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ASC Proceedings of the 41st Annual Conference
University of Cincinnati - Cincinnati, Ohio
April 6 - 9, 2005         
 
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:
 
  1. Risk Identification;
  2. Risk Assessment;
  3. Risk Response; and
  4. 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:
 
  1. Risk Identification;
  2. Risk Assessment;
  3. Risk Response; and
  4. 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.