Risk Assessment and Allocation for Highway Construction Management

October 2006

Table of Contents

• 1. Introduction
  • 1.1. Project Management Approach
  • 1.2. Business Case for Project Risk Management
  • 1.3. Definition of Key Terms
  • 1.4. Risk Management Process
  • 1.5. Outputs from Risk Assessment and Allocation Process
  • 1.6. Successful Use of Project Risk Management
  • 1.7. Conclusions
  • 1.8. Illustration: Strategic Approach
• 2. Risk Identification
  • 2.1. Objectives of Risk Identification
  • 2.2. Risk Identification Process
  • 2.3. Risk Characteristics
  • 2.4. Risk Identification Process
  • 2.5. Conclusions
  • 2.6. Illustration: Identification of Major Risks
• 3. Risk Assessment
  • 3.1. Objectives of Risk Assessment
  • 3.2. Conducting Risk Assessment
  • 3.3. Complex Nature of Risk in Highway Project Delivery
    • 3.3.1. Risk to Whom
    • 3.3.2. Sources of Risks
    • 3.3.3. Foundations of Risk
    • 3.3.4. Incremental and Discrete Risks
    • 3.3.5. Model Risk and Data Risks
  • 3.4. Risk Screening: Risk Severity and Frequency
    • 3.4.1. Low-Risk Events
    • 3.4.2. Moderate-Risk Events
    • 3.4.3. High-Risk Events
  • 3.5. Application of Risk Assessment
  • 3.6. Conclusions
  • 3.7. Illustration: Assessment of Risks
• 4. Risk Analysis
  • 4.1. Objectives of Risk Analysis
  • 4.2. Characterizing Risk
  • 4.3. Input Risk Parameters
  • 4.4. Outputs of Risk Analyses
  • 4.5. Risk Analysis Methods
    • 4.5.1. Traditional Methods
    • 4.5.2. Analytical Methods
    • 4.5.3. Simulation Models
    • 4.5.4. Probability or Decision Trees and Influence Diagrams
  • 4.6. Conclusions
  • 4.7. Illustration: Risk Analysis and Range Cost Estimate
• 5. Risk Mitigation and Planning
  • 5.1. Objectives of Risk Mitigation and Planning
  • 5.2. Risk Response Options
  • 5.3. Risk Planning
  • 5.4. Risk Planning Documentation
    • 5.4.1. Red Flag Item Lists
    • 5.4.2. Risk Charters
    • 5.4.3. Formal Risk Management Plan
  • 5.5. Conclusions
  • 5.6. Illustration: Risk Mitigation and Planning
• 6. Risk Allocation
  • 6.1. Objectives of Risk Allocation
    • 6.1.1. Allocate Risks to Party Best Able to Manage Them
    • 6.1.2. Risk Allocation in Alignment with Project Objectives
    • 6.1.3. Risk Sharing
    • 6.1.4. Risk Allocation in Alignment with Customer-Oriented Performance Goals
    • 6.1.5. Risk Allocation Matrix
  • 6.2. Innovative Contracting Tools and Techniques
  • 6.3. Contingency Considerations
  • 6.4. Conclusions
  • 6.5. Illustration: Risk Allocation
• 7. Risk Monitoring and Updating
  • 7.1. Objectives of Monitoring and Updating
  • 7.2. Reporting
  • 7.3. Risk Management Metrics
  • 7.4. Contingency Management and Contingency Resolution
  • 7.5. Conclusions
  • 7.6. Illustration: Risk Monitoring and Reporting
• 8. Conclusions: What's Next?
  • 8.1. Vision of Risk Assessment and Allocation in the Highway Sector
  • 8.2. Next Steps
• Appendix A: Case Studies
  • Caltrans Risk Management Program
  • Highways Agency Risk Management (HARM)
  • Ministry of Transport, Public Works, and Water Management Public Sector Comparator
  • FHWA Federal Lands Highway Division
  • Virginia DOT Route 58 Project
  • Washington State DOT CEVP and CRA Programs
• Appendix B: Risk Identification Checklists
  • 1. DOE Office of Engineering and Construction Management Risk Document Checklist
  • 2. Caltrans Sample Risk List.
  • 3. American Consulting Engineers Council and Associated General Contractors of America Checklist
  • 4. Washington State DOT 2002 Urban Corridors Study Common Risks
• Appendix C: Design-Build Responsibility and Risk Allocation Matrix
  • Matrix
• Appendix D: Risk Charters
  • 1. Caltrans Risk Management Plan Worksheet
  • 2. Example of Risk Register Detail
• Glossary
• Acknowledgments
• References
• Bibliography
• Figures
  • Figure 1: FHWA International Technology Scanning Program scans citing risk assessment and allocation
  • Figure 2: Conceptual refinement of a cost estimate
  • Figure 3: Caltrans Project Risk Management Handbook
  • Figure 4: Caltrans risk management process
  • Figure 5: Cyclical nature of the risk management process
  • Figure 6: Risk management and cost validation in the WSDOT CEVP process
  • Figure 7: Map of US 555-SH 111 interchange
  • Figure 8: Risk identification classification
  • Figure 9: Risk assessment process
  • Figure 10: Likelihood-impact matrix for the Federal Lands Highway Division
  • Figure 11: Example of a Federal Lands Highway Division critical elements risk assessment
  • Figure 12: Assessment outcome
  • Figure 13: Cost risk assessment top-level diagram
  • Figure 14: Mean and mode in normal and lognormal distributions
  • Figure 15: Probability distributions for high, medium, and low dispersions
  • Figure 16: Distributions for risk analysis.
  • Figure 17: Example of sensitivity analysis with tornado diagram
  • Figure 18: Typical Monte Carlo output for total costs
  • Figure 19: Example of decision tree or event tree
  • Figure 20: Range estimate for project costs
  • Figure 21: Innovative contracting approaches for risk allocation
  • Figure 22: WSDOT cost and risk status report
• Tables
  • Table 1: Risk assessment: timing, issues, objectives, and outcomes
  • Table 2: Key expertise for risk analysis by project phase
  • Table 3: Key responsibilities for risk process tasks
  • Table 4: Sample DOT risk identification checklists
  • Table 5: Risk identification tools and techniques
  • Table 6: Traditional risk analysis method example
  • Table 7: Cost and schedule risks
  • Table 8: Highlights from the US 555-SH 111 interchange risk charter.
  • Table 9: Example of project objectives to promote risk allocation
  • Table 10: Example of risk allocation matrix
  • Table 11: Highlights from the US 555-SH 111 risk allocation matrix
  • Table 12: Selected monitoring items from Caltrans risk charter
  • Table 13: Example of risk status report
  • Table 14: Highlights from the US 555-SH 111 risk status report
  • Table 15: Caltrans Risk Management Plan Example Worksheet
  • Table 16: Example of Risk Register Detail (For Hypothetical Eight-Component Light Rail Project)

Sponsored by:

In cooperation with:

• American Association of State Highway and Transportation Officials
• National Cooperative Highway Research Program

FFHWA-PL-06-032

Notice

The Federal Highway Administration provides high-quality information to serve Government, industry, and the public in a manner that promotes public understanding. Standards and policies are used to ensure and maximize the quality, objectivity, utility, and integrity of its information. FHWA periodically reviews quality issues and adjusts its programs and processes to ensure continuous quality improvement.

Technical Report Documentation Page

1. Report No.: FHWA-PL-06-032
2. Government Accession No.:
3. Recipient's Catalog No.:
4. Title and Subtitle: Guide to Risk Assessment and Allocation for Highway Construction Management
5. Report Date: October 2006
6. Performing Organization Code:
7. Author(s): David B. Ashley, James E. Diekmann, Keith R. Molenaar
8. Performing Organization Report No.:
9. Performing Organization Name and Address:
   American Trade Initiatives
   P.O. Box 8228
   Alexandria, VA 22306-8228
10. Work Unit No. (TRAIS):
11. Contract or Grant No.: DTFH61-99-C-005
12. Sponsoring Agency Name and Address:
    Office of International Programs
    Office of Policy
    Federal Highway Administration
    U.S. Department of Transportation
    American Association of State Highway and Transportation Officials
13. Type of Report and Period Covered:
14. Sponsoring Agency Code:
15. Supplementary Notes: FHWA COTR: Hana Maier, Office of International Programs
16. Abstract:

    In 2004, a team of representatives from the Federal Highway Administration, State highway agencies, industry, and academia visited Canada, Finland, Germany, the Netherlands, Scotland, and the United Kingdom. The purpose of this International Technology Scanning Program study was to identify practices that might be evaluated and applied in the United States to improve construction management.

    One significant scan finding was that the countries visited had an advanced awareness of risk assessment and allocation techniques that are just now evolving in U.S. highway agencies. This instructional report was developed as part of the scan team's implementation plan to raise awareness of risk management techniques and begin the process of incorporating risk management elements into the institutional structures of highway agencies. The report is designed to be used in conjunction with workshops on implementing risk management.

17. Key Words: Construction management, decision tree, mitigation, risk allocation, risk assessment, risk management
18. Distribution Statement: No restrictions. This document is available to the public from the: Office of International Programs, FHWA-HPIP, Room 3325, U.S. Department of Transportation, Washington, DC 20590
    international@fhwa.dot.gov
    www.international.fhwa.dot.gov
19. Security Classify. (of this report): Unclassified
20. Security Classify. (of this page): Unclassified
21. No. of Pages: 72
22. Price: Free

Form DOT F 1700.7 (8-72)

Reproduction of completed page authorized

Prepared by the Construction Management Expert Technical Group of the Construction Management International Scanning Study Team

Keith R. Molenaar, James E. Diekmann, David B. Ashley, (report authors) and American Trade Initiatives, Inc.

for Federal Highway Administration U.S. Department of Transportation American Association of State Highway and Transportation Officials National Cooperative Highway Research Program

Preface

In May 2004, a delegation of U.S. officials from the Federal Highway Administration (FHWA), State departments of transportation (DOTs), industry, and academia visited Canada, Finland, Germany, the Netherlands, Scotland, and the United Kingdom. The purpose of this International Technology Scanning Program study was to identify practices that might be evaluated and applied in the United States to improve construction management.

One significant scan finding was that the countries visited had an advanced awareness of risk assessment and allocation techniques that are just now evolving in U.S. highway agencies. This instructional report was developed as part of the scan implementation plan to help raise awareness of risk management techniques and to begin the process of incorporating elements of risk management into the institutional structures of DOTs.

The Highways Agency in England has developed Highways Agency Risk Management (HARM) to model the uncertainties of estimates for cost and time to ensure robust and realistic budgets for publicly financed projects. The Ministry of Transport, Public Works, and Water Management in the Netherlands has developed the Public Sector Comparator and the Public-Private Comparator (PSC/PPC) to assist with these same analyses. Both agencies have dedicated staff that support project teams in identifying and quantifying project risk using probabilistic techniques, and then choosing delivery and contracting strategies that can best control and mitigate these risks.

While few U.S. State highway agencies use formalized risk assessment and management programs like HARM and PSC/PPC, awareness is developing in the United States. In particular, the Washington State Department of Transportation (WSDOT) has developed the Cost Estimate Validation Process (CEVP) and Cost Risk Assessment (CRA) process. The California DOT (Caltrans) now employs a risk management program. There are also a number of excellent examples in the United States of project-based risk management plans.

It is hoped that this report will raise awareness within the highway construction management community that risk can be understood and managed. The more strategic goal is that DOTs and contractors, as appropriate, will actually identify, assess, analyze, mitigate, allocate, and monitor risk in a structured and cooperative way of doing business.

This report was prepared by the Construction Management Expert Task Group (CM ETG), formed by FHWA and the American Association of State Highway and Transportation Officials to implement the scan findings. The CM ETG is working to implement the concepts and promote them in the United States. The group is distributing this report in print and on the Web as part of the initial awareness effort. In addition, the CM ETG is involved in workshops with volunteer DOTs that are evaluating risk management in their construction management organizations. If these efforts prove successful, it is hoped that other DOTs will follow suit and use these implementation tools as catalysts to examine and adopt risk management in their own organizations.

Construction Management Expert Task Group

Steve DeWitt, (cochair)
North Carolina DOT

Gerry Yakowenko, (cochair)
FHWA

Stuart Anderson
Texas Transportation Institute

Tim Aschenbrener
Colorado DOT

Brian Blanchard
Florida DOT

Thomas Bohuslav
Texas DOT

Robert Burns
CH2M Hill

Tucker Ferguson
Pennsylvania DOT

Ted Ferragut, (ETG consultant)
TDC Partners, Ltd.

Celso Gatchalian, (liaison)
FHWA

Matt Girard
Flatiron Construction Corp.

Eugene Hoelker
FHWA

Rich Juliano
ARTBA

Mike Loulakis
Wickwire Gavin, PC

Keith Molenaar
University of Colorado-Boulder

Jerry Porter
Peter Kiewit

Greg Schiess
FHWA

Sid Scott
Trauner Consulting Services

Jim Sorenson (liaison)
FHWA

John Smythe
Iowa DOT

Jim Triplett
United Contractors

Rich Wagman
GA & FC Wagman

FHWA International Technology Scan Reports

International Technology Scanning Program: Bringing Global Innovations to U.S. Highways

All Publications are Available on the Internet at www.international.fhwa.dot.gov

Safety

• Safety Applications of Intelligent Transportation Systems in Europe and Japan (2006)
• Traffic Incident Response Practices in Europe (2006)
• Underground Transportation Systems in Europe: Safety, Operations, and Emergency Response (2006)
• Roadway Human Factors and Behavioral Safety in Europe (2005)
• Traffic Safety Information Systems in Europe and Australia (2004)
• Signalized Intersection Safety in Europe (2003)
• Managing and Organizing Comprehensive Highway Safety in Europe (2003)
• European Road Lighting Technologies (2001)
• Commercial Vehicle Safety Technology and Practice in Europe (2000)
• Methods and Procedures to Reduce Motorist Delays in European Work Zones (2000)
• Innovative Traffic Control Technology and Practice in Europe (1999)
• Road Safety Audits — Final Report and Case Studies (1997)
• Speed Management and Enforcement Technology: Europe and Australia (1996)
• Safety Management Practices in Japan, Australia, and New Zealand (1995)
• Pedestrian and Bicycle Safety in England, Germany, and the Netherlands (1994)

Planning and Environment

• Managing Travel Demand: Applying European Perspectives to U.S. Practice (2006)
• Transportation Asset Management in Australia, Canada, England, and New Zealand (2005)
• Transportation Performance Measures in Australia, Canada, Japan, and New Zealand (2004)
• European Right-of-Way and Utilities Best Practices (2002)
• Geometric Design Practices for European Roads (2002)
• Wildlife Habitat Connectivity Across European Highways (2002)
• Sustainable Transportation Practices in Europe (2001)
• Recycled Materials in European Highway Environments (1999)
• European Intermodal Programs: Planning, Policy, and Technology (1999)
• National Travel Surveys (1994)

Policy and Information

• European Practices in Transportation Workforce Development (2003)
• Intelligent Transportation Systems and Winter Operations in Japan (2003)
• Emerging Models for Delivering Transportation Programs and Services (1999)
• National Travel Surveys (1994)
• Acquiring Highway Transportation Information from Abroad (1994)
• International Guide to Highway Transportation Information (1994)
• International Contract Administration Techniques for Quality Enhancement (1994)
• European Intermodal Programs: Planning, Policy, and Technology (1994)

Operations

• Managing Travel Demand: Applying European Perspectives to U.S. Practice (2006)
• Traffic Incident Response Practices in Europe (2006)
• Underground Transportation Systems in Europe: Safety, Operations, and Emergency Response (2006)
• Superior Materials, Advanced Test Methods, and Specifications in Europe (2004)
• Freight Transportation: The Latin American Market (2003)
• Meeting 21st Century Challenges of System Performance Through Better Operations (2003)
• Traveler Information Systems in Europe (2003)
• Freight Transportation: The European Market (2002)
• European Road Lighting Technologies (2001)
• Methods and Procedures to Reduce Motorist Delays in European Work Zones (2000)
• Innovative Traffic Control Technology and Practice in Europe (1999)
• European Winter Service Technology (1998)
• Traffic Management and Traveler Information Systems (1997)
• European Traffic Monitoring (1997)
• Highway/Commercial Vehicle Interaction (1996)
• Winter Maintenance Technology and Practices — Learning from Abroad (1995)
• Advanced Transportation Technology (1994)
• Snowbreak Forest Book — Highway Snowstorm Countermeasure Manual (Translated from Japanese) (1990)

Infrastructure-General

• Construction Management Practices in Canada and Europe (2005)
• European Practices in Transportation Workforce Development (2003)
• Contract Administration: Technology and Practice in Europe (2002)
• European Road Lighting Technologies (2001)
• Geometric Design Practices for European Roads (2001)
• Geotechnical Engineering Practices in Canada and Europe (1999)
• Geotechnology-Soil Nailing (1993)

Infrastructure-Pavements

• Quiet Pavement Systems in Europe (2005)
• Pavement Preservation Technology in France, South Africa, and Australia (2003)
• Recycled Materials In European Highway Environments (1999)
• South African Pavement and Other Highway Technologies and Practices (1997)
• Highway/Commercial Vehicle Interaction (1996)
• European Concrete Highways (1992)
• European Asphalt Technology (1990)

Infrastructure-Bridges

• Prefabricated Bridge Elements and Systems in Japan and Europe (2005)
• Bridge Preservation and Maintenance in Europe and South Africa (2005)
• Performance of Concrete Segmental and Cable-Stayed Bridges in Europe (2001)
• Steel Bridge Fabrication Technologies in Europe and Japan (2001)
• European Practices for Bridge Scour and Stream Instability Countermeasures (1999)
• Advanced Composites in Bridges in Europe and Japan (1997)
• Asian Bridge Structures (1997)
• Bridge Maintenance Coatings (1997)
• Northumberland Strait Crossing Project (1996)
• European Bridge Structures (1995)

Abbreviations and Acronyms

A+B

time plus cost

A+B+Q

multiparameter bidding

AACEI

Association for the Advancement of Cost Engineering International

AASHTO

American Association of State Highway and Transportation Officials

BAM

bid-averaging method

Caltrans

California Department of Transportation

CEVP

Cost Estimate Validation Process

CII

Construction Industry Institute

CM ETG

Construction Management Expert Technical Group

CRA

Cost Risk Assessment

DBOM

design-build-operate-maintain

DBOM-F

design-build-operate-maintain-finance

DOE

U.S. Department of Energy

DOT

Department of transportation

FHWA

Federal Highway Administration

FMEA

failure modes and effects analysis

FTA

Federal Transit Administration

HARM

Highways Agency Risk Management

PCR

project change request

PID

project initiation document

PSC/PPC

Public Sector Comparator and Public-Private Comparator

SEP 14

Special Experimental Projects 14

VFM

value for money

WSDOT

Washington State Department of Transportation