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 of information or ambiguity ..ISO Guide -73

The Risk
Future problems that can be avoided or mitigated, rather than current ones that must be immediately addressed. Risk can be seen as relating to the Probability of uncertain future events. The probable frequency and probable magnitude of future loss. Risk is ..the product of ( probability of a hazard resulting in an adverse event) * ( severity of event) -OHSAS

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

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

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 about proactively working with project stakeholders to minimise the risk and maximise the opportunities associated with project decisions.

Risk Management
The aim is not to avoid risk but to make more informed decisions to ensure that project objectives are achieved and , ideally, exceeded. The Challenge is not to avoid risk , but to take calculated risks, by recognising and managing effectively Risk Management is a proactive process of looking forward and is fundamentally different from Crisis Management. ~ Crisis Management is reactive and backward looking.

Risk Management
What is Risk Management ?
~ Risk Management is a methodology that help managers make best use of their available resources.

Risk Management
Who uses Risk Management ?
Risk Management practices are widely used in public and the private sectors, covering a wide range of activities or operations. These include: ~ Finance and Investment

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Insurance Health Care

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Public Institutions
Governments

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.

Risk Management
The basic process steps are: ~ Establish the context ~ Identify the risks ~ Analyze the risks ~ Evaluate the risks ~ Treat the risks

Risk Management
Risk is dynamic and subject to constant change, so the process includes continuing:

~ Monitoring and review ~ Communication & consultation

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 business priorities.

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

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

Risk Management
The Risk Management process:
~ Evaluate the risks

- Rank the risks according to management priorities, by risk category and rated by likelihood and possible cost or consequence.

- Determine inherent levels of risk.

Risk Management
The Risk Management process: ~ Treat the risks : - Develop and implement a plan with specific counter-measures to address the identified risks. ~ Consider: - Priorities (Strategic and operational) - Resources (human, financial and technical) - Risk acceptance, (i.e., low risks)

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.

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.

Risk Management
The Risk Management process: ~ Monitor and review :

-Risk Managers must monitor activities and processes to determine the accuracy of planning assumptions and the effectiveness of the measures taken to treat the risk.
- Methods can include data evaluation, audit, compliance measurement. ~ Communicate & consult

Risk Management
Evaluate the risks - After identifying and analyzing the risks, you can evaluate . What is the likelihood of the risk event occurring? - Almost certain - Likely - Moderate - Unlikely - Rare

Risk Management
What is the consequence if the risk event occurs? Extreme Very high Moderate Low Negligible

Risk Management
Evaluate the risks : - Describe or quantify exactly what is the Likelihood and Consequence terms mean to you. This helps in ensuring a consistent approach in future risk assessment and review and monitoring. It promotes a common understanding within the Administration.

Risk Management
Evaluate the risks :
After establishing Likelihood and Consequence, tabulate the workouts..

 Evaluate the risks :

Extreme Almost certain Likely

Risk Management
Very high Moderate Low Negligible

Severe

Severe

High

Major

Moderate

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

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 management plan.

- The plan catalogues the risks, the level of risk, and describes a treatment.
- The treatment is the action proposed, (and perhaps the resources allocated).

Risk Management
Treating the risks : ~ Development of Risk Profiles

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Industry audits
Random examinations Targeted selections Physical examination Compliance improvement

Risk Management
Contract Risk Management
Risks are the Chances or Probabilities of Damage or Loss.

Risk Management is a subject of guesstimate of future.

Risks are to be .. Identified Understood Evaluated and.. Mitigated
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Risk Management
Contract Risk Management
Element Causing Risks.. Silence on Certain Aspects
Inadequate Specifications Openness on Certain Aspects

Unlimited Liabilities

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Limitation on Liabilities

Sellers liabilities are specified under various clauses for identified circumstances. These are :

Termination of Contract - risk purchase Warranty / Guarantee - risk purchase Defects Liability Consequential & or indirect damages Indemnities Liquidated damages against delayed delivery & shortfall in performance
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Limitations on Liabilities

Sellers liabilities vary as per the stipulations of individual clauses. Put Cap on Overall Liabilities of the Seller arising out of All Clauses in the Contract.

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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 of any contract or for any indirect or consequential loss or damage which may be suffered by the other Party in connection with the Contract, other than .. (a) Under Sub-Clause16.4 (Payment on Termination) and (b) Sub-Clause 17.1( Indemnities )

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) Sub Clause 4.20 ( Employers Equipment and FreeIssue 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 .

Limitation of Liability
~ This Sub Clause shall not limit liability in any case of . fraud , deliberate default or reckless misconduct by the defaulting Party.

Risk Management Contract Risk Management

Force Majeure
Unforseeable Circumstances Beyond Partys Normal Business Acumen.

Beyond Partys Control.

Caused By An Irresistible Force.

Unavoidable Inspite Of The Reasonable Care

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Risk Management Contract Risk Management

Force Majeure Events
Nature
Government

Wars
Public Actions Industrial Circumstances Shortage Of Inputs
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Risk Management Force Majeure

~ Clause 19.1 :- FIDIC Definition of Force Majeure

In this Clause, "Force Majeure means an exceptional event or circumstance : (a) which is beyond a Partys control,
(b) which such Party could not reasonably have provided against before entering into the Contract.

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 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 person other than the Contractors Personnel and other employees of the Contractor and Sub-contractors,

Risk Management Force Majeure

(iv) munitions of war, explosive materials, ionising radiation or contamination by radio-activity, except as may be attributable to the Contractors use of such munitions ,explosives, radiation or radio- activity, and (v) natural catastrophes ,such as earthquake, hurricane ,typhoon or volcanic activity.

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 event or 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 Force Majeure

The Party shall having given notice, be excused performance 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 the Contract.

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 Force Majeure

~ Clause 19.4 :- Consequences of force Majeure If the Contractor is prevented from performing any of his obligations under the Contract by Force Majeure of 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:

Risk Management Force Majeure

(a) an extension of time for any such delay, if Completion is or will be delayed under Sub-Clause 8.4 [Extension of Time for Completion], And (b) if the event or circumstance is of the kind descried in sub paragraphs(i) to (iv) of Sub Clause 19.1[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 proceed in accordance with Sub-Clause 3.5 [Determinations] to agree or determine these matters

Risk Management Force Majeure

~ Clause 19.5 :- Force Majeure Affecting Subcontractor IF any Subcontractor is entitled under any contract or agreement relating to the Works to relief from force majeure 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 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 84 days 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 more than 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 Force Majeure

In this event, the termination shall take effect 7 days after 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 out for which a price is stated in the Contract;

Risk Management Force Majeure

(b) the Cost of Plant and Materials ordered for the Works 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 circumstance was reasonably incurred by the Contract in the expectation of completing the Works;

Risk Management Force Majeure

(d) the Cost of removal of Temporary Works and Contractors Equipment from the Site and the return of these items to the Contractors work in his country (or to any other destination at no greater 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 Force Majeure

~ Clause 19.7 :- Release from Performance under the Law 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 be released from further performance of the Contract, then upon notice by either Party to the other Party of such event or circumstance :

Risk Management Force Majeure

(a) the Parties shall be discharged from further performance, 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 SubClause 19.6.

Generic Formula for Variation Adjustment

Ln En Mn Pn a b L c E d M ..... O O O multiplier to be applied for the Pn = adjustment contract value. a = fixed coefficient, non adjustable part of the contract value. b, c, d.. = coefficients of percentage of each cost element. Ln, En, Mn.. = current cost indices/ reference prices for the period n L0, E0, M0.. = Base cost indices/ reference prices on the Base Date
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VARIATIONS PERTAINING TO MATERIAL COST

Price Variation Algorithm:

BPAN ECH N SPN SP 0.60 O X 0.20 BPA ECHO O
Where, SP = Sales Price; N = New ; O = Current; i=Initial BPA = Index Price per MT of Bisphenol A (BPA) ECH =Index Price per MT of Epichlorohydrin (ECH)
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i 0.20 XSP

VARIATIONS PERTAINING TO LABOUR COST

Necessary when the supplies are labour intensive Variation in basic wages of specified labour category Variation in dearness allowance Iv Ib + 0.30 Pq x Wv Wb Ib Wb Pv = Price variation payable; Pq = Quoted Price Iv = Average consumer Price Index for Ind. Workers for Pune for later 2/3 rd period Ib = Index for March (current year) Wv =Average Minimum basic Wages of skilled worker in sellers works for the month of completion of fabrication Wb = Wages for March (current year) Pv = 0.60 x Pq x

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II II

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