ASSIGNMENT NO-1

ON

" RISK MANAGEMENT & INSURANCE"

SUBMITTED TO:

NATIONAL INSTITUTE OF CONTRUCTION

MANAGEMENT
& RESEARCH (NICMAR) PUNE.

SCHOOL OF DISTANCE EDUCATION (SODE)

By
Miss. Tanushri Balkhande
(PGPM - 31)

Reg.no.-215-05-31-12440-2173

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 RISK MANAGEMENT & INSURANCE

Assignment
For the successful implementation of a project it is essential that the people involved in its
implementation be sensitive to the risks involved in the project and formulate the most suitable
structure for the management of such risks. There are certain variables and uncertainties in common
to most of the infrastructure projects. Many risk mitigation techniques are applied to infrastructure
projects. Discuss in details the risk management to construction with special reference to a project
currently in progress with your company.

STUDY
Risk Management of Construction Industry Managers, the lesson book complied by NICMAR
KEY
i. Describe scope of project in short
ii. Explain type of project
iii. Note down important points of perceived construction risk, project risk, risk economic risk,
insurance.
iv. Risk mitigation is done in construction infrastructure development projects.

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 STRUCTURE
Name of project
Scope of work
Important details project, cost, time, type risk involved, risk mitigation etc.
Important points from contractors project managers point of view to be monitored/resolved.
Method followed for administer and monitor risk
Recommendations / Conclusion
Bibliography / Readings

TYPE OF PROJECT

XYZ IMPLITZ LTD is a design consultancy providing tower design solutions to the telecom and
power sectors.

The scope of our work includes the following:

Tower design
Design checking
Preparation of Structural Fabrication Drawings
Building analysis for installing a roof top tower.
Preparation of structural drawings of existing buildings (if building structural drawings are not
available)
Supporting beam design for installing roof top tower.
Foundation design of ground based tower
Estimations during tender stages

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 Dynamic analysis and Non Linear Analysis.
Design Checking and strengthening of towers
Preparation of as built drawings

One of the cellular service providers by the name of TELESERVICES MH LTD asked us to
design a ground based tower.

It was a 60 meter tower based on a piece of land that the client had acquired from the
landowner by entering into a contract with him. The agreement was for a valid consideration and for
a definite period of time. After the lapse of the period the client would either have to dismantle the
tower or renew the agreement with the landowner for a further period.

The parties involved in the project were the client, the consultant, the contractor and the outsourcing
companies who accomplished the work of acquiring the land for the client. The modus operandi
was thus:
The outsourcing agent would acquire the land shortlisted by the client from the landowner by
doing the necessary groundwork and entering into necessary legal agreements for a valid
consideration. The client would then summon the consultant and give his requirements of tower
height and load of antennae coming on the tower, etc. Based on this the consultant would prepare
layout drawings after conducting a preliminary survey whether the piece of land would be enough
for a tower of that height. He would then furnish the layout drawings and then conduct the soil
investigation of the proposed site to ascertain the safe bearing capacity of the soil. Depending upon
the recommendation of the client, and the data gathered from the soil investigation and from the
client the consultant would then design the tower for the required load coming on the tower along
with its foundation system. He would also design the supporting beams for the shelter and the diesel
generator.
On receiving the design drawings the client would then pass them on to the contractor
earmarked for the project and he would then order the material required for the erection depending
upon the bill of materials furnished by the consultant's drawings. The consultant would also give the
fabrication drawings based on which the steel sections would be fabricated in situ. Based on the
erection drawings of the consultant the contractor would then start erection of the tower and its
accessories namely the shelter and diesel generator. Once the erection has been done then
commissioning would commence in which the client's engineers would cross check the contractor's

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 work by simulating conditions similar to those that would prevail under normal working of the
tower. Once the commissioning is over then the site would be handed over to the client by the
contractor. The client would then ask the consultant to prepare as built drawings of the site showing
the views of the tower as it is standing. In all these works there are a lot of risks that each of the
parties have to bear and find out ways to mitigate. Following are the list of risks that each of the
parties have to bear.

RISKS HANDLED BY EACH OF THE PARTIES TO THE PROJECT

Risks from the perspective of the cellular service provider

Revenue Risk

Revenue risk is the uncertainty in relation to the revenue that a project would actually generate.
The uncertainty of the revenue of an infrastructure project (as opposed to other industrial projects)
is because of its public nature, which carries with it the uncertainty in the ability and willingness of
consumers to pay for the benefits arising from the project. In this case the client will be bearing the
risk of spending on the facility and then hoping that he gets some other operators to share the tower
with him. Also that people in that region will subscribe to mobile telephones so that he can recover
the costs of his erecting a tower in that region.

Design Risk

This risk relates to any defect in the design of the infrastructure facility or the design
requirements stipulated for the project. This is an inherent risk in the project as it is very difficult to
conclusively ascertain that the damage to the facility is actually caused due to the defect in the
construction or design assumptions made by the consultant or design data supplied by the client or
the very design itself. Generally, it is the design contractor who is responsible for the design aspects
of the project. In the case of the project the client has to indemnity himself from any damage that
may be caused by the accidental falling of the tower due to wind pressure or any other reason. In
design risk itself the cellular service provider has to indemnify himself vide his purchase orders that
he is not responsible for any standard laws that the design contractor may violate, whether they are
labor laws or laws governing structures in that region and national building codes. He also

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 indemnifies himself against injury to any of the workers of the design contractor during the process
of conducting the survey. The client also indemnifies himself against any false assumptions that the
consultant may make in the designing of the project facility. In our project the consultant had to
make various assumptions based on the standard facts regarding the land strata as the land was such
that it was not possible to collect site data using normal methods.

Costs as the main risk

The main risk involved in the gestation stages relate to the costs being incurred on the
narrowing down on a suitable land for erection of a mobile tower. There is a high probability that
the land may be dropped from the list of approved sites by the client due to practical considerations
like lack of proper approach road, etc. Even if a decision is taken to develop and implement the
project further, there is a possibility that the costs incurred at this stage may simply keep an
increasing and may occur again at the developmental stage. There may be instances where the
landowner may back out of the proposal given to him by the client.
Social impact

A preliminary study should be undertaken regarding the impact of the installation of the tower
in a particular area, the extent of hardship it may cause to people living there. There is a possibility
that the owner of the building or land where the tower has been installed will not allow access to the
cellular service provider for maintainance purposes in spite of the fact that he is receiving rent for
the piece of land occupied by the client. This he does as he suffers harassment when the client's
engineers come for maintenance work. He faces the risk that the building or landowner may
discontinue the arrangement due to adverse effects of the tower on human beings.

Technical feasibility

A preliminary study of the engineering requirements and feasibility of the project being sought
to be undertaken should be made. There may be a possibility that a ground based tower may not be
suitable on the land earmarked for the same. The soil conditions on the land may not be conducive
to erection of a tower of a particular height. The orientation of the tower that is required to be
provided by RF point of view may not be obtained due to practical conditions prevailing at site.

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 Financial Risk

This risk is the totality of all risks that relate to the financial developments external to the
project that are not in the control of the clients. This risk is common to all the parties to the project.
These risks include: 1)risks associated with the fluctuations of foreign exchange rates. 2) risks
associated with the devaluation of the local currency. 3)Risks associated with the non-convertibility
or non-repatriation of foreign exchange from India, and 4)Risks associated with the fluctuations in
interest rates. In our case this risk was prevalent as foreign investment was brought in by the client
for the project.

Political Risk

Political risks are a bundle of distinct risks that can include not only political factors but also
administrative, social and economic factors. Political risks associated with a project are closely
evaluated as they are generally outside the control of the parties to the project, other than the
government to a certain extent. But even the government fixing the policies of the telecom industry
do not have control over all the categories of political risks. It should be kept in mind that many of
the political risks arise from the possibility of arbitrary action by the government and altering the
framework on which the very foundation of the project rests.

The main categories of political risks include:

1. Risk of political instability such as riots, revolutions, coup d'etat, terrorism, guerrilla
warefare
War, whether declared or undeclared.
2. International sanctions
3. Expropriation
4. Nationalization
5. Creeping expropriation (discretionary regimes, excessive taxation, import restrictions,
refusal to allow or provide for collection or review of tarrifs, etc)
6. Failure to grant or renew approvals and Excessive interference in the implementation of the
project, thereby causing severe prejudice to the concessionaire. (in this case the TRAI)

Force Majeure Risks

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 These risks are regarding the events that are outside the control of any party and cannot be
reasonably prevented by the concerned party. These risks generally arise due to causes extraneous to
the project. The defining of force majeure events include:
National force majeure events comprise all events that can be submitted to natural conditions or
acts of god such as earthquakes, floods, cyclones and typhoons. These risks shold be shared equally
among the parties.
Direct political force majeure events are attributable to political events that are specific to the
project itself such as expropriations, nationalization
Indirect political force majeure. Events are those that have their origin in political events but are not
project specific such as war, riots, etc.
In our case this risk was considered to the extent that a storm could disrupt operations of tower
erection during the construction stage and that would lead to loss of life and property.

Construction risks

The construction risks are essentially a bundle of various individual risk factors that adversely
affect the construction of a project within the time frame and costs projected and at the standards
specified for the facility. Construction risks generally relate to:
1. Risks related to the availability of land for the project
2. Suitability of the land for the construction of the project facility
3. Delay in completion of the construction
4. Cost overruns in supplies, transportation, machinery, equipment, new materials, etc.
5. Availability of the basic infrastructure required for the construction of the facility such as
water, electricity, etc.
6. Availability of workforce
7. Occurrence of force majeure events, and
8. Failure of the facility to meet the performance criteria and standards specified.
9. In our project this risk was very important as all the above mentioned factors could go
wrong during the project.

Operating risks
Operating risks are similar to the construction risks. They are a bundle of risks associated with

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 the operation of the infrastructure facility. Operating risks generally relate to:
1. Operating cost overruns
2. Risks related to obsolescence
3. Risks associated with compliance of specified performance criteria, quality and quantity (as
the case may be)
4. Force majeure risks and
5. Risks associated with the inability to comply with the maintenance standards and
availability of funds required for the operation and maintenance of the facility

Risks from the perspective of the contractor

Ability to implement the project in a commercially viable manner

The main concern of the project contractor would be to ensure that the contract for lease of the
piece of land between the client and the landowner are without any legal hindrances i.e. the title of
the land is clear and no other claimants will come when he is carrying out the erection work of the
owner. He is concerned about the fact that he does not become a basket for storing all the risks
simply on the basis that it is obtaining a commercial return. In our project there was a constant
danger that the land acquisition team had not done their work properly and that the title of the land
was not clear but still the client had to choose it as his radio frequency team had shortlisted it.

Certainty of Costs

Each obligation each risk and each uncertainty has an attached cost. The aim of the contractor
should be to ensure the project can be determined and controlled in a certain manner. In our project
the contractor was not paid any initial amount for mobilization and he had to do all the initial
investment on his own. Hence it was very necessary that he controlled the costs that he incurred.

Return of investment

The project and the documentation should be capable of providing an adequate return to
investors in the project. This is a universal necessity in order to justify any private investment in any
venture. In our project the contractor had to arrange for finance on his own at a certain cost to him
and hence he would expect that he earn a certain percentage more in doing the work than the rate of

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 interest he has to pay funds to execute the work.

Distribution and Management of Risks

The documentation in relation to the project should be such so as to enable the passage of
various risks that are not within the control of the contractor but it has been allocated to it under the
main concession or license. The contractor should not be straddled between the various documents
with risks it has no control over or is not capable of absorbing. Thus the risk allotted under the
contract to the contractor should flow down to the various sub-contractors under the relevant
documents with the sub-contractors. In our case there were no sub-contractors and hence the
contractor had to bear the risk on his own.

Force Majeure Risks

This risk is not in control of any party to the contract and the contractor like the client is
exposed to the same risks as the client. This risk is similar to that faced by the client.
Providing a level playing field
Here the contractor is exposed to the vagaries of competition. Since there would be many
contractors interested in doing the work for the client, it is necessary that the tendering and bidding
process be as transparent as possible. The contractor is however at times exposed to nefarious
dealings of a coterie of contractors who collude with the clients for the purpose of getting the work
thus leading to rigging of the tendering process.
In our project there was a great deal of transparency in the tendering procedure and three
aspects were considered important by the client in awarding the contract, one being the contractors
past experience in doing such works, secondly, his price bid and thirdly, his financial strength.
Financial Risk
This risk faced by the contractor is similar to that faced by the client. In our case, the contractor
was paid after the work was carried out and he was given no advances for his mobilization, etc. This
resulted in him resorting to taking finance from lenders at a cost. He would then pay off the debts
when he got paid by the client. In such cases the timing of payment made by the client plays a very
important role and the contractor must make the payment terms clear before he can take up the
contract.

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 Physical Risks

Physical risks relate to the ground conditions, natural conditions, adverse weather conditions,
physical obstructions and other physical conditions that would adversely affect the implementation
of the construction activities at the project site. It happens at site that the ground conditions are not
what the consultant has assumed in his design. In our project this risk was not faced by contractor as
things were laid to rest in the consultant's report.
Construction risks
The construction risk relate to the factors affecting the very ability to undertake construction
activities like availability of resources, industrial relations, safety during construction, quality of
raw material, workmanship, delay in supplies, strikes by transport operators, shortage of material
required for the project construction techniques, failure to comply with construction milestones,
cost of construction, etc.

Design Risks

The design risks relate to, as the term itself suggests, the risks associated with the design of the
project facility. These relate to incomplete design, design life, availability of information,
compliance with standards, completion of design, viability of design, etc. In some cases even there
may be a change of the standards being followed in designing such project facilities. The contractor
in his contract with the client indemnifies himself against any errors made by the consultant by
stating that the erection has been done based on the drawings supplied by the contractor.

Risks from the perspective of the consultant

Risk of revenue:

In this type of risk the consultant may give the total design to the client, but may not get paid
for it due to the inability of the client to pay up. In certain cases the client may get insolvent and the
consultant may have to make do with whatever he offers as payment. In our project we had no such
risk as the client was very strong financially and this risk did not arise.

Risk from the contractor

The contractor may misinterpret the drawings given by the consultant and consequently do

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 erroneous work of erection of tower. In our case the consultant had to guard against this risk as the
client had given work to contractors who were not experienced in erection of tower. This led to
more consultant visits on the site to inspect the erection.

Force Majeure Risk

This risk affects the consultant also and covers all the risks explained earlier in case of client and
contractor.

Risk of change in standards

The consultant may have to face the risk of change in standards by the statutory bodies like
national building codes, Indian standard codes, etc.

Risk of wrong data from clients

In the project of tower erection the consultant has to perform a survey to collect site data for
incorporating into the design. At this time the consultant is also given data from the client like load
of the batteries placed in the building, etc. This data may be erroneous and the consultant has to
guard against such an eventuality.

Risk against statutory bodies

The consultant faces the risk of cancellation of his license by statutory bodies like the
Municipal Corporation, etc for violating general standards of design. The consultant had obtained
the ISO 9000 certificate for quality work and there was a necessity to document whatever the
consultant did. The quality council could cancel the award for non conformance with its laid out
standards.

RISK MITIGATION IN CONSTRUCTION PROJECTS.

Risk response & mitigation is the action that is required to reduce or eliminate the potential
impact of risk. There are two types of response to risk-

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 One is an immediate change or alteration to the project, which usually results in the elimination
of the risk, second is the contingency plan that will be only implemented if an identified risk should
materialize.

The risk manager is responsible for identifying the risk that arise, taking suitable action to
mitigate or avoid them & evaluate the consequences of his actions. Using adequate contingency
plans risks that are avoidable are mitigated thus insuring that the overall project objective of time,
cost & quality is not jeopardized.

The options of responding to risk are the following:

Risk avoidance

Risk reduction

Risk transfer

Risk sharing

Risk retention

Insurance

Allocation of risks

Risk avoidance

This is perceived as the ultimate mitigation strategy implying that the project may be aborted.
This may cause by the eliminating the causes of risk. Alternative course of action are examined.
Other examples of risk avoidance include the use of exemption clauses in contracts, either to avoid
certain risks or consequences of risks. In certain cases the project may be aborted. An example of

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 risk avoidance in our project is that the client who gives work of as built drawing to the consultant
mentions on his purchase order to the consultant that he be identified from any wrong assumptions
made by the consultant or any wrong policies followed by the consultant & which are against
standards laid out by the statutory bodies.

Risk reduction

This method adopts an approach whereby potential exposure to risks & their impact is
alleviated. Here one considers alternative solutions for risk reduction, examining in detail & obtain
more information. Take management or design action. In our project the client used to employ this
strategy by giving other cellular operators the use of the tower installed at his cost by charging a
monthly fee for the same from operator. This will reduce his risk to the extent that his cost of
maintain the facility will become less to that extent.

Risk transfer

This method involves the transfer of risk to other project participants. Commonly risks are
transferred through the placement of contracts, the appointment of specialist sub-contractors or
suppliers or by taking out an insurance policy. In our projects the cellular operator used to transfer
the risk on the project company, by not paying it any mobilization charges or advances for the for
the work commencement. The project company in turn was transferring the risk to the contractors
by paying them when they completed the particular tower site. Thus they used the method of risk
transfer to mitigate the risks. Secondly the client used to transfer the risk of damage to his expensive
tower equipment by taking out insurance policy for the same.

Risk Sharing

Where the portion of the risk is transferred whilst some risk is retained this is known as risk
sharing. This approach may be adopted where the risk exposure is beyond the control of one party.
In such instances it is imperative that each party appreciates the value of portion of risk which it is
responsible. In our project of tower erection once the tower erection & commissioning was
complete then the cellular service provider would share the facility with some other operator so that
he could earn some money in the bargain & thus share the risk that he bears against the owner of
land.

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 Risk retention

Once all the risk mitigation strategies are exhausted & there are still some risks remaining, then
this method is adopted to nullify this risk. This means that when the estimate is being done for
tower erection then some contingencies are always considered in the estimate to eliminate the
residual risks that remain after applying all the risk mitigation strategies that are elaborate earlier. In
our project the consultant employed this strategy to mitigate the risk that he face from his staff i.e.
he used to bear the burden of wrong design and assumptions made by by one of his employee in
designing the tower. The consultant paid compensation to the client for any such eventuality.

Insurance

This is the technique of risk transfer or risk reduction depending upon the nature of the contract
between the insurer & the insurance company. This is the technique to minimize the loss of cost due
to specific risk for certain consideration. This technique was adopted by the cellular services
providers to transfer the loss due to damage to their tower s to the insurance company for specific
consideration. The contractor who was executing the project was Also resorting to this method of
risk management for covering his loss due to any damage to his equipment used for execution.

Allocation of risks:

This would entail the third party to undertake the measures to control or mitigate the risk, and
bear the adverse consequences, if it is not able to redress the risk, and bear the adverse
consequences, if it is not able to redress the risk, thereby insulating the other parties to the project
from the direct impact of the risk.

The main principle for evaluating an adequate allocation or risks is that the party which is best
placed to control or redress the risk is that the party which is best placed to control or redress the
risk or the circumstances that may arise if the risk occurs should be allocated the risk.

Conclusion

Thus we see that risk can be managed, but to do so, requires a deliberate & structured approach.
A pragmatic approach to risk management should be followed depending upon the project success
depends ultimately on a combination of honest intention, rigorous analysis & professional
judgment.

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 References:

1. Project financing in corporate sector by C G Karandikar/ G. M. Dave

2. Construction Finance Management (NCP 29 by NICMAR)
3. Project formulation & appraisal by NICMAR
4. Website http:/indiabudget.nic.in
5. Website census of India
6. NSS 63rd Round (July 2006 June 2007)

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