Pricing Uncertainty
The present slump has heightened our awareness of risk. Nevertheless, in the face of a volatile market, some businesses and project teams have made no attempt at pricing uncertainty. They presuppose that construction risk is unfathomable and/or that any data produced quickly becomes obsolete, thereby rendering the pricing exercise worthless. Absent appropriate allowances for uncertainty, decisions are, at best, made on analyses of partial data; in the worst case, no decision is made at all.
Revay does not agree that construction risk is incalculable. In Revay's role as claims expert, its investigations follow the path of root cause. In its risk practice, Revay[9] follows a parallel path, utilizing comprehensive cause analysis to identify any multiple pathways. The responsible risk owner is identified as the entity within the team most able to manage the risk, regardless of liability or exposure (see Figure 2).
Figure 2: Risk Flow for Changes in Outcome Cost
Once uncertainty is identified both the source and the multiple pathways are assigned and probabilities of occurrence and quantum are estimated using Monte Carlo analysis techniques.
In so doing, the "unfathomable" is reframed as a quantitative input variable. Once an organization adopts this process as part of a complete risk management procedure, the potentially paralyzing failure to properly address risk is substituted by a repeatable and auditable management exercise. In the current climate risk aversion has become acute. Now is the time to rethink risk management practices.
9. The reader will have noted that, although not mathematically correct, as is usual in risk management texts the terms uncertainty and risk are herein considered as synonymous.
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Introduction
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