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Systematic Approach for Determining Construction Contract Time: A Guidebook (2022)

Chapter: Chapter 5 - Relationship of Contract Time to Risk Management

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Suggested Citation:"Chapter 5 - Relationship of Contract Time to Risk Management." National Academies of Sciences, Engineering, and Medicine. 2022. Systematic Approach for Determining Construction Contract Time: A Guidebook. Washington, DC: The National Academies Press. doi: 10.17226/26537.
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Suggested Citation:"Chapter 5 - Relationship of Contract Time to Risk Management." National Academies of Sciences, Engineering, and Medicine. 2022. Systematic Approach for Determining Construction Contract Time: A Guidebook. Washington, DC: The National Academies Press. doi: 10.17226/26537.
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Suggested Citation:"Chapter 5 - Relationship of Contract Time to Risk Management." National Academies of Sciences, Engineering, and Medicine. 2022. Systematic Approach for Determining Construction Contract Time: A Guidebook. Washington, DC: The National Academies Press. doi: 10.17226/26537.
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Suggested Citation:"Chapter 5 - Relationship of Contract Time to Risk Management." National Academies of Sciences, Engineering, and Medicine. 2022. Systematic Approach for Determining Construction Contract Time: A Guidebook. Washington, DC: The National Academies Press. doi: 10.17226/26537.
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Suggested Citation:"Chapter 5 - Relationship of Contract Time to Risk Management." National Academies of Sciences, Engineering, and Medicine. 2022. Systematic Approach for Determining Construction Contract Time: A Guidebook. Washington, DC: The National Academies Press. doi: 10.17226/26537.
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Suggested Citation:"Chapter 5 - Relationship of Contract Time to Risk Management." National Academies of Sciences, Engineering, and Medicine. 2022. Systematic Approach for Determining Construction Contract Time: A Guidebook. Washington, DC: The National Academies Press. doi: 10.17226/26537.
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Suggested Citation:"Chapter 5 - Relationship of Contract Time to Risk Management." National Academies of Sciences, Engineering, and Medicine. 2022. Systematic Approach for Determining Construction Contract Time: A Guidebook. Washington, DC: The National Academies Press. doi: 10.17226/26537.
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Suggested Citation:"Chapter 5 - Relationship of Contract Time to Risk Management." National Academies of Sciences, Engineering, and Medicine. 2022. Systematic Approach for Determining Construction Contract Time: A Guidebook. Washington, DC: The National Academies Press. doi: 10.17226/26537.
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Suggested Citation:"Chapter 5 - Relationship of Contract Time to Risk Management." National Academies of Sciences, Engineering, and Medicine. 2022. Systematic Approach for Determining Construction Contract Time: A Guidebook. Washington, DC: The National Academies Press. doi: 10.17226/26537.
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Suggested Citation:"Chapter 5 - Relationship of Contract Time to Risk Management." National Academies of Sciences, Engineering, and Medicine. 2022. Systematic Approach for Determining Construction Contract Time: A Guidebook. Washington, DC: The National Academies Press. doi: 10.17226/26537.
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Suggested Citation:"Chapter 5 - Relationship of Contract Time to Risk Management." National Academies of Sciences, Engineering, and Medicine. 2022. Systematic Approach for Determining Construction Contract Time: A Guidebook. Washington, DC: The National Academies Press. doi: 10.17226/26537.
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Suggested Citation:"Chapter 5 - Relationship of Contract Time to Risk Management." National Academies of Sciences, Engineering, and Medicine. 2022. Systematic Approach for Determining Construction Contract Time: A Guidebook. Washington, DC: The National Academies Press. doi: 10.17226/26537.
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Suggested Citation:"Chapter 5 - Relationship of Contract Time to Risk Management." National Academies of Sciences, Engineering, and Medicine. 2022. Systematic Approach for Determining Construction Contract Time: A Guidebook. Washington, DC: The National Academies Press. doi: 10.17226/26537.
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Suggested Citation:"Chapter 5 - Relationship of Contract Time to Risk Management." National Academies of Sciences, Engineering, and Medicine. 2022. Systematic Approach for Determining Construction Contract Time: A Guidebook. Washington, DC: The National Academies Press. doi: 10.17226/26537.
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Suggested Citation:"Chapter 5 - Relationship of Contract Time to Risk Management." National Academies of Sciences, Engineering, and Medicine. 2022. Systematic Approach for Determining Construction Contract Time: A Guidebook. Washington, DC: The National Academies Press. doi: 10.17226/26537.
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Suggested Citation:"Chapter 5 - Relationship of Contract Time to Risk Management." National Academies of Sciences, Engineering, and Medicine. 2022. Systematic Approach for Determining Construction Contract Time: A Guidebook. Washington, DC: The National Academies Press. doi: 10.17226/26537.
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Suggested Citation:"Chapter 5 - Relationship of Contract Time to Risk Management." National Academies of Sciences, Engineering, and Medicine. 2022. Systematic Approach for Determining Construction Contract Time: A Guidebook. Washington, DC: The National Academies Press. doi: 10.17226/26537.
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Suggested Citation:"Chapter 5 - Relationship of Contract Time to Risk Management." National Academies of Sciences, Engineering, and Medicine. 2022. Systematic Approach for Determining Construction Contract Time: A Guidebook. Washington, DC: The National Academies Press. doi: 10.17226/26537.
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86 Risk management is the process of dealing with project uncertainties. An eective risk man- agement process consists of a systematic identication and evaluation of project risks and the development of mitigating procedures for reducing or allocating adverse risk eects. e pur- pose of schedule risk management is to concentrate on schedule-related risk factors and propose methods for identifying, quantifying, and mitigating these risks. Project delays cause inconve- nience and hardship for the traveling public and increase project costs. Every state transporta- tion agency strives to control and minimize project delays and prevent schedule overruns. Large and complex transportation projects have been plagued with budget and schedule overruns, and this circumstance has caused a surge of interest in risk management. Beginning in the early 2000s, some state agencies started implementing formal risk assessments for their transporta- tion projects, and currently the FHWA requires that risk assessments be done on all major projects as a condition for funding. In 2014, TRB’s SHRP2 program published the Guide for the Process of Managing Risk on Rapid Renewal Projects (Golder et al. 2014). At present, several state DOTs have developed guidelines for formal risk management to be followed in their capital project development and planning. In this guidebook, risk assessment and mitigation principles have been incorporated into the project duration determination process so that an accurate and eective duration time can be established for the project. e emphasis in this chapter is on how to use the outcome of schedule risk assessment in CTD. e outcome of the risk assessment exercise consists of listing the major risk factors that can aect project schedule and measuring the potential impact of each factor on the project completion date. A risk report can also be created to show the range of possible project durations. Using this information, the contract time developer will be in a position to establish a CTD that is reasonable and defensible. Risk assessment is a costly process that needs to be planned and undertaken carefully. e eort should be planned by considering the importance and size of the project. Accordingly, this chapter provides guidance on the risk assessment process for smaller and larger projects with an emphasis on using the outcome for the CTD. A quick review of the list of highway projects undertaken by various DOTs shows that most can be categorized as smaller projects, for which a deterministic approach is sucient for conducting the risk analysis. For these smaller projects, an overall contingency duration for the project can be determined through qualitative risk quantication based on historical data and the expert opinion of the sta. For larger projects that involve a longer duration and risk major consequences due to delay, it may be justied to use probabilistic methods for quanti- fying the uncertainties. e introduction of stochastic elements into a duration model may be necessary because they transform the model from an exact statement to a probabilistic description about expected outcomes. C H A P T E R   5 Relationship of Contract Time to Risk Management

Relationship of Contract Time to Risk Management 87   e timing of risk assessment corresponds to the project development phases. At the planning phase, although project information such as project details and characteristics is limited, it is still benecial to start the risk management process. rough risk identication and qualitative risk quantication, the relative risks of diering project alternatives can be compared. Such comparisons can help the agency choose among alternatives, such as design alternatives or project delivery alternatives. A comprehensive probabilistic risk analysis can be conducted aer the completion of preliminary design and during the nal design phase, by which time more information about the project has become available. e project team should also develop and establish risk mitigation strategies and a monitoring plan during the nal design phase. During the bid proposal development phase, the risk mitigation strategies should be considered and incorporated when determining the contract time and draing the contract. When a project enters the construction stage, the main focus is continuing to monitor previously identied risk factors and manage schedule contingencies. Although the size and importance of the project dictates the steps in the risk assessment pro- cess and the project development phases dictate the timing of the risk assessment, other factors will also have to be considered. e following factors are discussed in this context: • e project delivery method (traditional DBB or APDM), which aects the range of outcomes and the timing of the risk assessment process; and • e chosen contracting technique or techniques (e.g., regular DBB versus A+B with incentives). 5.1 Systematic Stepwise Procedure During the past decade, many DOTs have started implementing comprehensive risk manage- ment methods for their capital projects. Examples of risk management guidelines include those prepared by the Washington State DOT (2014) and the Virginia DOT (2015). e Virginia DOT uses a risk matrix to outline schedule risk factors along with their respective impact and prob- ability of occurrence and updates the matrix at major milestones in the project development process. e Utah DOT utilizes risk management meetings, risk matrices, Monte Carlo simula- tion, and detailed documentation for the risk management process. For larger projects, risk registers and risk matrices are widely used by DOTs, including the Massachusetts DOT, the New York State DOT, and the Washington State DOT. Figure 5-1 provides an overview of the risk management process. e project phase and project size/complexity decide the risk analysis method to be used. e risk management process is well developed and has been frequently used in the past 10 years. It systematically (1) identies the major sources of uncertainty/risk and their trigger events, (2) selects the risk analysis methods based on project size and complexity, (3) analyzes the combined eect of the risk impacts on total project and milestones’ completion times/ dates, (4) develops mitigation measures to cope with adverse eects of the identied risks, and (5) utilizes the output of risk analysis in establishing contract time. e preparation work for starting such a process is a comprehensive review of base project scope, cost, and schedule to validate reasonableness. e remaining sections of this chapter briey describe each step.

88 Systematic Approach for Determining Construction Contract Time: A Guidebook Figure 5-1. Schedule risk management process.

Relationship of Contract Time to Risk Management 89   5.1.1 Step 1—Risk Identication Schedule risk identication is the process of identifying risks that can adversely aect the project schedule. e overview provided in Figure 5-2 summarizes key aspects of this step. Schedule risks are closely related to the inuential factors of project duration and contract time. A listing of these inuential factors is available in the spreadsheet-based CTD4HP Toolkit that accompanies this guidebook. e list in the toolkit can be used as a starting point for risk identication. Some inuential factors, such as location and type of work, are considered deterministic, whereas other inuential factors—mostly schedule risks—are subject to uncertainty. A risk checklist or a catalog with a listing of the typical risk factors from past similar projects is usually used as a starting point and guide for identifying risks. A risk checklist ensures that the project team has not missed any major risk factors. Required documents and information. Risk catalog/checklist. The outcome of this step. Initial risk register. The methods and tools used in this step. Review project documents. Validate project schedule/cost. Group brainstorming to examine past similar projects. Expert interview(s). Risk workshop. Figure 5-2. Overview of Step 1— Risk identication. Step 1 Risk Identification

90 Systematic Approach for Determining Construction Contract Time: A Guidebook e concept of risk breakdown structure (RBS) can be used to list project risks in a hierar- chical structure arranged by risk category and subcategory. An example of RBS is provided in Appendix A (Tool T5.1). For example, project risks can be categorized according to the following breakdown: • Technical risks, • Organizational risks, • Environmental risks, and • Social and economic risks. An initial risk register—consisting of a list of schedule risk factors for the specic project— provides the basis for the project’s risk analysis. Several project attributes need to be considered in developing a project risk register. Project type and project location can mostly inuence the technical, social, and economic risks, whereas dierent contract times (e.g., calendar days versus working days) and contracting methods (e.g., unit price versus xed price) will mainly inuence the organizational risks. For example, a new construction project will likely be subject to tech- nical risks such as poor site conditions and unexpected geotechnical issues, whereas a pavement repair project may be subject to fewer unknown factors aecting the schedule. e locations of projects (e.g., urban or rural projects) also lead to diering schedule risks. In comparison to rural projects, urban projects tend to have more organizational and stake- holder-related risks, such as restricted working time, coordination with other projects, high- volume trac, and scope creep due to stakeholders’ particular demands. e project delivery method will aect both the distribution of risks between the contract parties and the timing of the risk assessment process. During the past 2 decades, the emergence of APDMs has provided agencies with new approaches, but a full understanding of these methods and their associated risks is vital for project success. e choice of contract time also can shape the risk picture for agencies. For example, if the contract time type is working days but ambiguity exists about how working days will be charged, delays can be caused by the need to resolve contractual disputes. When a xed completion date contract is used, safety issues such as unsafe operation and risks related to poor project quality management might become more dominant because of pressure to crash the project duration. According to the Colorado DOT’s Innovative Contracting Guidelines (2015): e Department must ensure the overall duration of time available is reasonable and completion is achiev- able. If these conditions cannot be veried a signicant risk is created. e Department’s risks include: the project will not be completed on the specied date; increased costs for extended engineer support; increased potential for losses related to disputes and claims; loss of creditability; potential negative impacts to sub- sequent dependent projects; and stang resources not being available to support other projects and/or needs. e Contractor’s risks include nancial loss for department specied damages; losses for extended labor eorts and project support; and loss of ability to bond, bid and construct other projects. For each identied risk factor, the impact of the risk and the likelihood of occurrence can be estimated by the project experts during a risk assessment workshop. Step 1 Risk Identification

Relationship of Contract Time to Risk Management 91   5.1.2 Step 2—Select the Risk Analysis Method The tools used for the risk analysis may differ depending on the nature and the size of the project. Highway projects may be categorized into two classes: 1. Larger and more complex projects that consist of multiple phases and are affected by conges- tion, and 2. Smaller projects that are typically one-season or two-season projects with limited costs. Most state DOTs approach the risk analysis process based on project dollar size. It is under- stood that project dollar size alone is not always the best indicator of the riskiness of the project. As an example, some large-scale projects consist of relatively simple construction activities with little complexity. Thus, it may be possible to establish project duration in such cases with rela- tive ease. Despite this possibility, it is expected that major cost and schedule overruns are more prominent in larger projects. As an example, in the Colorado DOT construction manual, projects of high risk, medium risk, and low risk are defined as projects that cost over $40 million, between $40 million and $10 million, and below $10 million, respectively (Colorado DOT 2015). In the Washington State DOT’s manual, this classification is $100 million, $25 million, and $10 million (Washington State DOT 2014). At the New York State DOT, if the dollar value of a federally aided project is over $100 million, then a formal risk analysis based on probabilistic risk assess- ment is required in the project management plan. During the interviews conducted for NCHRP Project 08-114A, the Utah DOT mentioned that it conducts formal schedule risk analysis for larger scope projects (over approximately $30 million) during preconstruction, whereas informal risk analysis is conducted for smaller scope projects. It is difficult to specify a threshold to separate smaller projects from larger projects because the threshold may vary from state to state depending on their project portfolio and the degree of complexity of the projects contained in the portfolio. The research team suggests that as a starting point, projects under $10 million can be considered smaller projects, and revisions can be made as needed depending on the experience gained by the agency as it conducts the risk assessments. Figure 5-3 provides an overview of Step 2 that summarizes key aspects of this step. The risk management effort needs to be commensurate with the size and complexity of the project. Expending an inordinate effort on risk management of small projects may not be economically justifiable. Generally, a qualitative risk analysis can be conducted in 1 day and can provide an overall assessment of the project’s risk level for decision-making. Thus, this approach is appli- cable for small and simple projects. Because the quantitative risk analysis involves probabilistic methods and simulations that might require trained professionals with a statistical background, such efforts usually includes a cost/schedule risk workshop that may extend over a few days and are justified for larger projects that would face major consequences from delays. Step 2 Select Risk Analysis Method Required documents and information. Project scope, schedule, and cost estimate. The outcome of this step. Decision on risk analysis method. The methods and tools used in this step. Evaluate the importance and complexity of the project. Examine the information available at the current phase. Figure 5-3. Overview of Step 2—Select the risk analysis method.

92 Systematic Approach for Determining Construction Contract Time: A Guidebook Step 3a Qualitative Risk Analysis Required documents and information. Initial risk register. The outcome of this step. A qualitative risk register with risk scores which can be used for risk ranking and/or direct mitigation. The methods and tools used by this step. Convene a workshop to rate risk factors using qualitative ratings such as red/yellow/green (high, medium, low) or numerical ratings, such as the Likert Scale or a risk matrix. Figure 5-4. Overview of Step 3a—Qualitative risk analysis. 5.1.3 Step 3a—Qualitative Risk Analysis The qualitative approach to risk analysis involves assessing the likelihood and consequences of risks in terms of subjective ratings. A qualitative risk analysis typically is used to adjust a top-down PDE. Figure 5-4 provides an overview that summarizes key aspects of this step. The risk rating (or scoring) is based on the understanding of the project team regarding the types of risks that can affect the project, which are assessed both in terms of how likely they are to occur and the level of impact the risk will have on the project if it does occur. For example, an identi- fied risk might be assessed as having a high likelihood of occurrence and a medium impact on scheduling if it occurs. Another approach uses numerical ratings (e.g., a 5-point Likert scale, with 1 for very low impact or likelihood and 5 for very high impact or likelihood) to measure the likelihood of occurrence and the impact of a risk should it occur. Typically, during the risk analysis, a risk score can be calculated by multiplying the likelihood and the impact and using the product as a ranking tool. A mitigation strategy will be developed and implemented for those highly ranked risks. The results should be documented in a risk register that serves as a baseline for further risk management steps. An example of a partial risk register is shown in Table 5.1, and a template can be found in the risk management tool set. The output of qualitative risk analysis is a risk matrix that serves as a baseline for developing risk mitigation strategies and monitoring risks during the project implementation (see Table 5-1). Experts from both the Massachusetts DOT and the New York State DOT strongly suggest focusing on the major risk factors and avoiding including an excessive number of risks in the risk register. Identifying too many minor risk factors may overwhelm the project team and clutter project objectives. A risk matrix is a commonly used tool for ranking risks qualitatively. A risk matrix is an effective tool to show the likelihood and impact of identified risks schematically.

Relationship of Contract Time to Risk Management 93   The qualitative approach to risk analysis is relatively quick, and the risk matrix provides a simple visual rating. In this way, working from the risk register, project participants can quickly develop an overall assessment of the risk level of the project. Such an assessment can inform participants if the current project will likely take a longer time than similar historical projects, and the results of a top-down PDE can be adjusted accordingly to decide the contract time. When working with a risk matrix it is prudent to concentrate on the top-ranked risks (e.g., five or fewer risk factors) and estimate the potential delay caused by each factor. The assessment is done by the risk assessment team (or, in the case of small projects, by the person responsible for preparing the project schedule). The potential cumulative delay due to these risk factors is either additive (if the risks affect portions of work that are sequential, such as activities in-series in the CPM) or concurrent (such as parallel activities in a CPM network). In case of concurrent delays, the scheduler needs to decide what portions of various delays are additive and estimate the combined effect of these delays. The combined effect of delays will be added to the base schedule duration to arrive at the project completion time. For some small projects, schedulers do not use CPM. For these projects, schedulers may rely on production rates or general rules of thumb (e.g., 1 season versus 2 seasons as an estimate of project duration). Given this factor, the accuracy of a qualitative risk assessment will depend on the experience and knowledge of the scheduler rather than on the mathematical accuracy of the approach. Risk ID Risk/ Opportunity Description of Risk Likelihood of Occurrence (Scale: 1 to 5 *) Impact of Risk (Scale: 1 to 5 *) Risk Score (Likelihood × Impact) Risk #1 Maintenance of traffic Real traffic may vary from predicted traffic and cause delays. 4 4 16 Risk #2 Working time restrictions Disruption to the public could lead to restricted work time and reduced production rate. 4 4 16 Risk #3 ROW availability ROW acquisition could be delayed because of condemnations and demolitions. 3 4 12 Risk #4 Soil conditions The depth and seasonal and spatial variability of 3 3 9 groundwater could cause delays. Risk #5 Coordination with other projects The interface with other projects may influence the construction methods and production rate. 3 3 9 * Rating Scale: 1 = lowest risk/least impact; 5 = highest risk/highest impact. Table 5-1. Example of a qualitative risk matrix based on a risk register listing five items. Step 3a Qualitative Risk Analysis

94 Systematic Approach for Determining Construction Contract Time: A Guidebook 5.1.4 Step 3b—Quantitative Risk Analysis A quantitative risk analysis can help the project team gain a better understanding of the like- lihood for achieving existing milestones and the effect of individual risk factors on the project schedule. Based on such information, a logical and defensible schedule contingency can be established. A quantitative risk analysis typically is used to adjust a bottom-up PDE. Figure 5-5 provides an overview that summarizes key aspects of quantitative risk analysis. When the quantitative risk approach is adopted, the project team begins by assessing the specific probability of occurrence and the duration impacts of each risk factor, and then con- ducts a Monte Carlo simulation based on a network (such as the CPM network of the project schedule). The schedule modeling process is different from cost risk modeling. In cost risk analysis, the total risk cost—a summation of all risks—is added to the project base estimate to arrive at the total required cost. However, the schedule is not simply additive given the existence of network logic among activities. As a result, the project team generally works with a summary- level network of the project schedule (including 30–100 activities). Additional details about the quantitative risk analysis process can be found in Appendix A. Required documents and information. Initial risk register. The outcome of this step. A Risk Report that provides a list of the risks and their combined impact on project duration and the probabilities of achieving various project durations. The methods and tools used in this step. Convene a risk workshop to quantify risk impacts and likelihoods. Calculate the combined effect of risks using Monte Carlo simulation or analytical methods. Link the risks to project activities. Model activity durations using probability distributions and consider the relationships/correlations among activities using Monte Carlo simulation of the schedule network. Figure 5-5. Overview of Step 3b—Quantitative risk analysis. Step 3b Quantitative Risk Analysis

Relationship of Contract Time to Risk Management 95   Step 3b Quantitative Risk Analysis Figure 5-6. Sample histogram and cumulative distribution function for a total schedule. The output of the quantitative risk analysis is a Risk Report that provides context and evaluation for risk factors, a histogram of possible project durations, and a contingency analysis. Specifically, the project team can set an appropriate (desired) confidence level and establish the contract time based on that confidence level using the cumulative distribution function for total duration. Figure 5-6 shows a sample histogram and cumulative distribution function for a total schedule. In this example, if a confidence level of 90 percent has been selected, the project duration will be established such that there is a probability of 90 percent that the project will not suffer from delay. In Figure 5-6, in order to have a confidence level of 90 percent, a project completion date of 9/27/2029 has been established. It is also possible to calculate the percentage of times that any activity falls on the critical path(s). This element, called the criticality index, measures the activity’s criticality and its impact on project milestones and completion dates.

96 Systematic Approach for Determining Construction Contract Time: A Guidebook 5.1.5 Step 4—Risk Mitigation and Monitoring The risk mitigation and monitoring process involves preparing a Risk Mitigation Plan (RMP) based on the risk analysis results and then implementing the plan. Figure 5-7 provides an overview that summarizes key aspects of this step. The RMP usually involves identifying the underlying causes (or triggers) of risks, developing mitigation strategies, and allocating the management of the risks to various project parties. Both the identification and prioritization of risks and their causes/triggers allow DOTs to develop more targeted and cost-effective risk mitigation strategies. To develop risk mitigation strategies, the project team first needs to determine which signifi- cant schedule-related risks it can mitigate. Both technical risks and non-technical risks may need to be considered. The mitigation decisions for technical risks can be made by the project team, whereas the mitigation decisions for non-technical risks might be more appropriately left to the DOT’s executive management and policy boards. In general, risks should be allocated to the party best able to deal with them, and the contract should seek to achieve a fair and balanced allocation of risks between the owner/agency and the contractor. Improper or unbalanced allocation of risks may result in severe and adverse impacts. It is advisable to think of the RMP as an evolving process rather than as a static plan. The project team will need to reevaluate and update risk mitigation strategies if previously unanticipated risks arise during construction. Also, “old” risk factors may be retired or mitigated over time. As the project progresses, these changes should be added to the RMP. The risk manage- ment process ends when the project is completed and opened for use. A template register that can be used to develop an RMP is provided as Tool T5.2 in the CTD4HP Toolkit (see Appendix A). Required documents and information. A Risk Report prepared based on the qualitative or quantitative risk assessment. The outcome of this step. A Risk Mitigation Plan (RMP). The methods and tools used in this step. Convene a risk mitigation workshop to identify the underlying causes of risks, develop mitigation strategies, and allocate risks to various project parties. Implement the RMP. Monitor and update the risk register, reanalyze risks and review risk management plan periodically, especially at major milestones or after major changes in conditions. Figure 5-7. Overview of Step 4—Risk mitigation and monitoring. Step 4 Risk Mitigation & Monitoring

Relationship of Contract Time to Risk Management 97   5.1.6 Step 5—Utilize the Output [of the Risk Analysis] in CTD As mentioned in Chapter 2, the contract completion time that results from a CTD approach is not necessarily the same as the completion time that results from the PDE. The contract time is often driven by external factors and establishes an ultimate deadline for the project. In contrast, the PDE is a method-driven approach, and it considers factors internal to the project (e.g., activity duration, activity precedence logic, the working calendar, project location, and the like). Estimates are always fraught with uncertainty because of a lack of information. In order to establish an accurate contract time, the uncertainties need to be quantified and accounted for. Figure 5-8 illustrates how the output of the risk management procedures followed in Steps 1 through 4 can be applied in CTD. For small (e.g., 1-season) projects, the project team may assess the overall project risk level by referring to the list of identified risk factors, rank them by their importance, and use the information to make a realistic contract time decision. For larger and more complex projects, agencies may conduct a detailed bottom-up PDE and risk analysis using a network model (such as CPM) developed during the earlier stages of the project and updated as the design progresses. For example, at the bidding stage, the risk report may consist of a distribution similar to that shown in Figure 5-6. This risk report can be used to assess the established contract time. If, based on its experience, a highway agency strives for a confidence level of approximately 80 percent for schedule determination, then a duration based on an 80 percent confidence level can be read off the chart (see Figure 5-6). The selection of the confidence level will vary depending on the priorities of the highway agency and its attitude toward risk. For risk-averse highway agencies where a lower confidence level is unacceptable, DBB with incentives (i.e., the A+B method with I/D and LR) may be suggested to cope with the schedule risks. As was discussed in Chapter 3, the A+B bidding process, through offering an early completion bonus, incentivizes contractors to come up with innovative ways to reduce construction duration. Figure 5-9 provides an overview of the proce- dure for utilizing risk analysis results in CTD. Step 5 Utilize Output in CTD

larger smaller Schedule Risk Identification Initial Schedule Risk Register Schedule Network Simulation Risk Analysis Workshop Risk Analysis Workshop Project Size/ Complexity Completed Schedule Risk Register Completed Schedule Risk Register Risk Mitigation Workshop Risk Mitigation Plan CTD CTD = Completion of preliminary engineering = Completion of final design Revised Schedule Figure 5-8. Application of risk management output in CTD. Step 5 U tilize O utput in C TD

Relationship of Contract Time to Risk Management 99   Step 5 Utilize Output in CTD Required documents and information. Risk register or Risk Report. Estimated project duration. The outcome of this step. Contract time decision. The methods and tools used in this step. For smaller projects, the risk register obtained through qualitative analysis informs the agency about the project’s overall risk level. The agency could increase or decrease the estimated duration (PDE) accordingly to establish the contract time. For larger and more complex projects, the risk report derived through a quantitative analysis includes a distribution of possible project durations that enables the agency to decide on a contract time based on the desired confidence level. Figure 5-9. Overview of Step 5—Utilize output in CTD.

100 Systematic Approach for Determining Construction Contract Time: A Guidebook Preliminary design RFQ RFP Select Award Final Design Build DB contract time Planning Preliminary risk assessment Full-fledged probabilistic risk assessment CTD Figure 5-10. Timing of risk management for DB projects. 5.2 Contracting Methods and Their Impact on Risk Management 5.2.1 Risk Management for DB Projects e past two decades have seen a rise in the use of APDMs such as DB and CMGC in trans- portation projects. e risk management process remains the same regardless of the delivery method used. For DB projects, however, the allocation of risks and the timing of the risk analysis workshop diers from the traditional contracting method. DB delivery has been mainly used in large and/or complex highway projects. As such, it is reasonable to disregard the qualitative risk analysis and only consider the quantitative approach (described in Step 3b). e quantitative approach usually involves the use of rigorous measure- ment of the eects and likelihood of various risk factors and may involve the use of simulation for developing the distribution of risks for the total project duration. In the DB approach, the contractor is usually selected aer the conclusion of the preliminary engineering phase. Oen, the owner agency performs the risk analysis before selecting the contractor because the results of the analysis will help in establishing the project budget and duration. is method means that, for DB projects, the risk analysis is performed at an earlier stage than in a traditional DBB project. At this earlier stage, the risk factors are less dened and have larger variances. Figure 5-10 shows a sample timeline for conducting risk assessments in DB projects. e list of risks in the risk register for DB projects usually diers from the list in the traditional project deliveries. In DB projects, the owner shis the design-related risks to the contractor; therefore, the contractor cannot claim extra time due to design errors and omissions. Table 5-2 highlights some of the important dierences in risk allocation across various project delivery Contracting methods The owner/agency The contractor DBB/A+B Has design responsibility. Preconstruction phase services. Risks may include unidentified utilities affecting site, third-party litigation, environmental impact reviews, and ROW acquisition. Construction phase services. Risks may include project site safety and coordination of construction. DB Part of the preconstruction phase services. Risks may include third-party litigation, environmental approvals, and ROW acquisition. Has design responsibility. Part of the preconstruction phase services. Risks may include unidentified utilities affecting site. Construction phase services. Risks may include project site safety and coordination of construction. Table 5-2. Schedule risk allocation under different contracting methods.

Relationship of Contract Time to Risk Management 101   methods. Because the design-builder is the single point of responsibility, project delays caused by ineffective communication among contract parties can be reduced to some extent; however, if a highway agency has not used DB in the past, it is likely that this delivery method can cause delays due to the novelty of the approach, lack of experienced agency personnel, and unfamiliarity with local contractors. 5.2.2 Risk Management for A+B with Incentive/Disincentive Contracts Chapter 3 described the use of the A+B approach in highway projects. The A+B approach is mainly intended for projects in which traffic delays need to be held to a minimum or projects during which public safety can be endangered. Examples include projects in urban areas with heavy traffic volume, major bridges, or projects located within high accident areas that could worsen during construction. One area of concern in A+B projects is the risk that the bid values will fall well below the engineer’s duration estimate, which can result in large incentive payments to the contractor. Given that the intent of the A+B approach is to reduce total construction time, the outcome is not necessarily undesirable; however, the incentives and the engineer’s estimates may some- times be unnecessarily generous. A review of highway projects in California during the period 2003–2008 showed that the average contractor’s bid was about 40 percent lower than the engineer’s estimated duration (Bajari and Lewis 2009). Kent (2003) reviewed highway projects for the New York State DOT and reported that, in a sample of 133 projects, contractors underbid the engineer’s duration estimate on average by 31 percent. In 114 out of 133 projects (∼85 percent), the contractors earned incentives. An effective risk assessment can help the agency come up with a reasonable time estimate so that the contractor has sufficient incentive to bid on an A+B project but the agency will be some- what protected against paying out windfall profits to the contractor. As shown by the example in Figure 5-6, a comprehensive risk assessment yields a distribution of project duration. This distribution provides a possible range for the project duration that covers a wide range of likely risk events that can be used to establish a fair CTD for A+B contracts. The selection of the confidence level is a policy decision that depends on the risk perceptions of the agency. This decision often will be based on the agency’s previous experience. If the agency has used the traditional approach in establishing the CTD, the agency will have provided a duration with a much lower likelihood of delay (which is reasonable when no incentive exists for early completion). This traditional duration will most likely account for the most likely and predictable contingencies that arise in typical projects. Especially in the case of traditional contracts, the CTD can be established at a somewhat conservative confidence level, such as 80 percent. For A+B contracts, however, it may be advisable to consider selecting a lower value. Consider an agency that selects a 50 percent confidence level. This confidence level implies that there is a 50 percent chance that the bidder will receive an incentive or disincentive (see Figure 5-11), and the process may allow a relatively large incentive payout to the contractor. Ideally, a balance will be struck that curbs excessive windfalls for the contractor but also fairly rewards the contractor’s performance. The choice of a confidence level for duration distribution can be a trial-and-error procedure that is fine-tuned over time as the agency collects data on contractors’ performances and A+B projects. For example, the agency may decide to establish the project duration for A+B contracts based on a 65 percent confidence level to encourage more competition. The use of formal risk assessment in A+B CTD may be limited to larger projects in which conducting a comprehensive risk assessment is economically justifiable.

102 Systematic Approach for Determining Construction Contract Time: A Guidebook Figure 5-11. Cumulative density function for total schedule with 50 percent condence level. 5.3 Summary of Schedule Risk Management To summarize, managing schedule risk in highway projects involves ve steps: 1. Identifying risks, 2. Selecting the risk analysis method, 3. Performing the risk analysis, 4. Conducting risk mitigation and monitoring, and 5. Utilizing the risk analysis output in CTD. To eectively conduct schedule risk management for highway projects, risk management tools and methods need to be considered vis-a-vis the project phases and project size. e level of uncer- tainty changes as the project progresses, and the availability of information also varies. erefore, the timing of the risk assessment will be inuenced by the project’s development phases. Project size dictates the selection of risk analysis methods. For smaller projects, the quali- tative risk analysis process should be used, and the process can be implemented once. For projects that are large and complex, a quantitative (probabilistic) risk assessment should be conducted, and the risk management process should be updated at project milestones.

Relationship of Contract Time to Risk Management 103   It is suggested that identifying schedule risks should start with a listing of the typical risk factors from past similar projects. e identied risks should be documented in a preliminary risk reg- ister. e two approaches available for risk analysis (qualitative and quantitative) correspond to the schedule estimating methods. Specically, the qualitative approach is used for projects using a top-down PDE, whereas the quantitative approach aligns with a bottom-up PDE. When using the qualitative approach, risk factors are assessed subjectively, and a risk matrix can be constructed and used to prioritize risks. e most signicant risks are identied, and their eect on project duration is assessed. Depending on the aected project elements, the impact of these risks may be either concurrent or additive. A decision is made based on the collective impact of the risk factors, and the CTD is established by considering these risk impacts. When using the quantitative approach, a single-point (deterministic) estimate or a fully proba- bilistic distribution is established for each risk factor. A risk quantication workshop can be convened to accomplish this step. e project team should update the initial risk register by incorporating the quantication results. e follow-up quantitative schedule risk analysis can be conducted using the schedule network. To analytically combine the base schedule and risk factors, a Monte Carlo simulation is usually conducted. Based on the results of the Monte Carlo simulation analysis and the selected condence level, an overall duration can be established for the project. Aer conducting and documenting the results of the risk workshop, the project team can convene again for a risk mitigation workshop to identify and evaluate mitigation strategies for the most signicant risks. e outcome of the mitigation workshop will be an RMP, which serves as a road map for risk monitoring during the construction phase. Last but not least, the risk assessment output should be integrated in the CTD process. Based on the information of the overall project risk level or the distribution of possible project duration, a more realistic and accurate contract time can be established. is chapter has examined CTD under various project delivery methods from the perspective of risk management. e eects of the timing of the risk analysis process under DB and DBB delivery methods were elaborated and the lists of risks and risk allocation between the agency and the contractor were compared across varying delivery methods. A+B projects also were discussed, and the use of risk analysis was explained in establishing a reasonable and defensible threshold for monetary incentives for early completion. By incorporating risk assessment and mitigation principles into the project duration determination process, DOTs will be able to identify con- straints as early as possible and take informed actions to minimize potential scheduling risks. 5.4 References Bajari, P., and G. Lewis (2009). “Procurement contracting with time incentives: theory and evidence.” Working Paper 14855, Massachusetts Institute of Technology, Cambridge, MA. Colorado DOT (2015). Innovative Contracting Guidelines. Colorado DOT. Available at: https://www.codot.gov/ business/designsupport/adp-db-cmgc/documents/Innnovative%20Contracting%20Guidelines.doc/view Golder Assoc. Inc, K. Molenaar, M. Loulakis, and T. Ferragut (2014). Guide for the Process of Managing Risk on Rapid Renewal Projects. SHRP2 Report S2-R09-RW-2. Transportation Research Board, Washington, D.C. Avail- able at: https://doi.org/10.17226/22665. Kent, D. L. (2003). “Innovative contracting techniques that consider driver impact, use of A+B bidding,” Pre- sented at FHWA Workshop, Making Work Zones Work Better. Available at: https://ops.wa.dot.gov/wz/ workshops/sheet6.htm. Virginia DOT (2015). Project Risk Management. Report No. PMO 15.0, Project Management Oce, Virginia Department of Transportation, Richmond, VA. Washington State DOT (2014). Project Risk Management Guide. Engineering and Regional Operations, Washington State Department of Transportation, Olympia, WA.

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Contract time affects the cost of construction, traffic disruption and public inconvenience, the economic impact of projects to the surrounding areas, and schedule risks.

The TRB National Cooperative Highway Research Program's NCHRP Research Report 979: Systematic Approach for Determining Construction Contract Time: A Guidebook provides state departments of transportation guidance for producing consistently credible, reliable, and defensible contract time estimates.

Supplemental to the report is NCHRP Web-Only Document 298: Developing a Systematic Approach for Determining Construction Contract Time, a spreadsheet-based Toolkit, a Technical Memorandum, and a Presentation.

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