Using Artificial Intelligence in Risk Management

One of the challenges that the construction industry has is a lack of coordinated data sharing.  Some agencies have started to collect large amounts of data, but it tends to be project specific, not particularly accessible and not organized in a way that it can be easily analyzed to develop usable information. 

Data mining could be particularly valuable for risk management and improving the quality of design and planning contracts.  If an agency had multiple years of change order data from its construction contracts it may be possible through data mining to extract information as to the types and severity of changes.  This information could be studied to identify reoccurring problem areas.  For example, if it was determined that large and consistent geotechnical related change orders occurred, it might point toward changing the design and planning process to require more geotechnical investigation. 

This same data mining could help categorize changes so that the severity and probability of various types of changes could be better understood, allow for better contingency forecasting, and promote better planning for how to handle individual changes.  For example, knowing that weather related changes occur on a certain percentage of a certain type of project and have a certain average impact would provide a better foundation for predicting the impact of these changes on individual projects and encourage more effective contract language and decision making for dealing with these impacts.

If such data is available, and before analysis starts, it needs to be reviewed to see if individual change descriptions accurately explain the reason for the change (for example, is there a bias against stating that there was a “design error” or the owner “changed criteria”) and whether the data is sufficiently detailed to extract usable keywords and phrases.  This exercise would also help contract administrators better coordinate with management to identify key data that should be tracked in the future and promote consistent change order language.

Is Dispute Resolution a Part of Risk Management

Isn’t Risk Management what you do prior to a problem occurring and Dispute Resolution what happens after the problem has occurred?

I often talk of construction dispute resolution and risk management as if they are the same thing.  If risk management is the identification, management and monitoring of each risk, that implies that a process has been established to determine how each risk will be handled.  This would include establishing who is best able to handle the risk, an approach to dealing with the risk, and subsequent monitoring to see whether those decisions are appropriate. 

If we define dispute resolution more broadly as implementing systems to deal with and reduce the impact of issues as they are identified – are the two that much different?  Some dispute resolution processes encourage consistent third-party involvement with a project from initiation to completion.  For example, Dispute Resolution Boards (DRBs) are often required to meet regularly throughout the course of a project so that they are familiar with progress and potential issues and, because of this familiarity, are able to quickly understand and deal with issues as they develop.

Many construction risks are not discrete, stand-alone occurrences, but are hard to separate from normal productive activities and often have related residual issues.  There is usually a period of time where consensus on the extent of the issue and appropriate resolution can be initiated prior to there being a significant impact if systems are in place to allow this to happen.  This process does not even have to be non-contentious – as long as there is alignment of purpose, agreements can be reached for many different and divergent reasons.

If dispute resolution is included as a part of a project’s issues escalation process, it would go a long way to meet the desired objective of avoiding or expeditiously resolving issues that could impact a project’s success.  This requires looking at ADR as not the last resort before litigation or what to do when everything else has failed, but rather as an integral part and an important element of the risk management process.

Better RFPs, Better Proposals

Owners often misunderstand how much effort goes into preparing a focused and informative proposal and, regrettably, professional service providers often don’t bother to go to the effort to prepare one because it is not always apparent that it makes a difference in the selection.  It is certainly no fun to slog your way through voluminous boilerplate that begins to look the same between each proposal.  It is also no fun to spend the time and incur the expense of preparing a comprehensive and detailed proposal if it seems that it will not be read.  

As the number of project opportunities starts to pick up with the renewed emphasis on rebuilding and expanding our infrastructure, proposers can become selective on what they seriously pursue, and owners will want to do everything possible to get the best teams working on their projects.

So, what can an owner do to improve this process? 

1) Decide what is important and tell the proposers what you want to know

This means spending the time to honestly evaluate how you will make your decision and to clearly describe the keys to making that decision.  Is it valuable to have each proposer discuss in depth their approach to every aspect of the project delivery process?  Do you value innovation?  How do you value company experience versus individual staff experience?  If what is important to you can be addressed in 20 pages instead of 120 pages, why not encourage brevity?

If an owner takes the time to explain what they want, it is incumbent upon proposers to respond accordingly. 

2) Provide all available information

Proposers spend a lot of time trying to locate and obtain all available information related to a project.  While it may be impressive that a company has the resources to dig up difficult to locate background information, it does not mean that they are the best team to do the work.

Providing all available studies and plans and conducting a thorough and informational pre-bid meeting shows that you as a client are serious and helps all proposers work from an even playing field. 

3) Shortlisting

The shortlisting process allows an owner the opportunity to tell individual proposers that they have a limited chance of being selected due to not addressing what is important, a lack of experience, or a lack of capability. 

While shortlisting might increase the amount of time and effort needed to make a selection, it will certainly increase the number of highly qualified bidders who might pursue your project and it allows you to focus on more detailed discussions ensuring better alignment between you and the successful proposer.

4) Pricing

Providing a price for professional services at proposal submission, at interview time, or in advance of a discussion of the exact scope and expectations is rarely a valuable exercise for either owner or proposer and detracts from the time that can be spent preparing a responsive proposal.  Also, for most public works projects, using price as a part of the selection for professional services is inconsistent with regulations.

While an owner may want to have some idea of the cost of what they are buying, depending on the assumptions made by each proposer, the pricing might vary significantly for what is seemingly the same work.  Wait until there is alignment on the scope of work before asking for pricing.

Robust Risk Management Can Lower Costs

The intent of risk management is to identify potential issues before they occur; track these issues throughout planning, design, construction and operations; develop ways to accommodate these issues that best allocates risk; and monitor the issues as your project progresses to see if they develop and whether the plan to deal with them is appropriate.  A robust program of risk management helps to properly price and schedule a project and helps reduce those surprises that prevent a project from progressing as planned.  Tips for effective use of your risk management program include:

·        Start early.  Every assumption made during planning and design results in a potential risk.  Keep track from the beginning of the planning stage so that they are not forgotten or overlooked.  Go back regularly to check if the approach to handling each risk is appropriate and the potential impacts and probability of occurrence still make sense.

·        Be fair.  If you made the decision as an owner to limit your budget for design or research (geotechnical exploration for example), don’t be shocked if there are change requests due to differing site conditions.  Expect to set an appropriate probability of occurrence and contingency for unforeseen conditions and be prepared to deal with them in a timely manner.

·        Share your risk register.  Keeping information of where there may be problems from your contractor may not be the best way to protect yourself.  Consider whether it is better for everyone to know and discuss issues in advance or to find out the issue in the field when crews are mobilized, and delay costs are substantial.

·        Recognize that all risks can have an impact on project progress.  Advances in schedule management promote having several work areas available – dependent upon the effective flow of resources and equipment and the ability to work unimpeded – with less focus on a single critical path.  Knowing where potential problems might be helps to identify where to shift resources when there are delays and lower potential impact costs.

·        Appreciate that information collection has improved spectacularly in the past years and contractors are able to accurately measure productivity.   Calculating and claiming for a loss of productivity (the “measured mile” approach) is much more credible.  Anticipating and planning will reduce the impact when change occurs.

·        Not all change is negative.  Tracking of potential positive issues is just as important as tracking potential negative ones.  The ability to capitalize on a positive change that has been identified and monitored is just as important as avoiding problems.

Why Contractors Do What They Do

What is the impact of some common contract terms:

·        Claim notification must be submitted within ?? days of an occurrence or the claim is void

·        All costs must be submitted within ?? days or they will not be considered.

·        The amount negotiated is full and final settlement for that change

·        No total cost claims are allowed

Each of these requirements is perfectly sensible, you need to be notified in a timely manner, costs should be collected expeditiously, and once negotiated, the costs of changes should be final.  Unfortunately, many changes are not so clear-cut as to have definite start and completion dates (do you make a claim for changed conditions after the first hard driving pile of 500, the 10th, ???).  A series of changes may have a different cumulative impact than the sum of the individual changes and some changes result in incremental increases in the cost of the work (for example, a high-water table impacting the rate at which material can be excavated).   If you work in area where strict notice regulations apply, as a contractor, you may have little choice but to claim quickly and claim often in order to protect your right to recovery.  Even if substantial compliance with contractual notice is accepted in your area, why take the chance?

What constitutes notice is sometimes an issue as well.  Is formal written notice of a potential claim required, are site meeting minutes sufficient, is the change so obvious that notice is a given?

A contractor has every right to be compensated for changed conditions and, as an owner, you should want your contractors to be paid for the work that they have done and to be recognized as a partner, not a combatant, in delivery of your projects.  Ignoring contract requirements is not a solution for either party, but appreciate that your contactor may be playing by the rules that you established and react accordingly.