-
- Developing a Graduate-level Course in Construction
Risk
-
- David N. Sillars, Ph.D., P.E.
- Oregon State University
- Corvallis, OR
-
The instruction of risk is an important part of a
construction management education. The nature of risk, however, is
difficult to fully teach in a crowded undergraduate curriculum, especially
when most undergraduate education focuses on formula-driven results that are
derived with certainty. Learning risk does require this understanding of
the basics of formulaic analysis, yet it also requires a certain maturity of
experience in the world of uncertainty. A graduate-level risk management
course provides the opportunity to meet both these criteria. This paper
discusses the need to strongly reinforce the uncertain nature of risk events
and the subjective nature of risk evaluation, by supplementing standard
texts with heavy use of alternate readings, guest lectures and continual
case study review. The use of case studies is particularly important,
providing students with the ability to practice risk awareness,
identification and evaluation in a complicated environment under conditions
of imperfect information.
-
-
Key words: Risk, Graduate,
Curriculum
-
-
- Background
-
- In a typical undergraduate construction management
curriculum, most of the instructional hours focus on science and
engineering, and on construction management coursework such as scheduling
and estimating that accounts for the elements of the construction process.
In accordance with criteria set out by the American Council for Construction
Education (ACCE), a post secondary construction education degree program
should consist of five specific curriculum categories—general education,
mathematics and science, business and management, construction science, and
construction—with some allowance for additional institutional hours. The
minimum total requirement is 180 quarter hours (120 semester hours), of
which only one sixth is dedicated to construction (American Council for
Construction Education (ACCE) 2004). It is the within this sixth of the
curriculum that ACCE suggests construction risk is to be taught along with
broad subjects such as project management, estimating, accounting,
scheduling, construction law and safety. While risk is taught within these
constraints, it is difficult to deliver a detailed treatment within such a
crowded agenda.
-
- Typical courses in standard undergraduate mathematics,
science, and construction topics train students to solve problems using
techniques that favor formulas which produce singular results and focus on
either individual projects or portions of projects under given conditions.
The use of formula-based teaching encourages students to solve problems
using established methods and algorithms. The expectation is that there is
a specific answer, and it is generally the methodology to achieve that
answer that is taught. It is expected that if a student (or any student for
that matter) consistently follows the prescribed formulas, then the same
answer will result. This type of instruction is provided in the interests
of establishing the basics, and in the Author’s experience, mimics much of
professional practice.
-
- The use of formulas to reach a specific result is
deterministic. Deterministic project evaluation seeks to find a
singular answer to project questions, such as how long it will take to
complete the project, or what the final cost will be. Industry
practitioners are familiar with determinism. Competitive bidding procedures
regularly ask for a singular project cost, and even evolving bidding
techniques, such as A+B bidding used in transportation, also asks for
a specific project completion time. Yet, industry practitioners also know
that rarely does a project’s outcome meet the systematically determined cost
or time estimates.
-
- Construction project management is becoming increasingly
complex; so, too, is its instruction. Covering the basics required by ASC
and industry for entry-level project managers requires increasing amounts of
instruction. Meanwhile, in this environment of significantly increased
tuition, there is increasing pressure to become more efficient in the
instruction program to allow students to enter the job market as quickly as
possible. Little time is available for adding instruction that teaches
students to deal with the unsolved industry problem of project results that
regularly vary from predicted goals.
-
- In practice, project outcomes vary and deterministic
techniques are inadequate to forecast project outcomes. Techniques
frequently used to address this variability are safety factors (in
engineering design), contingency funds or contingency time (in project
management) or insurance. These techniques are often taught as risk
management in undergraduate engineering programs. More sophisticated
techniques for addressing this project variability, or risk, requires
significantly more instruction. In the environment of decreasing
instructional time and increasing instructional content, these more
sophisticated techniques of risk control may not be taught at the
undergraduate level.
-
- Effectively teaching comprehensive risk management
techniques requires significant amounts of instruction time and a firm
prerequisite grasp of deterministic analysis techniques; instructing risk
management at the graduate level provides opportunity for these conditions
to exist. A graduate-level risk management course was recently added to the
courses available at Oregon State University. In addition to populating the
class with students who have completed their undergraduate educations, the
majority of students have significant amounts of industry experience. This
experience lends a certain amount of maturity to the understanding of the
nature of risk, including practical experience with varying project
outcomes.
-
-
- Risk
-
- Risk, often defined as the likelihood of a hazardous
outcome, is an important issue in the construction industry and risk exists
at all contractual levels. In a presentation to top industry executives,
Ralph Peterson, CEO of CH2M Hill, observed that “We do a lousy job of
understanding and pricing risk, particularly those with a low chance of
occurring and high consequence”(ENR 2004). Risk is often managed passively,
through techniques such as safety factors, contingency funds, contractual
risk shedding and insurance. Instruction on means to identify and reduce
risk would benefit the industry as a whole.
-
- Increasingly, Owners look to shift their risk toward
construction engineering and management (CEM) professionals(Tulacz 2003).
While some CEM firms have mimicked the Owners’ practice of contractually
shedding risk, the fallout from this practice has been increasing
adversarial relationships with subcontractors, inadequate management of risk
events, and increasing insurance premiums(Grynbaum 2001). To preserve a
balanced risk position and become competitive, CEM firms will need to find a
way to directly manage many of the project risks that have been otherwise
shed(Construction Industry Institute Contracts Task Force 1988). As this
trend continues, these CEM firms will require employees who have the ability
to use state-of-the-art techniques to recognize and manage this risk issue.
-
-
- Risk management instruction
-
- There are many currently available texts on risk; review
of several indicates a somewhat standard methodology for risk
management(Chapman and Ward 1997; Grey 1995; Smith 1999; Wideman 1992).
This methodology may be summarized in the following four steps:
-
-
- Risk Identification;
-
- Risk Assessment;
-
- Risk Response; and
-
- Risk Control.
Textbooks available on risk management methodologies
delve deeply into systematic, quantitative approaches for assessing and
responding to identified risks. Such approaches include systems for
prioritizing identified risks, selecting among alternatives, and valuing
risk events across a variety of probability profiles. Beliveau and Peter (Beliveua
and Peter 2002) report that students in construction engineering management
and civil engineering tend to favor technical approaches, such as those used
for risk assessment. These methods provide consistency, structure and
objectivity to risk assessment, creating a common platform across which
other engineers and managers may discuss the assessment and create
management plans to deal with the consequences. In the author’s experience,
students in the risk management course respond well to these quantitative
methods.
Most textbooks, however, do not deal well with the human
side of risk. The quantitative methods are well developed and are becoming
increasingly sophisticated, yet these methods rely on an identification of
risk that is still largely judgment-based. Although all of the texts cited
above recognize this situation, the discussion of judgment-based risk
identification presented in those volumes is very limited—almost in footnote
fashion—and certainly secondary to the treatment of the quantitative
methods. Yet, the principle that the output of a formula or algorithm can
only be as good as the input certainly applies here. It is the
identification of which risks to assess that becomes the critical factor.
Risk identification occurs naturally to us all. One
makes decisions everyday which are based on whether one outcome is more
likely than another: Which checkout line should one enter at the grocery
store to best decrease delay; Should one open that email with no “subject”
line or should it be deleted for fear that it will cause a computer virus?
These decisions are made quite naturally, and the mechanisms behind these
types of risk decisions are only partially understood. Usually, these types
of decisions involve three valuations—the likelihood of the event, the cost
of the outcome, and the whether or not that cost is significant to those
affected by the event. The use of heuristics to value among risk
alternatives in personal and professional decisions often occurs quite
casually, and frequently unreliably. To improve on the reliability of these
decisions, it helps to understand the basic processes which people use to
form judgments. Herein lays the knowledge which must be added to the
standard textbook fare to fully provide the students with a broad
understanding of risk.
Course methodologies
Problem-based learning under controlled conditions are
inadequate to provide students with an understanding of the variability of
real-world project conditions. Beliveau and Peters, and Bernold (Beliveua
and Peter 2002; Bernold 2003) argue that current methods used for
construction management education should be expanded to include more
open-ended problems with varying conditions, through which students become
more aware of the processes by which they solve problems and can adapt to
varying learning conditions. Bernold defines this as metacognition.
This process of understanding the means by which engineering judgments are
made to arrive at solutions is important for students. To be able to
understand what causes a project engineer or manager to prefer one solution
over another under uncertain risk conditions must be studied.
Current risk management texts must be supplemented with
other texts, guest lecture, and case studies that introduce students to the
understanding of the human nature of risk identification and valuation.
Vick (Vick 2002), in his “Degrees of Belief”, provides such an understanding
of how these judgments arise and the effect they have on the way in which
engineers solve problems. Use of this and other writings on the means by
which human experience affects risk identification is important in the
classroom. Through this knowledge, students develop a metacognitive
understanding of how their (and others’) biases may affect the question of
project risk.
Case study use in the classroom is a powerful means
through which students are confronted with open-ended problems, better
reflecting real world situations(Banik 2003). The environments that
surround projects in case studies introduce students to the world of the
future unknown, wherein risk is found. Banik describes two types of cases—
Appraisal cases and Decision cases. Appraisal cases ask the
student to assess the project and its surroundings, to organize the
information and determine what is relevant and important in the project.
Decision cases pose a problem, and ask the student to reflect on the case
and determine the means by which the question posed can be solved within the
context of the case.
A risk management course should include both Appraisal
and Decision cases. Each type of case represents an important skill in
making judgments, the former asking the student to scan the environment and
identify which risk situations are important to resolve and the latter
providing practice in choosing appropriate methods to solve a particular
risk problem.
Course agenda
The course agenda provided below, in outline form, is
similar to many similar risk course agendas. The basic outline follows the
four standard steps, mentioned earlier, in typical risk management texts:
-
- Risk Identification;
-
- Risk Assessment;
-
- Risk Response; and
-
- Risk Control.
The distinction, from the standard text fare, found in
the proposed course agenda is on the increased emphasis of the human nature
of risk, judgment and appraisal. The following discusses each of these four
major sections, and how additional course material and case studies are used
to broaden the textbook quantitative methods available for instruction of
risk management.
Risk identification
Risk identification is the heart of a successful risk
management program. Due to its project-based nature and diversity of trade
contractors, histories of what caused project outcomes to vary are not
tracked well from project to project. Many projects rely on experienced
project personnel to identify potential risks, rather than relying on
databases (which usually don’t exist) of information that could forecast
situations which may cause hazards—cost overruns, schedule delays, physical
damage, safety losses, etc. While expert risk identification is used
throughout the industry and certainly worthwhile, this type of risk
identification is subject to the personal experiences of these experts, and
may be highly susceptible to personal biases. Before relying on these
sources, a student (and future project manager) should understand the
principles involved.
To aid the student’s understanding of these issues, the
student is provided with an initial history of the theoretical background
surrounding probability and how people perceive chance events. The use of
texts that deal with this subject, such as the aforementioned Vick’s
“Degrees of Belief”(Vick 2002), provide much needed background to this
subject. Further, the students are asked during this part of the class to
find cases, first from their personal lives and then from industry
publications such as ENR, in which some level of uncertainty exists
and how that uncertainty translates into the concept of risk.
Through discussions of the concepts of risk in personally
familiar situations and in topically current cases, students examine their
own use of the language and terms surrounding risk. Development of precise
language is very helpful in mastering the stages of risk management. Terms
such as risk, variance, opportunity, probability and the like move from
casual parlance to specific terminology used in objective analytical
methodologies.
Valuation of risk extends beyond merely listing potential
events and developing an objective cost (whether the cost is money, time or
some measure of quality). Utility theory proposes that the value of
cost is subjective, and perceptions of cost will vary among those facing
risk(Schuyler 2001). Valuing among alternatives on a purely objective basis
may prove inaccurate; rather, the difficult to appraise subjective nature of
value must be considered—the importance of a given cost may vary widely
across individuals or firms. Studying cases and discussing those cases from
multiple perspectives provides the student with a better understanding of
this concept.
Risk analysis
Risk analysis involves, primarily, some level of
quantitative analysis of previously identified risk events. Although some
refinement of the primary measures of risk events—namely likelihood and
magnitude—occurs at this stage, the analysis assumes some degree of
confidence in the holistic identification of the project risk events in the
earlier stage. Students must rely on their understanding of judgment to
recognize that limitations should be placed on the quantitative analysis.
Although tempting, outcomes cannot contain more significance than the input
allows.
Risk software, such as @Risk and Crystal Ball,
provides students with the ability to manage the quantitative aspects of
risk analysis; both commercial packages cited have academic and student
versions. Through course evaluations, the engineering students in the risk
classroom express strong interest and comfort with these analysis software
packages. Of course, these packages are incapable of differentiating how
solid or how inclusive the inputs are, yet these packages are capable of
producing output to seemingly high degrees of precision—at least it appears
so in the number of decimal places shown on the output. The important
analysis here, of course, comes not from the software but from the student
who must interpret the result and place limitations on the output based on
the student’s understanding of the depth and reliability of the risk
identification and valuation.
Case studies provide students with real world situations
in which information is broad, sometimes irrelevant, and most often
incomplete. Throughout the course, students prepare case study analyses for
presentation to the class. As a whole, the class practices the risk
principles taught, through round-table discussions of the other students’
analyses. These discussions cause students to challenge each other’s
conclusions and to become increasingly sensitive to the use of personal bias
only when defensible and also to the understanding that multiple
alternatives are often present.
Risk response
Risk response is a topic for which the graduate student
generally has some basic understanding, usually through the use of
contingency funds in cost estimates, time contingencies in schedules, or
insurance provisions. However, more sophisticated techniques for addressing
risk become available once a well-thought risk identification and analysis
has occurred. It is during the response stage that important decisions are
made to actually reduce the potential risk, not merely passively soften the
blow when a risk incident occurs.
Risk responses generally follow one of four
choices—avoidance, transference, reduction, or acceptance. When a project
creates a contingency fund against potential risks, the implication is that
the risk events are inevitable (though the likelihood of an individual
occurrence is uncertain). Some level of this “Murphy’s Law” approach of
risk acceptance is undoubtedly prudent; however, a more active approach of
risk reduction would certainly benefit most projects—reducing the amount of
contingency funds and creating more certainty in the project outcomes. Risk
reduction can only be successful, however, when the most important risks are
identified and prioritized—again, a function of human judgment.
Case study work in the classroom for risk reduction
follows a different model (Decision Cases) than that for identification and
analysis (Appraisal Cases). For identification and analysis, the students
are asked to obtain individual cases from current articles or actual project
situations and are challenged to appraise the environment and identify the
key risk events in each. On the other hand, risk response cases make better
teaching aids when developed so that the decision at hand is obvious, is
shared among the entire class, and the focus is on how best to respond to a
specific risk—essentially exploring what process to use rather than which
risk to evaluate. Here, the cases are constructed rather than found.
Risk transfer and risk avoidance are controversial risk
response subjects in the construction industry(Meir 2002). Although many
texts discuss risk transfer techniques, few capture the reality of
unbalanced contractual risk shifting and the detrimental effects that it has
on lower-tiered subcontractors. Neither legal nor project cases describe
well the cause-and-effect nature of the systemic practice of risk
shedding—usually only the consequence. In this case, an instructional
strategy which brings expertise from outside the classroom works well. Both
guest speakers—such as industry attorneys—and trade magazine articles
capture the controversy and introduce the students to the concept that
pursuing a seemingly safe strategy at one contractual tier may have
unintended long-term consequences at a lower contractual tier.
Risk control
Risk control, as the last major step in the risk
management process, is primarily an administrative process—setting goals,
measuring progress toward those goals, and reacting to unexpected change by
modifying the risk plan. Once the prior three steps of risk
management—identification, analysis, and response—have been completed, the
students return once again to more familiar territory, using techniques
similar to project management taught at the undergraduate level. There is a
major difference, however, in that the students—through case study learning
techniques—have grown to appreciate the variable nature of the information
with which they have developed their project risk control plan. In
addition, they have become more attuned to which portions of the project may
create the most havoc, and which information has the least (or greatest)
reliability.
Conclusion
Much of the undergraduate construction management
learning experience is deterministic—learning to derive a best answer using
specific formulas and techniques for solving a project problem. This type
of learning is an outgrowth of the scientific process of prescribing
predictive formulas to describe patterned events.
Real world experience, however, indicates that project
events vary and that project outcomes also vary in turn. In order to manage
projects and also deal with this variability, the foundation of
deterministic analysis is necessary, but so also is an understanding of
stochastic variance and experience and judgment. Graduate-level coursework
in risk has the advantage of having students who have a grounding in
deterministic methods, yet these students also carry greater experience and
a desire to better understand their observations that deterministic
solutions rarely match real world outcomes.
Developing a graduate course in risk management has
involved developing problems that are case-study based. Case studies do not
establish known parameters and do not limit the risk problem to a closed
environment. Open problem solving using case studies asks the student to
develop a sense of judgment and to explore problems using multiple criteria,
often with incomplete information. Case studies shared in class allow
alternate interpretations and methods to be debated and weighed—a skill
necessary for dealing with projects found in the field.
Current texts in risk management deal largely with the
quantitative techniques to resolve risks once they are identified and
valued. Little space is devoted to the actual identification and valuation
itself. For a more thorough study of risk management, it is better to
broaden cousework beyond a given text, and provide the student an
understanding that the real art of management lies in the less tangible
concepts of visualization, intuition and judgment. This broadening occurs
through the use of supplemental texts, guest lectures, and case studies.
As construction management research expands into
resolving questions of risk perception and as experiential databases become
more prevalent, then these future developments may also be brought into the
classroom.
References
American Council for Construction Education (ACCE).
(2004). "Document 103: Standards and Criteria for Accreditation of
Postsecondary Construction Education Degree Programs." 103, American
Council for Construction Education, San Antonio, TX.
Banik, G. C. "Writing an Effective Construction Case
Study." 39th Annual Conference of the Associated Schools of Construction,
San Antonio, TX.
Beliveua, Y. J., and Peter, D. "Educating the Builder of
Tomorrow - A Constructivist Model." 38th Annual Cconference of the
Associated Schools of Construction, Blacksburg, VA, 221-230.
Bernold, L. E. "To Save Our Profession: Higher Education
in Construction Needs a Radical Change." Construction Research Congress
in Construction, Reston, VA.
Chapman, C., and Ward, S. (1997). Project Risk
Management, John Wiley & Sons, Ltd., Chichester, West Sussex, England.
Construction Industry Institute Contracts Task Force.
(1988). "Contract Risk Allocation and Cost Effectiveness." 5-3,
Bureau of Engineering Research, University of Texas at Austin, Austin, TX.
ENR. (2004). "Top 500 Executives Focus on Deepest
Industry Challenges." ENR, 253(23), 16-16.
Grey, S. (1995). Practical Risk Assessment for Project
Management, John Wiley & Sons Ltd., Chichester, West Sussex, England.
Grynbaum, J. (2001). "Risk-Shifting Contracts Hurt."
ENR, 247(12), p63.
Meir, J. (2002). "Risk-shifting Contracts Hurt." ENR,
248(20), p59.
Schuyler, J. (2001). Risk and Decision Analysis in
Projects, Project Management Institute Inc., Newton Square.
Smith, N. J. (1999). Managing Risk in Construction
Projects, Blackwell Science Ltd., Oseny Mead, Oxford, England.
Tulacz, G. J. (2003). "CM-at-Risk Continues to Gain As
Owners Look to Shift More Risk." ENR, 250(23), 48-49.
Vick, S. G. (2002). Degrees of Belief, ASCE Press,
Reston, VA.
Wideman, R. M. (1992). Project & Program Risk
Management: A Guide to Managing Project Risks and Opportunities, Project
Management Institute, Newtown Square, PA.