Every construction project carries risk. The difference between profitable and losing bids often comes down to how well risks are identified, assessed, and priced. This guide provides systematic techniques for bid-phase risk assessment.
Why Risk Assessment Matters
Impact of Poor Risk Assessment
| Outcome | Consequence | |---------|-------------| | Underpriced risk | Project losses | | Overpriced risk | Lost bids | | Unidentified risk | Costly surprises | | Ignored risk | Business failure |
Benefits of Systematic Assessment
- More accurate pricing
- Better bid/no-bid decisions
- Improved negotiation position
- Reduced project surprises
- Higher profitability
Risk Categories
Project Risks
| Category | Examples | |----------|----------| | Scope | Unclear specifications, incomplete design | | Schedule | Aggressive timeline, weather exposure | | Site | Access limitations, unknown conditions | | Technical | Complex systems, new technologies | | Coordination | Multiple primes, occupied facilities |
Business Risks
| Category | Examples | |----------|----------| | Financial | Payment terms, client solvency | | Contractual | Onerous terms, liability exposure | | Competitive | Market conditions, pricing pressure | | Resource | Availability of labor, materials | | Relationship | New client, difficult history |
External Risks
| Category | Examples | |----------|----------| | Economic | Material escalation, labor market | | Regulatory | Permit delays, code changes | | Environmental | Weather, site contamination | | Political | Funding uncertainty, policy changes | | Force majeure | Natural disasters, pandemics |
Risk Identification Process
Document Review
Key Documents to Analyze:
- Contract terms and conditions
- Specifications and drawings
- Geotechnical reports
- Survey and site information
- Schedule requirements
- Owner's project requirements
Risk Identification Checklist
Contract Risks:
- [ ] Liquidated damages provisions
- [ ] Indemnification scope
- [ ] Insurance requirements
- [ ] Warranty obligations
- [ ] Change order limitations
- [ ] Payment terms
- [ ] Dispute resolution process
Technical Risks:
- [ ] Specification clarity
- [ ] Drawing completeness
- [ ] Design coordination
- [ ] Performance requirements
- [ ] Testing requirements
- [ ] Commissioning scope
Site Risks:
- [ ] Access limitations
- [ ] Existing conditions
- [ ] Soil conditions
- [ ] Utility locations
- [ ] Environmental concerns
- [ ] Adjacent properties
Schedule Risks:
- [ ] Duration adequacy
- [ ] Weather days
- [ ] Owner-furnished items
- [ ] Permit timeline
- [ ] Long-lead items
- [ ] Liquidated damages
Team Risk Sessions
Conduct risk identification meetings:
Participants:
- Lead estimator
- Operations representative
- Project manager
- Safety manager
- Specialty consultants (as needed)
Session Approach:
- Review project documents
- Brainstorm potential risks
- Categorize identified risks
- Assess likelihood and impact
- Assign risk owners
Risk Quantification
Probability and Impact Matrix
| Probability / Impact | Low | Medium | High | |---------------------|-----|--------|------| | High (>60%) | Medium | High | Critical | | Medium (30-60%) | Low | Medium | High | | Low (<30%) | Low | Low | Medium |
Quantifying Risk Costs
Expected Value Method:
Risk Cost = Probability × Impact Amount
Example:
Risk: Unsuitable soil requiring remediation
Probability: 30%
Impact if occurs: $150,000
Expected Value: 0.30 × $150,000 = $45,000
Range Estimating
For significant risks, estimate a range:
| Scenario | Probability | Cost Impact | |----------|-------------|-------------| | Best case | 20% | $0 | | Most likely | 50% | $75,000 | | Worst case | 30% | $200,000 | | Expected value | | $97,500 |
Monte Carlo Analysis
For complex projects, consider probabilistic analysis:
- Model multiple risk variables
- Run thousands of simulations
- Generate probability distribution
- Identify confidence levels
Risk Pricing Strategies
Contingency Allocation
By Risk Type:
| Risk Category | Contingency Range | |---------------|-------------------| | Well-defined scope | 3-5% | | Some unknowns | 5-8% | | Significant unknowns | 8-12% | | Major uncertainty | 12-20%+ |
Line Item vs. Lump Sum
Line Item Approach:
- Price specific identified risks
- Transparent to owner
- Easier to justify
Lump Sum Contingency:
- General risk allowance
- Flexibility in application
- May be questioned by owner
Risk in Markup
Include risk assessment in markup decisions:
Base Markup: 18%
Risk-Based Adjustment:
+ Complex project: 2%
+ New client: 1%
+ Aggressive schedule: 2%
- Repeat client: -1%
Adjusted Markup: 22%
Contract Risk Mitigation
Negotiable Risk Terms
| Term | Preferred Position | |------|-------------------| | Liquidated damages | Reasonable daily amount, cap | | Indemnification | Mutual, limited to negligence | | Consequential damages | Mutual waiver | | Differing site conditions | Clear provisions | | Force majeure | Broad, with relief | | Delay damages | No damage for delay (limited) |
Non-Negotiable Responses
When unfavorable terms can't be changed:
- Price the risk explicitly
- Document in bid qualifications
- Consider bid/no-bid impact
- Ensure insurance coverage
Project-Specific Risk Factors
Renovation Projects
| Risk Factor | Assessment Focus | |-------------|-----------------| | Hidden conditions | Age, history, documentation | | Hazardous materials | Survey availability, age | | Structural adequacy | Documentation, observations | | System compatibility | Existing systems, integration | | Occupied areas | Operational constraints |
Site Work Projects
| Risk Factor | Assessment Focus | |-------------|-----------------| | Soil conditions | Geotechnical report adequacy | | Groundwater | Seasonal variations, dewatering | | Utilities | Locate accuracy, conflicts | | Weather exposure | Schedule duration, season | | Access | Weight restrictions, routes |
Fast-Track Projects
| Risk Factor | Assessment Focus | |-------------|-----------------| | Design completeness | Percentage complete, changes expected | | Coordination | Multiple packages, interfaces | | Schedule compression | Overtime, shift work needed | | Procurement | Long-lead items, availability | | Change frequency | Design evolution expected |
Risk Register
Creating a Risk Register
Document all identified risks:
| ID | Risk Description | Category | Probability | Impact | Expected Value | Owner | Mitigation | |----|-----------------|----------|-------------|--------|----------------|-------|------------| | R01 | Unsuitable soil | Site | 30% | $150K | $45K | PM | Geotech verification | | R02 | Weather delays | Schedule | 50% | $80K | $40K | Supt | Float, indoor work | | R03 | Material escalation | Economic | 40% | $100K | $40K | Est | Early procurement |
Risk Register Maintenance
During Bidding:
- Update as new information obtained
- Revise probabilities and impacts
- Add newly identified risks
- Calculate total risk exposure
If Awarded:
- Transfer to project team
- Monitor and manage
- Track actual vs. estimated
- Capture lessons learned
Common Risk Assessment Errors
| Error | Prevention | |-------|------------| | Optimism bias | Use historical data, peer review | | Anchoring | Start fresh each project | | Groupthink | Seek diverse perspectives | | Overconfidence | Challenge assumptions | | Ignoring low-probability | Consider tail risks |
Risk-Based Decision Making
Bid/No-Bid Considerations
| Risk Level | Consideration | |------------|---------------| | Acceptable | Proceed with proper pricing | | Elevated | Proceed with mitigation plan | | High | Careful go/no-go review | | Excessive | Decline unless terms change |
Go/No-Go Risk Factors
Automatic No-Bid:
- Uninsurable risks
- Contract terms unacceptable
- Risk exceeds project value
- Insufficient information to price
Requires Executive Review:
- Total risk >10% of contract
- Novel risk types
- Reputational exposure
- Financial capacity concerns
Related Articles
- Bid/No-Bid Decision Making Framework
- How to Calculate Construction Bid Markup
- Construction Bid Ethics and Compliance
Frequently Asked Questions
How much contingency is enough? It depends on project-specific risks. Use systematic assessment rather than standard percentages. Well-defined projects may need 3-5%, while uncertain projects may require 15-20% or more.
Should I share my risk assessment with the owner? Generally no, though you may need to justify pricing. Some delivery methods (CMAR, IPD) involve more transparent risk discussions.
How do I price risks I can't quantify? Use range estimates, seek more information, or qualify your bid to address the unknown. Consider if the uncertainty is too great to bid.
What if my risk assessment differs from management's? Document your analysis thoroughly and present it clearly. Final decisions rest with management, but informed decisions require good analysis.
How do I learn from past risk assessments? Track actual outcomes versus estimates. Conduct project close-out reviews. Build a database of risk factors and actual impacts for future reference.
