This paper describes an exercise that uses the game of poker to teach students the fundamentals of construction risk management.  The paper describes the need for risk management, a brief summary of risk management theory, and a description of how poker games can be used to educate students on risk identification, assessing risk probability, and mitigating or eliminating potential construction risks.

 

Key Words: Construction risk management, risk identification, risk assessment, risk mitigation, poker games, risk simulation

 

 

 

In most construction projects there are substantial risks that are balanced by the reward of a potential profit. Indeed, a contractor quipped that running a construction business is a lot like gambling in Las Vegas: “you never really know if you have a winner or a loser until your project is finished and all the bills are in” (Goodman, 1997).

 

But given the risks that are inherent in the construction business, many major contractors have started to analyze risks and rewards through a management system called “risk management”.   Risk Management can be defined as a formal process used to identify, control, and minimize the impact of uncertain events.  If contractors can minimize or eliminate these uncertain events or risks, then they typically can maximize their schedules, improve quality and increase the profitability of their projects.  As a result, there is a growing need for professionals who understand how to manage and control contractual, financial, and environmental, safety, subcontracting and other risks.

 

Given this increasing need, our program recently integrated the study of Risk Management into a third year class called Construction Safety and Risk Management (CM 391). The primary objectives of this three-semester hour class are:

 

 

A large portion of the class is dedicated to developing our student’s understanding of construction safety, but approximately one month of instruction is reserved for the subject of construction risk management.  This paper will describe a particular exercise that uses the game of poker to help students understand how to manage construction risks.

 

Risk Management

 

To put this broad topic in perspective, some background information on risk management may be helpful. In general, risk management is a strategy that can be divided into four broad areas:  Risk Identification, Risk Assessment, Risk Mitigation, and Risk Documentation.

 

Risk identification is the first step in the management process, where managers, supervisors and trades people are asked to develop lists of potential risks associated with a project or even the specific tasks associated with an activity.  A complete description of these tasks is beyond the scope of this paper, but a thorough analysis of the subject can be found in Construction Risk: A Guide to the Identification and Mitigation of Construction Risks: by John Revere  (Revere, 2003).  Sometimes this part of the process occurs as a management brainstorming session.  Other firms use standardized checklists to identify safety problems.   Some broad areas of interest include :

 

 

The second step is the risk assessment of potential project risks.  Assessing a risk really means understanding the probability that the risk will occur during the course of the project.  For instance, a cut that requires first aid carries a much higher probability than a tower crane collapse or shoring failure. Because construction risks are varied and unpredictable, risk assessment is the most difficult part of the process. Some professional risk managers use historical data, and sophisticated computer modeling techniques to gauge potential construction risks, while others use “gut instinct” or prioritization to develop a sense of which risks will cause the most serious problems.  Chapman and Ward’s Managing Project Risk and Uncertainty  provides a comprehensive look at statistical systems for measuring uncertainty (Chapman & Ward, 2002).

 

Once the risks have been identified and prioritized, managers take steps to mitigate or eliminate the most serious problems. There are several strategies for risk mitigation.   For example, some liability risks can be transferred through subcontract indemnification clauses.  Other risk problems can be minimized through specific insurance policies like owners and contractors protective liability (OCP), environmental pollution coverage, and workman’s compensation.   The contractor routinely absorbs other risks like weather delays.  Again, this is an area that deserves discussion that is beyond the scope of this paper, but a useful guide on the subject is Opfer’s paper on Construction Insurance (Opfer, 2003).

 

The final stage in the risk management process is the documentation and evaluation phase.  Good risk management is dependent upon good data like accident rates, contract failures, warranty claims, insurance claims etc.  Sophisticated risk managers continually collect and update risk data to ascertain the trends that can lead to future problems.

 

Risk Poker

 

A good way to get students to understand the tricky thinking associated with risk management is to use the game of poker as an educational tool.   According to news clipping services, interest in the game of poker has surged over the last two years with the broadcast of poker tournaments on major television networks.  The New York Times notes that interest is particularly high with young adults – our primary audience as construction educators. 

 

When played well, a poker player is continually forced to assess the odds of winning a particular hand against the risks of losing the hand.  Peter Steiner describes the process well, “In turn this means that you have to pay attention to the relationship among the probability of holding the winning hand, and the amount you expect to spend to be in on the call, and the amount you expect to win if you have the winning hand.” (Steiner, 1996)  In short, poker is a classic game for understanding how risk is related to reward, and this is the essence of risk management.

 

With these thoughts in mind, the author developed the following “Risk Poker” exercise to help students develop an understanding of how risk management occurs in construction sites. Students become associated with examples of construction risks, how to develop an understanding of risk probability, and how to minimize those risks through insurance, risk transfer, and risk absorption.  They also get to play a little “low ball” poker.

Risk Poker Objectives

This game was designed to give students an understanding of risk assessment and risk transfer.  More specifically the game will look at

 

 

Rules of the Game

 

1. There are five players in each game.  One person acts as the dealer.
2. Each player acts as a construction company.  They must keep track of their bets and also keep a running tally of their earnings or losses  (See Scorecard).  The dealer enforces the rules and acts as an objective arbitrator for disputes.
3. Each hand will consist of a five cards dealt face down. Each hand played will represent one project.  Ten projects will be constructed. 
4. Each team starts with 25 chits. These tokens represent their company’s working capital. Each player must ante 1 chit to play each hand.  The ante represents the General Conditions for the project.
5. Each player can bet or buy insurance coverage prior to the start of the hand by placing additional chits in the pot.
6. A winning hand is a hand that has no pairs, three or four of a kind, or straights and flushes.  A winning hand pays 5 chits.
7. Losses will be assessed according to the hands drawn.  For instance, if you draw two pair and you haven’t purchased the appropriate insurance you’ll have to pay a fine of 25 chits. See the loss schedule for details
8. As soon as you loose all of your chits, your company has gone bankrupt.
9. Company with the most chits wins.

To help prepare students for the exercise, have them read and review Opfer’s article (2003)on construction insurance that was recently published in the Associated Schools of Construction proceedings.  This document can be found online (http://www.asceditor.usm.edu/archives/2003/Opfer03.htm).

 

Before starting the game, review the game of poker and talk in general about the idea that risk is related to reward.  The author hands out a sheet (table one) that describes probabilities of different poker hands, then asks the students to carefully review and discuss the odds associated with each possible event. For instance, in a fifty two card deck in which you were dealt five cards, you would have a 42% chance of getting a pair.  Three of a kind is much harder to get, and only occurs in 2% of all the hands that are dealt  (Steiner, 1996). Ask the students to note the events that will have the highest probability of occurring during the course of their jobs.

 

After discussion and feedback, hand out a second sheet (Table two) that describes the loss schedule of each “project”.  For instance if you get two pair, your company must pay 25 chits to cover the loss. Similarly, if your company is dealt four of a kind – an extremely rare event – you are immediately forced into bankruptcy.  As a springboard for discussion, ask the students to consider which risks have the highest probability, and to also analyze the risks with the lowest probabilities.

 

A third sheet summarizes how some risks can be transferred or eliminated.  The loss schedule (Table three) is developed so that if students try to cover all risks they will have difficulty turning a profit. This forces the students to assess the risks using their probability.

 

Break the students into groups, and ask them to carefully read the rules for the game. Ask the dealer to distribute the chits (paper clips are handy and cheap) to each player, and ask them to enforce the rules and monitor progress. 

 

 

Discussion Questions

 

Once the games are played and the scorecards are tallied, use the following questions to facilitate discussion:

 

While the game is still in development, we’ve had positive feedback from students on this exercise as a useful learning tool.  The game provides a simple system for explaining risk and reward thinking in construction, and allows students to develop some ideas about risk probability, insurance practice and risk mitigation.  The author is in the process of developing this exercise as a computer game that can be used as a homework assignment in large classes.

 

References

 

Chapman, C, &  Ward, S. (2002).   Managing Project Risk and Uncertainty.  New York, NY. John Wiley and Sons, Ltd.

 

Davis, S.D.& Prichard, R (2000).  Risk Management & Insurance and Bonding for the Construction Industry.   Alexandria, Va.  Associated General Constructors of America.

 

Goodman, Neil  (producer) (1997)   Superbridge.  Video presentation developed for Public Television. Boston, MA. Public Broadcasting Service.

 

Opfer, N.D. (2003) Current Construction Issues in Contractor’s Commercial Liability Insurance Coverage.   Proceedings of  39^th Annual Conference of the Associated Schools of Construction.  University of Nebraska  Lincoln.  Associated Schools of Construction.

 

Revere, J.  (2003).  Construction Risk: A Guide to the Identification and Mitigation of Construction Risks.  London, U.K. Ist Books Publishing.

 

Steiner, P. O. (1996).  Thursday Night Poker:  New York, N.Y. Random House Publishing,