risk management in projects by prof. mahajanrisk management,nicmar,pune
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Risk Management
By Vilas Mahajan
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The Risk
Exposure to the possibility of loss, injury ,or
other adverse or unwelcome circumstance ; a
chance or situation involving such a possibility
Oxford Dictionary
Effect of uncertainty on objectives
~ Uncertainties include events (which may or not
happen) and uncertainties caused by a lack ofinformation or ambiguity ..ISO Guide -73
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The Risk
Future problems that can be avoided or mitigated,rather than current ones that must be immediatelyaddressed.
Risk can be seen as relating to the Probabilityofuncertain future events.
The probable frequency and probable magnitude offuture loss.
Risk is ..the product of ( probability of a hazardresulting in an adverse event) * ( severity ofevent) -OHSAS
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The Risk
Risk versus Uncertainty :
~ Uncertainty is immeasurable ,not possible to
calculate ,while risk is measurable.
~ One may have uncertainty without risk but not risk
without uncertainty.
~ Uncertainty is the absence of information about
future events
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Risk Management
What is Risk Management ?
~ Process steps that enable improvement in decision
making
~ A logical and systematic approach
~ Identifying opportunities
~ Avoiding or minimising losses
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Risk Management
What is Risk Management ?
~ Risk Management is the name given to a logical and
systematic method of identifying, analyzing, treating
and monitoring the risks involved in any activity or
process.
~ Risk Management in Project is aboutproactively
working with project stakeholders to minimise the riskand maximise the opportunities associated with project
decisions.
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Risk Management
The aim is not to avoidrisk but to make moreinformed decisions to ensure that project objectivesare achieved and , ideally, exceeded.
The Challenge is not to avoid risk , but to take
calculated risks, by recognising and managingeffectively
Risk Management is a proactive process of lookingforward and is fundamentally different from CrisisManagement.
~ Crisis Management is reactive and backwardlooking.
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Risk Management
What is Risk Management ?~ Risk Management is a methodology that
help managers make best use of their
available resources.
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Risk Management
Who uses Risk Management ? Risk Management practices are widely used in public and the
private sectors, covering a wide range of activities oroperations.
These include:
~ Finance and Investment
~ Insurance
~ Health Care
~ Public Institutions
~ Governments
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Risk Management
How is Risk Management used?~ The Risk Management process steps are a
generic guide for any organization, regardless
of the type of business, activity or function.
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Risk Management
The basic process steps are:~ Establish the context
~ Identify the risks
~ Analyze the risks
~ Evaluate the risks
~ Treat the risks
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Risk Management
Risk is dynamic and subject to constant change, so the
process includes continuing:
~ Monitoring and review
~ Communication & consultation
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Risk Management
The Risk Management process:
~ Establish the context:
- The strategic and organizational context in
which risk management will take place
- For example, the nature of business, the
risks inherent in the business and the businesspriorities.
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Risk Management
The Risk Management process:
~ Identify the risks :
-Defining types of risk, for instance, Strategic risks to
the goals and objectives of the organization.- Identifying the stakeholders, (i.e., who is involved or
affected).
- Past events, future developments.
~ Monitor and review
~ Communicate & consult
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Risk Management
The Risk Management process:
~ Analyze the risks
- How likely is the risk event to happen? (Probability and
frequency?)
- What would be the impact, cost or consequences of
that event occurring? (Economic, political, social?)
~ Monitor and review
~ Communicate & consult
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Risk Management
The Risk Management process:
~ Evaluate the risks
- Rank the risks according to managementpriorities, by risk category and rated by
likelihood and possible cost or
consequence.
- Determine inherent levels of risk.
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Risk Management
The Risk Management process:
~ Treat the risks :
- Develop and implement a plan with
specific counter-measures to addressthe identified risks.
~ Consider:
- Priorities (Strategic and operational)
- Resources (human, financial and technical)
- Risk acceptance, (i.e., low risks)
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Risk Management
The Risk Management process:
~ Treat the risks :
- Document your risk management plan
and describe the reasons behind selecting
the risk and for the treatment chosen.
- Record allocated responsibilities,monitoring or evaluation processes, and
assumptions on residual risk.
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Risk Management
The Risk Management process:
~ Monitor and review :
- In identifying, prioritizing and treating risks,
organizations make assumptions and decisions
based on situations that are subject to change,
(e.g., the business environment, trading patterns, or
government policies).
- Risk Management policies and decisions must be
regularly reviewed.
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Risk Management
The Risk Management process:~ Monitor and review :
-Risk Managers must monitor activities and
processes to determine the accuracy ofplanning assumptions and the effectiveness of the
measures taken to treat the risk.
- Methods can include data evaluation, audit,compliance measurement.
~ Communicate & consult
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Risk Management
Evaluate the risks
- After identifying and analyzingthe risks, you can evaluate .
What is the likelihood of the risk event occurring?
- Almost certain- Likely
- Moderate
- Unlikely- Rare
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Risk Management
What is the consequence if the risk event
occurs?
- Extreme
- Very high
- Moderate
- Low
- Negligible
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Risk Management
Evaluate the risks :
- Describe or quantify exactly what is theLikelihood and Consequence terms meanto you.
- This helps in ensuring a consistent approach infuture risk assessment and review andmonitoring.
- It promotes a common understanding withinthe Administration.
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Risk Management
Evaluate the risks :
After establishing Likelihood and
Consequence, tabulate the workouts..
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Risk Management Evaluate the risks :
Extreme Very high Moderate Low Negligible
Almostcertain
Severe Severe High Major Moderate
Likely Severe High Major Significant Moderate
Moderate High Major Significant Moderate Low
Unlikely Major Significant Moderate Low Very low
Rare Significant Moderate Low Very low Very Low
k
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Risk Management
Treating the risks- Low and very low level risks can normally be
accepted, subject to on-going monitoring.
- All other risks are included in the managementplan.
- The plan catalogues the risks, the level of risk,and describes a treatment.
- The treatment is the action proposed, (andperhaps the resources allocated).
i k
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Risk Management
Treating the risks:~ Development of Risk Profiles
~ Industry audits
~ Random examinations
~ Targeted selections
~ Physical examination
~ Compliance improvement
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Risk Management
Contract Risk Management Risks are the Chances or Probabilities of Damage
or Loss.
Risks are to be ..
Identified
Understood
Evaluated and..
Mitigated
Risk Management is a subject of guesstimate of future.
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Risk Management
Contract Risk Management
Element Causing Risks..
Silence on Certain Aspects
Inadequate Specifications
Openness on Certain Aspects
Unlimited Liabilities
Limitation on Liabilities
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Limitation on Liabilities
Sellers liabilities are specified under various
clauses for identified circumstances. Theseare :
Termination of Contract - risk purchase
Warranty / Guarantee - risk purchase Defects Liability
Consequential & or indirect damages
Indemnities
Liquidated damages against delayed delivery& shortfall in performance
Limitations on Liabilities
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Limitations on Liabilities
Sellers liabilities vary as per thestipulations of individual clauses.
Put Cap on Overall Liabilities of the
Seller arising out of All Clauses in theContract.
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Limitation of Liability
Clause 17.6 :- FIDIC~ Neither Party shall be liable to the other Party
for loss of use of any Works ,loss of profit, loss ofany contract or for any indirect or consequential
loss or damage which may be suffered by the otherParty in connection with the Contract,
other than ..
(a) Under Sub-Clause16.4 (Payment on Termination)
and(b) Sub-Clause 17.1( Indemnities )
Limitation of Liabilit
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Limitation of Liability
~ The total liability of the Contractor to the Employer , under
or in connection with the Contract ,other than
(a) under Sub Clause 4.19 (Electricity, Water, and Gas),
(b) SubClause 4.20 ( Employers Equipment and Free-Issue Material),
(c) Sub Clause 17.1( Indemnities) and
(d) Sub-Clause 17.5 (Intellectual and Industrial Property
Rights),
shall not exceed the sum stated in the Particular
Conditions or ( if a sum is not so stated ) the Contract Price
stated in the Contract Agreement
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Limitation of Liability
~ This Sub Clause shall not limit liability in
any case of .
fraud ,deliberate default
or
reckless misconduct by the defaulting Party.
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Risk Management
Contract Risk Management
Force Majeure
Unforseeable Circumstances
Beyond Partys Normal Business Acumen.
Caused By An Irresistible Force.
Unavoidable Inspite Of The Reasonable Care
Beyond Partys Control.
Ri k M t
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Risk Management
Contract Risk Management
Force Majeure Events
Nature
Government Wars
Public Actions
Industrial Circumstances
Shortage Of Inputs
Risk Management
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Force Majeure
~ Clause 19.1 :- FIDICDefinition of Force Majeure
In this Clause, "Force Majeure means an exceptionalevent or circumstance :
(a) which is beyond a Partys control,
(b) which such Party could not reasonably have providedagainst before entering into the Contract.
Risk Management
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Risk Management
Force Majeure
(c) which ,having arisen, such Party could not
reasonably have avoided or overcome and,
(d) which is not substantially attributable to the
other Party.
Risk Management
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Risk Management
Force Majeure
~ Force Majeure may include ,but is not limited to,exceptional events or circumstances of the kind listed below
,so long as conditions (a) to (d) above are satisfied :
(i) war ,hostilities (whether war be declared or not ),
invasion act of foreign enemies,
(ii) rebellion ,terrorism, revolution ,insurrection ,military or
usurped power, or civil war,
(iii) riot ,commotion, disorder, strike or lockout by personother than the Contractors Personnel and other
employees of the Contractor and Sub-contractors,
Risk Management
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Risk Management
Force Majeure
(iv) munitions of war, explosive materials, ionising
radiation or contamination by radio-activity,
except as may be attributable to theContractors use of such munitions ,explosives,
radiation or radio- activity, and
(v) natural catastrophes ,such as earthquake,hurricane ,typhoon or volcanic activity.
Risk Management
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Risk Management
Force Majeure
~ Clause 19.2 :- Notice of Force Majeure
If a Party is or will be prevented from performing any
of its obligations under the Contract by Force Majeure
,then it shall give notice to the other Party of the eventor circumstances constituting the Force Majeure and
shall specify the obligations, the performance of which
is or will be prevented. The notice shall be given within
14 days after the Party became aware , or should have
became aware, of the relevant event or circumstance
constituting Force Majeure.
Risk Management
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Risk Management
Force Majeure
The Party shall having given notice, be excusedperformance of such obligations for so long as such
Force Majeure prevents it from performing them.
Notwithstanding any other provision of this Clause,
Force Majeure shall not apply to obligations of either
Party to make payments to the Party under theContract.
Risk Management
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Risk Management
Force Majeure
~ Clause 19.3 :- Duty to Minimise Delay
Each Party shall at all times use all reasonable
endeavors to minimise any delay in the performance
of the Contract as a result of Force Majeure.
A Party shall give notice to the other Party when it
ceases to be affected by the Force Majeure.
Risk Management
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g
Force Majeure
~ Clause 19.4 :- Consequences of force MajeureIf the Contractor is prevented from performing any of
his obligations under the Contract by Force Majeureof
which notice has been given under Sub-Clause 19.2 [Notice of force Majeure], and suffers delay and/or
incurs Cost by reason of such Force Majeure the
Contractor shall be entitled subject to Sub-Clause
20.1*Contractors Claims+to:
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Force Majeure
(a) an extension of time for any such delay, ifCompletion is or will be delayed under Sub-Clause8.4 [Extension of Time for Completion], And
(b) if the event or circumstance is of the kind descried
in subparagraphs(i) to (iv) of SubClause19.1[Definition of Force Majeure] and in the case
of subparagraphs (ii) to (iv) ,occurs in the Country,payment of any such Cost.
After receiving this notice,theEmpolyer shall proceedin accordance with Sub-Clause 3.5 [Determinations] toagree or determine these matters
Risk Management
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Force Majeure
~ Clause 19.5 :- Force Majeure AffectingSubcontractor
IF any Subcontractor is entitled under any contract or
agreement relating to the Works to relief from forcemajeure on terms additional to or broader than those
specified in this Clause ,such additional or broader
force Majeure events or circumstances shall not
excuse the Contractors non performance or entitled
him to relief under this Clause.
Risk Management
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Force Majeure
~ Clause 19.6 :- FIIDC Optional Termination,
Payment and Release
If the execution of substantially all the Works in
progress is prevented for a continuous period of 84days by reason of Force Majeure of which notice has
been given under Sub-Clause 19.2 [Notice of Force
Majeure],or for multiple periods which total morethan 140 days due to the same notified Force Majeure
,then either Party may give to the other Party a notice
of termination of the Contract.
Risk Management
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Force Majeure
In this event, the termination shall take effect 7 daysafter the notice is given, and the Contractor shall
proceed in accordance with Sub-Clause 16.3[Cessation
of Work and Removal of Contractors Equipment+Upon such termination, the Employer shall pay to the
Contractor:
(a) the amounts payable for any work carried outfor which a price is stated in the Contract;
Risk Management
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Force Majeure
(b) the Cost of Plant and Materials ordered for theWorks which have been delivered to the Contractor,
or of which the Contractor is liable to accept
delivery ;this Plant and Materials shall become the
property of(and be at the risk of) the Employer
when paid for by the Employer, and the Contractor
shall place the same at the Employers disposal;
(c ) any other Cost or liability which in the circumstancewas reasonably incurred by the Contract in the
expectation of completing the Works;
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Force Majeure
(d) the Cost of removal of Temporary Works andContractors Equipment from the Site and the
return of these items to the Contractors work in
his country (or to any other destination at nogreater cost );and
(e) the Cost of repatriation of the Contractors staff
and labour employed wholly in connection with
the Works at the date of termination.
Risk Management
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Force Majeure
~ Clause 19.7 :- Release from Performance under theLaw
Notwithstanding any other provision of this Clause ,if any
event or circumstance outside the control of the Parties (
including ,but not limited to ,Force Majeure) arises which
makes it impossible or unlawful for either or both Parties
to fulfil its or their contractual obligations or which ,under
the law governing the Contract, entitles the Parties to bereleased from further performance of the Contract, then
upon notice by either Party to the other Party of such
event or circumstance :
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Force Majeure
(a) the Parties shall be discharged from furtherperformance, without prejudice to the rights
Of either Party in respect of any previous
breach of the Contract, and(b) the sum payable by the Employer to the
Contractor shall be the same as would have been
payable under Sub Clause 19.6 [Optional
Termination ,Payment and Release ]
if the Contract had been terminated under Sub-
Clause 19.6.
Generic Formula for Variation
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Adjustment
= adjustment multiplier to be applied for the
contract value.a = fixed coefficient, non adjustable part of the
contract value.
b, c, d.. = coefficients of percentage of each costelement.
Ln, En, Mn.. = current cost indices/ referenceprices for the period n
L0, E0, M0.. = Base cost indices/ reference prices onthe Base Date
53
.....
OOO
n
M
Mnd
E
Enc
L
LbaPn
Pn
VARIATIONS PERTAINING TO MATERIAL COST
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i20.060.020.0 XSP
ECH
ECH
BPA
BPAXSPSP
O
N
O
N
ON
Price Var iation Algori thm:
SP= Sales Pr ice;N= New;O= Current; i=I nitial
BPA= Index Price per M T of Bisphenol A (BPA)
ECH=I ndex Price per MT of Epichlorohydr in (ECH)
Where,
VARIATIONS PERTAINING TO
LABOUR COST
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LABOUR COST
Necessary when the supplies are labour intensive
Variation in basic wages of specif ied labour category
Variation in dearness allowance
WvWb
Wb Pv=Price var iation payable;Pq=Quoted Price
I v=Average consumer Price I ndex for
I nd. Workers for Pune for later 2/3 rd period
I b= I ndex for March (current year)
Wv=Average M inimum basic Wages of ski l led
worker in sellers works for the month of
completion of fabr ication
Wb=Wages for March (current year)
+ 0.30PqxPv= 0.60 xPqxI vI b
I b
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II II