Risk Management in Railway Construction

Introduction

Constructing a railway is a complex process that requires not only careful planning and the involvement of skilled professionals but also the development of a risk mitigation strategy based on the appropriate identification of risks. In the context of constructing a new railway between two destinations, beneficial practices should include a detailed risk assessment, a risk management approach, and the development of new strategies and systems. Managing risks on such complex projects are of vital importance because it includes both an assessment and a mitigation strategy.

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While risk assessment is concerned with the identification of potential risks that could occur during construction as well as their evaluation, risk mitigation is targeted at the elimination of the effects of those identified risks (IRM 2002). This assignment will address risks that can occur during the construction of a railway between the West Midlands and Scotland. It will predominantly focus on the development of a feasible risk management strategy, identify the most appropriate risk analysis methods, and propose a risk management system that will take into account the complexity of the project along with its internal and external challenges. The rationale for the proposed risk management system is based on the need for using both qualitative and quantitative data in risk assessments due to the complex nature of the construction project, as well as the extensive list of commitments that should be delivered to various stakeholders.

Objectives of Risk Management

There are three primary objectives of the risk management strategy that will be developed to address the challenges associated with railway construction. First, the plan should be targeted at reducing the overall likelihood of risks that may adversely affect the construction project through the reduction of its negative consequences. Second, the risk management strategy should take into consideration efforts that assure external and internal stakeholders that there is awareness of possible risks along with active measures of their management (BS 31100 2011). Third, the risk management plan should also involve efforts to improve the overall decision-making; specifically, the prioritization of project steps, and their planning, through the improvement of understanding the fluctuating nature of the identified risks. These objectives will be addressed through the assessment of the levels of seriousness (critical, high, moderate, etc.) of the risk and the development of appropriate risk management strategies.

Risk Management Strategy for a Railroad Construction Project

Addressing the identified risks and meeting the above objectives of risk management is associated with turning “uncertainty to the organization’s benefit by constraining threats and taking advantage of opportunities” (HM Treasury 2004, p. 27). Key aspects of addressing possible risks include tolerance of risks, their treatment, transfer, termination, and taking opportunities. The proposed risk management system will include recommendations on how to tolerate risks, transfer them to another party, treat risks, and take advantage of opportunities.

Railway Construction Risks

In the particular scenario of constructing a railway between Scotland and West Midlands, several key risks can be identified:

  1. Social and political risks
  1. Permits and regulatory licenses that include Environmental Impact Statements, Assessments of Energy Use, and Transportation Impact Statements (Sunduck 2000).
  2. Transfers of technology.
  3. Feasibility of projects, including their long-term viability within the context of the current political situation.
  4. Planning, which involves technical constraints, complexity, the reasonableness of scope, scheduling, and costs of the construction project.
  5. Decision-making processes and public perceptions of the project’s safety.
  1. Engineering and construction risks
  1. Design of the project that includes such challenges as standardization, construction complexity, design completeness, and the integration of a new railway system into the existing infrastructure.
  2. Infrastructure procurement, which is associated with such risks as standards of safety, quality controls, contracting agreements, and the use of skilled labor (Sunduck 2000).
  3. System procurement that includes construction specifications, various procurement procedures, and procurement scope.
  1. Financial risks
  1. Project funding, which is one of the most significant risks for the current construction project because it includes such challenges as finding sources of stable funding, accounting for inflation and fluctuations in exchange rates, as well as estimating construction costs accurately.
  2. Other risks that fall under the category of financial risks include cost overruns, costs of delays, and costs of joint ventures (Sunduck 2000).

After listing all possible risks that could be involved in railway construction, it is essential to rank them by importance to develop a comprehensive risk management plan that addresses all possible risks. It should be emphasized that financial and technological risks are of major importance for a railway construction project since they involve both controllable (e.g., labor) and non-controllable factors (e.g., inflation). As such, those involved in risk management should approach the identified issues from both internal and external perspectives.

Financial Risks and Their Management

As identified previously, the construction of a railroad between two destinations is expected to bring financial risks that may negatively affect the project’s success, as well as the overall productivity of stakeholders responsible for construction. To manage such financial risks as cost overruns, inflation, exchange rate fluctuations, delay costs, and challenges in project funding, it is advised to follow several risk management steps. They are as follows:

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  • Include sufficient contingencies, estimations of inflation changes, and possible extensions into the planning of the construction budget. Since the construction of a railroad is a process that takes a lot of time, depending on its scope, accounting for even minor contingencies in the budget plan may save the project from limitations associated with costs. If the budgeting plan accounts for 15%-25% contingency, it will protect the project from such risks as increasing prices for materials, changes in quantities of necessary materials, and dependence on cost categories. It is essential to note that in the majority of construction projects, assumptions of cost changes are dramatically underestimated, which leads to the subsequent failures or extensions in construction timeframes (California High-Speed Rail Authority 2012).
  • Implement a strict cost-management strategy for the entire project, taking into account the risks of transfer costs and delays in construction schedules. This risk management strategy is likely to become a starting point for the infrastructural development of the railroad since it is based on much broader arrangements of partnership. For instance, it is expected that the project will include concession contractors who may be involved in maintenance and operations (California High-Speed Rail Authority 2012). Since such contractors usually have higher prices for their services, the risk management strategies should take into account all possible financial challenges such as risks of schedule and cost overruns.
  • Make a continuous effort to review estimates of construction costs, including such factors as underlying costs (e.g., depreciation, unit prices, etc.). This financial risk management strategy is expected to bring beneficial results for the construction project because it will evaluate costs continuously and therefore take into account any changes and fluctuations that occur during the implementation of the project.
  • Develop a schedule for the project’s funding availability. As the budget of the project is expected to reach around £40 billion, it is imperative to make sure that all of the funding necessary for completing the project was available when needed to avoid delays in construction. Several construction packages should be developed to account for scopes of different construction stages. Such packages may be adjusted and changed in the course of the project to account for the remaining portion of funds and savings for procurement. Overall, schedule development will greatly assist in financial planning and aid in the correct estimations for the project’s completion (California High-Speed Rail Authority 2012).

Management of Engineering and Construction Risks

Engineering and construction risks in a railway project include a variety of challenges, ranging from construction complexity to various procurement procedures. While it is impossible to manage all risks since many of them may occur unexpectedly, it is proposed to integrate several risk management strategies that can be successfully implemented in the context of a railway construction project. The following is the list of proposed risk management strategies:

  • Compliance with the established standardization, legislation, and codes while being prepared to make further improvements in the process of construction. While engineers involved in the construction are required to follow standard codes and regulations concerning the technological aspect of construction, they are generic and rarely cater to all situations and risks. Compliance with standardization is necessary because the construction project will have to be implemented safely while ensuring that the railway system remains operational, which presents an array of challenges. Engineers are advised to recognize the need for the standardized procedures and costs of construction, as well as understand their limitations with regards to addressing the need of preserving the operational capacity of the railway system.
  • Ensure a lasting system of risk oversight and scrutiny. It is important to mention that an efficient oversight system can help engineers in a railway construction project to safeguard their operations from possible risks. Within this risk management strategy, engineers should be very clear as to their roles and responsibilities within the construction project, especially when it comes to outsourced functions. Moreover, it is advised that the construction personnel scrutinizes decisions of the management when it comes to safety procedures (Engineering Council 2011).
  • Adopt a systematic approach to the identification of risks and their assessment and management. Within the context of a construction project, it is a complicated process to examine all risks in isolation due to their interdependence. Therefore, it is proposed that engineers look beyond technical specifications and considerations of construction procedures to address non-technical factors (e.g., organizational, cultural, human) (Engineering Council 2011). Additional advice for engineers in the construction process includes looking for connections between possible risks and opportunities of their mitigation, considering using ergonomics for reducing human error risks, making risk assessments to aid, but not replacing, professional judgments, and being aware that the array of elaborate procedures could undermine the culture of safety on a construction site (BS EN31010 2010).

Risk Response Practices in a Construction Project

Along with the risk management system to address challenges associated with financial and engineering in a construction project, it is also advised to introduce an efficient risk avoidance system to eliminate possible risks without having to manage them in the first place. In construction projects, risk avoidance is usually considered impractical as it could limit progress; however, if integrated correctly, risk avoidance can benefit projects in instances such as high level tendering, placing conditions on bids, and completing preliminary negotiations on contracts. Risk response practices include such procedures as risk transfer, risk retention, and risk reduction.

Risk transfer refers to efforts targeted at transferring an identified risk to another party. In the context of construction projects, financial risks can be transferred to an insurance company since it will safeguard the construction company from potential losses. The transfer of possible risks can be implemented through the transfer of property or the retention of property by transferring financial risks (e.g., insurance). Risk-retention is a method that helps engineers or contractors in a construction project to control possible risks through the implementation of internal management strategies. It is essential to mention that risk retention is needed when it is impossible or negligible to transfer them to another company. For instance, if the financial loss is minor, but risk avoidance is impossible, it is recommended to implement either passive or active retention of risks. While active retention refers to the deliberate strategy or risk management, passive retention usually takes place due to negligence or ignorance of dealing with risks (Mousa 2005). Lastly, construction projects can use risk retention as a general strategy to guide their efforts in reducing the influence of negative factors.

Appraisal of Risk Analysis Methods and Further Recommendations

At the stage of risk analysis in a construction project, the parties responsible for these processes should evaluate the available tools and methods aimed at the identification of risks. Such tools and methods include “brainstorming, the Delphi technique, checklists, experts’ evaluation, the internal audit in a company, the periodic document reviews, etc.” (Dziadosz & Rejment 2015, p. 260). Generally, risk analysis methods are differentiated into qualitative and quantitative. Qualitative methods of risk analysis are predominantly used for making decisions in business projects using judgment, experience, and intuition. It is important to understand that qualitative method can be used in conjunction with numerical data where there is not enough for a complete quantitative analysis.

Risk analysis methods that rely on qualitative data include such strategies as brainstorming, questionnaires, the Delphi technique (involvement of experts), and other forms of qualitative analyses. On the other hand, quantitative methods of risk assessment make it possible for engineers or contractors in construction projects to assign values to the identified risks and, therefore, rank them by importance. Such methods involve likelihood and consequences analyses, computer simulations, and other techniques that use quantitative data. While both quantitative and qualitative methods of risk assessment can be effective in assessing the impact and the likelihood of separate risks occurring in a construction project, such complex processes call for a much more elaborate procedure. This paper recommends two approaches to risk assessment that can be used in a construction project, the Monte Carlo simulation and the Delphi technique, as they will combine both quantitative and qualitative methods.

The Monte Carlo simulation is a quantitative mathematical technique that will allow the stakeholders in a construction project to account for the possible risks in analysis and further decision-making. The simulation works through creating models as a range of value (a probability distribution) for all factors that possess some level of uncertainty. The probability distributions show that the variables involved in the evaluation will have different outcomes. Common types of probability distributions include normal, lognormal, uniform, triangular, discrete, and PERT. It is advised to integrate the Monte Carlo method in the risk analysis because it provides visual representations of likelihoods assigned to certain categories of risks (Monte Carlo simulation 2018). Further benefits of the Monte Carlo method include its ease in the implementation, possibilities to align quantitative data with decision-making, usefulness in analyzing costs and schedules, as well as abilities to predict the likelihood of meeting the projected goals and objectives.

The Delphi technique can be used for risk assessments through conducting questionnaires completed by experts (either independent or those involved in the project). In general, there are several rounds of questionnaires, to which experts give answers anonymously; after the completion of each round, responses are aggregated and shared (Delphi method n.d.). Experts involved in the questionnaires usually adjust their answers to come to a mutual conclusion on questions discussed, particularly with regards to estimating the possibilities of risks’ occurrence. Therefore, the Delphi method is a qualitative method that is targeted at helping experts reach a consensus on risk assessment.

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To conclude, the process of risk analysis in the context of railway construction should involve both quantitative and qualitative assessment methods due to the possibility of different risks occurring. It has been concluded that the decision-makers involved in the construction of the West Midlands – Scotland railroad will benefit the most from the combination of the Delphi technique, which involves qualitative data gathered from questionnaires with experts, and the Monte Carlo method, which uses quantitative data for estimating the likelihood of risks hurting construction projects.

Risk Management System for a Construction Project

Based on the evaluation of risk assessment and management strategies, a risk management system will be proposed to cater to the needs of the stakeholders involved in the construction project. It is recommended to integrate a four-step risk management system that will account for the identified strategies and risk assessment methods. The steps are as follows:

Risk identification and assessment

By using the Delphi technique and the Monte Carlo method, key decision-makers in the construction project will be able to successfully identify risks that may limit the project’s success, as well as contribute to delays, increased costs, and unexpected outcomes. The identification of risks can be made using the Delphi technique as it does not require quantitative data collection. Risk identification is a disciplined and time-consuming process that involves the use of a checklist containing potential risks to evaluate the level of likelihood of adverse events occurring during projects. Once experts involved in the procedure come to a consensus regarding the key risks in construction (financial, political, economic, engineering, etc.), the Monte Carlo method can be used for the assessment of risks. The likelihood and impact of risks will be differentiated into critical, high, moderate, low, and very low. Based on the differentiation, specific risk management efforts will be implemented.

Risk management

The project’s stakeholders must act immediately when the identified risks have been assigned to either critical or high-risk categories (HR Treasury 2004). Actions that can be introduced include risk transfers or risk retention. For instance, if the assessment shows that the financial risks are high and the project is highly likely to suffer from cost fluctuations, the decision-makers can introduce internal management strategies for risk retention. Such strategies can include the development of a strict cost-management system, efforts to divide the budget into sections for avoiding over-spending, and setting a budget for contingencies. In this way, the project will not have to transfer its risks to another party but it will be able to keep it under control with a more strict internal management plan.

Process documentation

While the key point of this risk management system is to identify, assess, and address risks that occur during the construction project, the integration of process documentation can help the decision-makers to ensure that the identified risks and their measures of control are implemented successfully. Moreover, documenting the risk management process will help in managing other potential risks, as well as in litigation to demonstrate that the construction project followed a model that minimized financially, engineering, and other risks.

Review and monitor

The last step within the proposed risk management system is concerned with the evaluation of the system’s success and its impact on the further progress of the project. The stakeholders should determine whether the identified risks have been successfully identified, assessed, managed, and documented to analyze the best practices that can be used in the future. It is also advised for the management to conduct a review of the risk management system after a certain period for determining its suitability in the context of railway construction.

Concluding Remarks

Risk management of such complex projects as railway construction requires not only the development of a successful system but also the involvement of a variety of methods and techniques targeted at identification and assessment. It has been concluded that financial risks (e.g., project funding, cost overruns, costs of delays, and costs of joint ventures) and construction/engineering risks (e.g., standardization, construction complexity, design completeness, infrastructure procurement, and system procurement) will have the greatest impact on the success of a railway construction project. The assessment of their influence is recommended for implementation with the help of the Monte Carlo method and the Delphi technique; while the former uses quantitative data, the latter is focused on qualitative data collected from questionnaires completed by experts. The integration of both quantitative and qualitative methods is expected to accommodate the complexity of the construction project, as well as the nature of risks that occur during its implementation. Based on the results of the risk assessment, the decision-makers in the project will have to act immediately to address those risks that fell under the category of high or critical risks. Methods of addressing risks can depend on the nature of risks, and range from risk retention, through internal management practices, to risk transfers to another party (e.g., an insurance company). Lastly, it is also highly recommended to document the entire risk management process and evaluate its effectiveness.

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Reference List

BS 31100 2011, Risk management. Code of practice and guidance for the implementation of BS ISO 31000. BSI, London.

BS EN31010 2010, Risk management. Risk assessment techniques. BSI, London.

California High-Speed Rail Authority 2012, Risk identification and mitigation, Web.

Delphi method n.d., Web.

Dziadosz, A & Rejment, M 2015, ‘Risk analysis in construction project – chosen methods’, Procedia Engineering, vol. 122, pp. 258-265.

Engineering Council 2011, Guidance on risk, Web.

HR Treasury 2004, The orange book. Management of risks – principles and concepts, Web.

IRM 2002, A risk management standard, Web.

Monte Carlo simulation 2018, Web.

Mousa, J 2005, Risk management in construction projects from contractors and owners’ perspectives, Master Thesis, The Islamic University of Gaza, Web.

Sunduck, D 2000, ‘Risk management in a large-scale new railway transport system project: evaluation of Korean high-speed railway experience’, IATSS Research, vol. 24, no. 2, pp. 53-63.

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