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Risk
In Common Use
Risk, in common parlance, is the chance that something "bad" will happen. As such, it is generally understood as a binary, win/loss relationship.
This model of discrete-probability is ubiquitous of project-management-tm, and is the sort assumed when using risk-registers.
This scope of work presents a 1 in 10 chance of significant delay.
In Cost Estimation
The prior model is well suited to project management, which (being reductive) cares about "why"s, where cost estimation only cares about the bottom line.
It is generally not useful for construction cost estimation. Potential impacts sufficient to warrant documenting should usually just be proposals#exclusions.
Cost estimators usually understand risk in terms of continuous-probability.
The reality of cost estimation is that there are no certain costs. Traditional construction estimates give a false impression of certainty because they operate on and return fixed values. With the most generous interpretation, they can be said to evaluate cost in the most likely case of each axis of uncertainty.
"Escalation" means projecting recent pricing to a later date of purchase based on anticipated market conditions.
The Problem
An incongruity exists between estimators and management. Estimators know that estimation isn't even close to 100% accurate, however for management to admit this would require them to admit to executives that they allowed the bid despite the potential that it would not return the expected margin.
This is an obviously immature mindset. More competent organizations would attempt to quantify this potential as risk, however words like "risk" and "assumption" are upsetting to management who would maintain that a "good" estimate has no risk or assumptions, so instead of quantifying risk we use qualitative queries and expressions. The usual call-and-response looks something like this:
"Are you confident in this price?" "Yes, I feel good about it."
The reality of estimation is that it involves approximations, assumptions, and judgment under uncertainty. Incomplete design information, market volatility, and unforeseen site conditions inherently affect accuracy.
In contrast, management often expect deterministic results, treating estimates as precise forecasts rather than probabilistic assessments. This expectation can stem from a lack of understanding about the estimation process or a desire to simplify communication with higher-level executives.
The terms "risk" and "assumption" while common in mature parlance, require acknowledgement of uncertainty, a threatening concept when personal accountability is ignorantly placed above organizational responsibility.
Assuming a manager was interested in preserving risk analysis details, frameworks for presenting job details usually lack the detail required to do so, and are sometimes even incompatible with the concept of multiple possible prices due to optional scope.
ISO 31000
ISO 31000 defines risk as the "effect of uncertainty on objectives" therefore referring to positive consequences of uncertainty, as well as negative ones.
The standard gives a list on how to deal with risk:
- Avoiding the risk by deciding not to start or continue with the activity that gives rise to the risk
- Accepting or increasing the risk in order to pursue an opportunity
- Removing the risk source
- Changing the likelihood
- Changing the consequences
- Sharing the risk with another party or parties (including contracts and risk financing)
- Retaining the risk by informed decision