Chapter 6 Exercises — Risk Management

Work these with the chapter closed where you can. Selected answers appear in Appendix J; for the calculation items here, a numeric check is hidden in a <details> block so you can grade the arithmetic without being handed the reasoning.

Difficulty legend: ⭐ basic · ⭐⭐ applied · ⭐⭐⭐ advanced judgment · ⭐⭐⭐⭐ research and extension

Part A — Conceptual Understanding ⭐

A1. Define risk, uncertainty, and ignorance as the chapter distinguishes them, and give a construction example of each that is not one of the Northgate examples.

A2. A risk has three necessary properties. Name them, and explain why a tower crane you know you need for eleven months is not a risk.

A3. List the five risk responses. For each, write one sentence describing what it does to probability, to impact, and to who holds the exposure.

A4. What is the difference between a risk register's analysis columns and its management columns? Why do registers with only the first group get abandoned after preconstruction?

A5. Write the definition of a trigger in your own words, then write one good trigger and one bad trigger for the risk "long-lead switchgear arrives late."

A6. Northgate's construction contingency is $1,320,000 and its escalation allowance is $575,200. Explain why these are two different lines and not one bigger line. What happens if a project manager spends the escalation allowance on a productivity problem?

A7. State the contingency threshold concept in one sentence, then state the single question that tests whether a contingency meets it.

A8. Why is the total daily exposure on Northgate $10,650/CD rather than $5,500/CD? Name both components and say who each one is paid to.

A9. What does a burn ratio measure? Give the formula, and say what a value of 1.4 at 45% complete tells you.

A10. Explain, without arithmetic, why the sum of most-likely activity durations is systematically optimistic. Give both mechanisms named in the chapter.

Part B — Applied Analysis ⭐⭐

B1. A project manager shows you this register row:

"Risk: The MEP subs might not coordinate well. Probability: medium. Impact: bad. Owner: MEP team. Response: monitor closely."

Rewrite it so that every one of the eleven register fields is present and meets the standard set in the chapter. Invent plausible numbers and say what you assumed.

B2. An owner deletes the differing-site-conditions clause from a $30,000,000 building contract and tells the bidders that all subsurface risk is theirs. The owner is pleased: the contract now transfers a risk at no cost. Explain, in the terms of §6.3, what the owner has actually purchased and from whom, and describe the mechanism by which the owner pays for it even if the soil turns out to be perfect.

B3. Two risks on your register have nearly identical expected values:

Your contingency is $400,000. Explain why these two rows require completely different management despite being financially equivalent on paper, and say what response you would choose for each.

B4. Look at the Northgate 5×5 matrix in §6.5.1. R-11 (subcontractor default) scores 10 and R-07 (MEP clashes) scores 9, so the matrix ranks R-11 as the bigger problem. The expected values rank them the other way. Explain precisely why the matrix produced the wrong ranking, and describe a situation in which you would still choose to act on R-11 first anyway.

B5. At the 60% cost review on a job you manage, contingency is 68% drawn. Your operations executive asks whether this is a problem. Before answering, list the four pieces of information you need, and explain what each one changes about your answer.

B6. Your superintendent asks for $40,000 of temporary heat and blankets to protect a February slab pour. The job is a GMP with a 75/25 savings split. Describe the decision from three points of view — the project manager's, the superintendent's, and the owner's — and state the rule you would apply so that the savings split does not decide it.

B7. A subcontractor tells you at buyout: "I can't sign this. The delay clause makes me liable for your liquidated damages and I have no way to price that." You need the number they bid. Describe three legitimate ways forward and identify which one costs the project least over the life of the job.

B8. On a 14-month project the scheduler shows a network in which enclosure, elevator installation, and MEP rough-in all feed the start of interior finishes. Each feeder has an 85% probability of finishing on or before its planned date. Calculate the probability the successor starts on time and explain in one sentence what you would do with the answer.

Part C — Calculations and Deliverables ⭐⭐–⭐⭐⭐

C1. Expected monetary value. Compute the EMV of each row and the total.

C2. Three-point estimating. A concrete superintendent gives you these durations for a slab-on-grade sequence in work days: optimistic 18, most likely 24, pessimistic 39. Calculate the PERT weighted mean and the rough standard deviation. Then state, in one plain sentence, what you would tell the scheduler.

C3. Three-point on money. A sitework contractor gives you these unit prices for 18,400 CY of structural excavation: optimistic $31.00/CY, most likely $38.50/CY, pessimistic $58.00/CY. Compute the PERT unit price, the extended cost at the PERT price, the extended cost at the most-likely price, and the difference. Then say which number you would carry in a lump-sum bid and which in a conceptual estimate, and why they might differ.

C4. Contingency sized two ways. A $14,600,000 project has a cost of work of $12,400,000. Your company's top-down standard is 3.5%. Your register of owned risks totals $268,000 of expected value.

• (a) Compute the top-down contingency.
• (b) State the ratio of top-down to bottom-up.
• (c) Write a 150-word reconciliation naming at least three reasons the two numbers differ.
• (d) State the number you would carry and one sentence defending it.

C5. Drawdown and burn ratio. A project carries a $760,000 original contingency. Complete the table and identify the first reporting period at which you would escalate to your operations executive.

C6. Deductible versus premium. You are choosing between two builder's risk options on a 400-day project.

Your company's claims history for jobs of this size suggests 1.2 covered events, distributed as: 0.7 events under $50,000 averaging $18,000; 0.3 events between $50,000 and $150,000 averaging $96,000; 0.2 events over $150,000 averaging $415,000.

Compute the expected retained loss under each option, the premium saving, and the net expected advantage. Then state which you would choose at the project level and which at the company level, and explain the difference.

C7. Schedule risk in dollars. Your project has extended general conditions of $4,200/CD and liquidated damages of $3,000/CD. Your register carries these schedule impacts: 35% × 10 CD, 25% × 16 CD, 50% × 6 CD, 15% × 22 CD.

• (a) Compute the expected schedule impact in calendar days.
• (b) Convert it to dollars.
• (c) Explain the double-counting trap you must check before adding this to your cost contingency.

Part D — Judgment and Ethics ⭐⭐⭐

D1. You are the estimator on an open-book GMP. Your register supports a contingency of $840,000. Your operations executive asks you to carry $1,150,000 "because this owner is difficult and we'll need the room." You have no rows for the extra $310,000. Write your response, and describe the version of that $310,000 that would be legitimate.

D2. Your standard subcontract flows down a no-damage-for-delay clause, unlimited indemnity, and liability for the prime's liquidated damages. A $240,000 painting subcontractor signs it without comment. Six months later a delay you caused costs him $180,000 and he cannot absorb it. Trace what happens next, quantify it as best you can, and then answer the question the chapter poses: where is the line, and what would you have flowed down instead?

D3. At the 40% review a project manager tells you the contingency is "in good shape" because 36% of it is drawn. You ask to see the contingency-use log and discover that eleven of the nineteen draws have no register row ID. Nothing in the log is fraudulent; every draw was a real cost. Explain why this is still a serious problem, and describe what you would require of that project manager going forward.

D4. A hard-bid job is due in four hours. Your register supports a contingency of $610,000. Your estimator believes the low bidder will be within $250,000 of you. Describe three professionally defensible courses of action and one that is not, and say which you would take.

D5. Your risk register's safety row shows 12% probability and $140,000 of impact, for an expected value of $16,800 — the smallest number on the register. A colleague argues the row should therefore be the lowest priority. Write the argument you would make in response, in the terms of §6.9, without appealing to sentiment.

Part M — Mixed and Interleaved Practice ⭐⭐–⭐⭐⭐

These deliberately combine this chapter with earlier ones. That combination is the skill.

M1 (with Chapter 3 and Chapter 4). A municipal owner is deciding between design-bid-build lump sum and CM at Risk with a GMP for a $38,000,000 recreation center on a former industrial site with limited subsurface data. Build a table with one row per risk (use at least eight of the twelve risks from §6.3) and one column per delivery/pricing option, showing who owns each risk under each. Then write a 200-word recommendation that reasons from the risk allocation to the price, not the other way around.

M2 (with Chapter 4). Take Northgate's R-02 (steel escalation, 45% × $310,000). Rewrite the row three times — once as it would appear under a lump-sum contract, once under a GMP with an escalation allowance, and once under a cost-plus contract with no cap. For each, state who the owner of the row is and what changes about the response.

M3 (with Chapter 5). For each of these four register responses, name the legal instrument that makes it real and state its limit: (a) "transfer to the owner under the concealed-conditions clause"; (b) "transfer to the subcontractor by indemnity"; (c) "transfer to the surety by performance bond"; (d) "transfer to the insurer under builder's risk." Then rank the four by how much your recovery depends on the counterparty's solvency.

M4 (with Chapter 5 and Case Study 2). Curtis Boone lost $87,000 of a $128,000 claim because a text message was not written notice. Draft the notice he should have sent on day 35. Then list, for your own jurisdiction, the three notice deadlines you would want printed and taped inside the front cover of your project notebook — and state where you would go to confirm them, since these vary by state and by contract.

M5 (with Chapter 2). Kestrel is roughly $410,000,000 in annual revenue with a $150,000,000 aggregate and $60,000,000 single-project bonding program. Explain how a project-level risk register connects to that bonding capacity, and describe two specific things a project manager does on a Tuesday that affect a number the surety looks at once a year.

M6 (with Case Study 1). Forty percent of Northgate's contingency draw at 60% complete went to items never on the register, and the largest was a process failure inside Kestrel's own office. Design a one-page addition to the register-building method in §6.4 that is specifically aimed at internal process risk. It must name who runs it, when it runs, and at least five questions it asks.

Part E — Research and Extension ⭐⭐⭐⭐

E1. Obtain a real set of general conditions — an AIA A201-family document, a ConsensusDocs form, an EJCDC form, or the general conditions from a public agency in your area, several of which publish theirs online. Find and read the clauses governing at least six of the twelve risks in §6.3. For each, write one sentence on who the clause puts the risk on and one sentence on any modification you would negotiate if you were the contractor. Do not quote the text; describe what it does.

E2. Find the published bid results for a recent public project in your jurisdiction — most agencies post bid tabulations. Compute the spread between the low and second bids as a percentage of the low bid, and do the same for the spread between low and high. Then estimate, using the ranges in this chapter, what contingency the low bidder could have carried and still won. Write 300 words on what the spread suggests about how that market prices risk.

E3. Interview a working project manager, estimator, or superintendent about the last time a risk hit a job they were on. Ask four questions: Was it on any list before it happened? Who ended up paying for it? What was the first written record of it, and when was it created? What would have caught it earlier? Write up what you learned in 400 words, and add the risk they described to your Willow Street register as a new row — properly formed, with a probability, an owner, and a trigger.