-Even Analysis
2. Decision Tree Analysis
3. Simulation
4. Sensitivity Analysis

Break-Even Analysis
• Break-even analysis is a study of costs, revenues and
sales of a firm and finding out the volume of sales
where the firm’s costs and revenues will be equal.
• The Break-even point is the zone of no-profit and no-
loss as the costs equal revenues.
• Uses:
1. Determination of sales price which will be helpful for
getting desired profit
2. Fixation of sale volume level to cover a given return
on capital employed
3. Forecasting costs and profits as a result of change in
volume
4. Determination of costs and revenue at various levels
of output
5. Impact of increase or decrease in fixed and variable
cost on profit © Mr. Shrikant R. Kate 10

Example
OUTPUT IN
UNITS
TOTAL
REVENUE
PRICE RS.4/-
PER UNIT
TOTAL FIXED
COST
TOTAL
VARIABLE
COST
TOTAL COST
0 0 300 0 300
100 400 300 300 600
200 800 300 300 600
300 1200 300 900 1200
400 1600 300 1200 1500
500 2000 300 1500 1800
600 2400 300 1800 2100

Assumptions
• Some assumptions are made in illustrating the
BEP:
1. The price of the commodity is kept constant at
Rs.4/- per unit. i.e., perfect competition is
assumed.
2. Therefore, the total revenue is increasing
proportionately to output.
3. All the units of output are sold out. The total
fixed cost is kept constant at Rs.300/- at all levels
of output.
4. Then total variable cost is assumed to be
increasing by a given amount throughout.

Decision Tree Analysis
• A decision tree is a decision support tool that
uses a tree-like graph or model of decisions and
their possible consequences, including chance
event outcomes, resource costs, and utility. It is
one way to display an algorithm that only
contains conditional control statements.
• Decision trees are commonly used in operations
research, specifically in decision analysis, to help
identify a strategy most likely to reach a goal, but
are also a popular tool in machine learning.

• Advantages:
1. Simple to understand and interpret
2. Allows addition of new possibilities
3. Helps to find out worst, best and expected
values of different scenarios
• Disadvantages:
1. If any value is not fixed then calculations
become more complex
2. For data it include more categorical variables
with different number and levels

Sources of Risk
A. External environmental sources:
1) Political and Legal
2) Design and Specification
3) Financial and Economic
B. External environment unknown uncertainties:
1) Natural calamities
2) Ecological
3) Safety and Health
C. Internal environmental sources:
1) Scope change, time overrun and cost overrun
2) Change in technology
3) Quality and specification failures
4) Leadership and organizational failure
5) Resource failure
6) Contractor failure © Mr. Shrikant R. Kate 18

Risk check list for building project
1. Project scope risk
2. Design and specification risk
3. Quality risk
4. Time overrun risk
5. Cost overrun
6. Leadership risk
7. Organisational risk
8. Physical resources mobilization and utilization risk
9. Technology risk
10. Contractual risk
11. Political, legal and social risk
12. Financial and economic risk
13. Safety, health and environment risk
14. Funding failure risk
15. Communication and network failure risk© Mr. Shrikant R. Kate 19

Simulation
• Simulation is an imitation of reality
• Ex. Testing of aircraft model in a wind tunnel from
which we determine the performance of actual
aircraft under real operating condition
• Types:
1. Continuous models: Deals with system whose
behavior changes continuously with time
2. Discrete models: Deals primarily with the study
of waiting lines, with the objective of
determining such measure as the average
waiting time and the length of queue.

Advantages of Simulation
• Many important managerial decision problems
are too intricate to be solved by mathematical
programming and experimentation with the
actual system, even if possible is too costly and
risky.
• Through simulation, management can foresee
the difficulties and bottlenecks which may come
due to the introduction of new machines,
equipment or process. It thus eliminates need of
costly trial and error method of trying out the
new concept on real method and equipment.

Advantages of Simulation
• Simulation has advantage of being relatively free
from mathematics and thus can be easily
understood by the operating personnel and non
technical managers. This helps in getting the
proposed plans accepted and implemented
• Simulation model are comparatively flexible and
can be modified to accommodate the changing
environment of the real simulations
• Computer simulation can compress the
performance of system over several years and
involving large calculation into a few minutes of
computer running time

Limitations of Simulation
• If a particular type of problem can be well
represented by mathematical model the
analytical approach is considered to be more
economical, accurate and reliable
• Simulation does not produce optimum result
• In very large and complex problem, the large
number of variables and the inter relationship
between them make the problem very
unwisely and hard to program
• Simulation is by no means a cheap method of
analysis

Applications of Simulation
• Simulation is quite versatile and commonly applied
technique for solving decision problem
• In the field of basic science it has been used to
evaluate the area under curve, to estimate the value of
phi in matrix, inversion and study of particle diffusion
• In industrial problem including the shop floor
management, design of computer system, design of
queuing system, inventory control, communication
network, chemical processes, nuclear reactor and
scheduling of production process
• In business and economic problems, including
customer behavior, price determination, economy
forecasting and capital budgeting
• In the study of project involving risky investments

Monte Carlo Simulation
• This method was developed during world war
2 to study how far neutrons would travel
through different materials
• The technique employs random number and is
used to solve problems that involve
probability and wherein physical
experimentation is impracticable and
formulation of mathematical model is
impossible.

Sensitivity Analysis
• From All our possible decision , we take final
decision as acceptance and rejection of proposal.
• We Select one alternative from different possible
alternatives.
• In such case, we consider value of different
variable like, initial cost , receipts, interest rate.
• The effect of such variations are taken into
account in sensitivity analysis.
• So Manager will get idea about the effect of these
variables, to take appropriate decision.

Sensitivity Analysis
• sensitivity analysis is used where accurate value
of variable are not known.
• The calculation are repeated but with one
variable altered by known amount.
• To find out what will happen to net present worth
wrt some investment , when value like incoming
or outgoing value varies from fix values.
• sensitivity analysis help for decision of proposal
acceptance and rejection , economic decision.

Unit 4B-Value Engineering

Introduction
• Importance of value engineering came into
existence in world war II
• Due to shortage of critical resources there was
need to adopt changes in methods, materials
and traditional design methods, out of which
many changes were beneficial to reduce cost

Definition
• Value Engineering is defined as systematic
objective and analytical approach to effectively
identify unnecessary costs in construction.
• Unnecessary cost are those which do not provide
any enhanced quality appearance, utility or
improved life
• It is estimated that by adopting value engineering
techniques savings up to 5-10% on large
construction project can be achieved

Value Analysis
• Value analysis consists of elimination of
unnecessary cost reduction without affecting
appearance and quality of product
• It consist of providing best quality product to
customer at possible lowest cost
• The meaning of value can be varying from
person to person or organization to
organization

Aim of Value Analysis
• Save Money
• Increase profit
• Time consideration
• Quality problems
• Standardization
• Modify and improve the product design
• To ensure greater return from capital
investment
• Increase the efficiency of organization

Types of
Value
Cost
Value
Exchange
Value
Use or
Functional
Value
Esteem
Value

Types of Value
1. Cost Value: consist of cost of all items that
involve in production of product
2. Exchange Value: price that the purchaser will
offer at the time of buying product which will
be totally depend on the satisfaction of
customer
3. Use Value: it is work done or performance by
component
4. Esteem Value: price paid by customer other
than use value for attractiveness of product

When to apply Value Analysis
• To improve profitability of organization at any
time
• Introduction of new design to organization or
firm
• There is reduction in rate of return on capital
investment
• Firm is not able to deliver a product on time
• When cost of raw material increases abundantly
with respect to production
• Manufacturing cost per unit is increasing
• Complaints from customers regarding
performance of the product

Techniques of value Engineering
1. Find out available cost
2. Keep information of best source
3. Take ideas from expert for effective
implementation
4. Consult supplier for new ideas
5. Try to obtain maximum cooperation from the
other members in relevant department
6. Critical analysis of existing configuration

Advantages of Value Analysis
• Helps to achieve an improved product design
and quality
• It suggests elimination of unnecessary
function in organization
• It enhance the satisfaction of customers by
determining the exact need and expectations
of customers
• Helps to lower operating and maintenance
cost of organization
• Helps to improve efficiency of resources

Procedure of
Value Analysis
Gathering Data
Analysis and
Valuation of
Function
Generation of
ideas and
evaluation of
substitutes
Implementation
and
Regularization

Application of VE in road and building project
• To understand the behaviour of driver and
environment in which they operate
• Factors interacting in driving environment are:
1. Behaviour of driver (perception and reaction
time)
2. Vehicle (height, weight, length)
3. Roadway (design speed, super elevation,
shoulder width, side slope)
4. Traffic control devices
5. Road environment
• The principle approach of VE in construction is
focusing, elimination or modification of any
component of facility that adds cost without
contributing to functionality and safety© Mr. Shrikant R. Kate 42

Application of VE in building project
• Construction process has many components such
as concept, design and drawing, details of project
and construction
• Unnecessary costs are determined to be
eliminated from the project so that value of
building is increased and resources are not
wasted
• Value can be increased by:
1. Reduction in construction production cost
2. Finishing the job before time schedule
3. Quality improvement and correction
4. Reducing mistakes and deficiencies to minimum

Value Management
• Value Management is service that is provided
to maximize the function development of
project from initiation stage to completion
stage of project
• Value management aims to motivate people,
develop skill of people and maximizing the
overall performance of an organization
• Value management is used to enhance the
value of construction project by broking down
project into various stages

Stages Involved in
Value Management
1. Orientation Phase
2. Information Stage
3. Creative Phase
4. Evaluation Phase
5. Development Phase
6. Presentation Phase
7. Post study phase / follow up
phase

Phases in Job Plan

Sources of Energy
1.Non-Renewable or conventional
energy sources- eg. - Timber, fossil like
coal,
2. Renewable or Non-conventional
energy sources- eg. – solar energy ,
wind energy, biomass energy, tidal
energy.

Factors affecting Energy Consumption of
Building
1. Weather : Energy is used for heating and
cooling purpose (variation)
2. Production levels : Production of energy is
directly proportion to consumption of energy
3. Occupancy : Use of energy is more in a day as
compared to night
4. Normalize

Energy Consumption by sources :
1. Petroleum - 25th Rank greatest producer of crude Oil
2. Natural Gas – Rank below 20th
3. Coal – Reserve 90 billion tons
4. Electricity – 6th Rank in Electricity Generation
5. Hydro Power – (2000 year, 16000 MW)
6. Wind Power – 5th Rank in Power Installation
7. Solar Technologies- 2 ½ % of total power generated

Thank You

Risk Management and Value Engineering _ Unit 4 _ Construction Management _ Final Year (BE) _ Department of Civil Engineering _ TAE _ SPPU _ by Shrikant R. Kate

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Risk Management and Value Engineering _ Unit 4 _ Construction Management _ Final Year (BE) _ Department of Civil Engineering _ TAE _ SPPU _ by Shrikant R. Kate