1. ASSIGNMENT
VALUE AND RISK
MANAGEMENT
VALUE MANAGEMENT PROTOCOLS FOR TECHWATT CORPORATION AND AN ESSAY ON RISK
MANAGEMENT

2. INDEX
PART 1
Aim of the project 03
Reason for the study 03
Key points to be studied 03
Required information 03
Solution proposal 03
Members requested to attend the workshop 04
Required information for the workshop 05
Main issues to be considered during the workshop 06
Study agenda 08
Value management tools and techniques to be used 08
References 10
PART 2
Essay on risk management 11
Kinds of risks 11
Techniques of risk analysis 13
References 15
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3. AIM OF THE PROJECT
To provide an expert advice on how value management can be applied during the briefing stage and to
help develop the brief and confirm the decision to build.
Reason for the study
Techwatt Corporation sees value management as a means of ensuring that the project is properly
scoped before proceeding any further.
Key points to be studied
1) To verify the need of the construction project proposed by Techwatt corporation.
2) To compare the advantages and disadvantages of each option and evaluate them against
business needs.
3) Finalize on the preferred options.
4) Improve communication and understanding between all parties to the project brief.
5) Develop the project brief.
Required information
1) Preliminary list of the stakeholders.
2) Identification of similar facilities within the same geographical location.
3) Analysis of the main constraints of the project
4) Analysis of the resource pool of the project
5) Preparation of the action plan
6) Design requirements.
Solution proposal
A workshop is proposed to achieve a positive feedback on the study. The study shall be divided into two
stages-
 Strategic briefing
 Project briefing
Strategic briefing
During this stage, the reason for investing in a new head quarters and its important parameters shall be
considered. The next step is to consider and compare all the options that could meet the identified
business needs such as whether to construct a new building or lease/ rent an existing building or
upgradation of an existing building and other similar options shall be brainstormed during the workshop
sessions and finally evaluate these options and propose the best option to the client (Techwatt
Corporation).
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4. Project briefing
Once the decision to build has been taken, the study team should state the strategic objectives of the
project into construction terms such as site selection, specifications and budget estimation in order to
help develop the project brief.
Members requested to attend the workshop sessions and their roles in the
study
1) The client/client representative ( project sponsor)
The role of the client or the project sponsor would be to represent the Techwatt Corporation and to
chair the committee of Techwatt representatives as well as report to the board of directors on all
matters associated with the study.
The client / project sponsor would also need to provide the following information-
 the intention of the project
 concept design information
 resources for the budget
 constraints of the project
 objective need and project requirements
 performance specifications
 future expansion plans
2) project manager
The role of the project manager would be to develop realistic time and cost budgets against
which future decisions with respect to the project shall be made and to establish the functional
needs of the project.
3) Project advisor
The role of the project advisor will be to contribute his/her independent advises about different
technical issues related to the project.
4) Design team
The role of the design team would be to provide conceptual as well as technical advice related to the
project through conceptual design sketches and to help develop the project brief.
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5. 5) Facilities manager
The role of the facilities manager would be to provide information related to the operational costs as
well as building performance and also to ensure that the project brief takes in consideration the
organizational and strategic needs of Techwatt Corporation.
6) Facilitator
The role of the facilitator would be to encourage creative and lateral thinking, outlines the value
management study, prepares the study reports and to develop an action plan
Required information for the workshop
The accuracy and availability of information is very important to the success of the value management
study. The table below illustrates the necessary information to be gathered and its utility to workshops.
Theme Related information Utility
 TechWatt organizational The information is necessary for the
structure verification of need to build and in the
development of the strategic briefing.
 Decision making structure The decision tree is important for the
evaluation of legal and time issues.
Organization  Business strategy of TechWatt
 IT market trends
 Project stakeholders
 Corporate identity of TechWatt Important information at the stage of
brief development. The integration of
 Other social facilities for the corporate identity and the social
Context
employees: dining, nurseries, aspects of the facility are important to
recreation facilities, etc. achieve a successful project
 Proposed location(s) This information allows the study team
to evaluate the options that could meet
 Site characteristics the business need, and also to identify
the estimated cost and the
Location
 Proposed site (s) specifications of the adequate site.
 Property market trends
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6.  Source of funding The details about source and the
allocation of funding are important to
 Allocation of funding the project success and the evaluation
Finance
of high level financial risks to the
 Budget estimation project.
 Time constraints The study team will construct a
strategic time line diagram which is
Time
 Possibility of phased project based on this information
 Procurement strategy All legal issues that could have an
impact on the project in term of time
 Dispute resolution strategy and cost should be raised including the
Legal and contractual proposed procurement strategy
information  Insurance
 Land acquisition procedure
The objective of the second stage of
 Environmental friendly design this study is to transform TechWatt
requirements into technical assets;
 Pollution control-noise therefore an accurate articulation of
the required specifications is a
 Lighting requirements significant factor in the brief quality.
 Green material construction
Specifications and
 Sustainable development
requirements
 Landscape reservation
 Accessibility
 Appearance of the building
 Security and safety requirements
Main issues to be considered in the workshop
During the value management study, the study team shall evaluate the following issues:
Organizational issues
By investigating the strategic business of the company and identifying the place of the project within this
strategy. In addition, an evaluation of the impact of the decision making structure in the project must be
considered.
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7. Financial issues
Capital costs such as lead cost, design and construction costs, equipment costs, fees and other charges,
relocation cost, commissioning costs and allowances for contingencies shall be considered.
Recurrent costs such as operating costs, maintainance costs, human resource and information
technology shall also be considered.
Legal issues
All legal issues related to the project must be considered especially if they have an impact on the cost
and project.
Contextual issues
By considering the different options of location and the characteristics of the preferred site. Here again
an assessment of options should be carried out in order to identify the preferred location in terms of
financial, economical and political advantage.
Time issues
An evaluation of all time parameters shall be carried out including time constraints and relationships
between deadlines and the commercial purpose of the project.
Physical issues
Various alternatives to the initial concept design scheme shall be considered and a final spatial
requirement keeping future expansions shall be decided.
User issues
The needs of the end users (employees, potential customers, visitors) such as interiors, comfort,
lighting, and accessibility shall be considered.
Operational issues
Post occupancy facilities management is an important requirement that is to be considered at the brief
development phase.
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8. Study agenda
Value management tools and technique that can be utilized in the study
Function analysis system technique diagram (FAST)
The FAST diagram is a technique for analyzing the functional structure of a technical system. It can serve
as a useful tactic within any Systematic Design strategy.
After brainstorming, a FAST diagram can be constructed and all the ideas that arouse out of the
brainstorming sessions are listed as below-
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9. Ideas which fulfilled the basic functions or the client’s needs are considered whereas the ideas which
were of little significance were discarded.
Those ideas which were finally selected by mutual agreement of all parties in terms of their priorities
could then be placed in a diagram as stated below
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10. REFERENCES
Course notes, Heriot Watt university, 2009
Value management – John Kelly, Steven Male & Drummond Graham
Value management in design and construction – John Kelly and Steven Male
Real project planning – developing a project delivery strategy – Dr. Trish Melton
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11. PART 2 – RISK MANAGEMENT ESSAY
The following essay has been written by analyzing the risks associated from the construction managers/
project managers’ point of view. Citing the possible risks associated while working on international or
varied geographical location. Risks are associated with almost all levels of the project life cycle and is
mutually shared and mitigated by all parties employed within the construction industry. There are many
evidences to state that poor risk mitigation leads to poor performance and hence establish risk
management processes and practices are required to be adhered to in order to turn any project’s
outcome into a success.
The 2000 edition of the Guide to the Project Management Body of Knowledge (PMI,2000) states that a
project risk is :
‘An uncertain event or condition that, if it occurs, has a positive or negative effect on a project
outcome’.
Risks can be broadly classified into 2 categories- speculative risk and pure risk. Speculative risks can be
both positive and negative whereas pure risks are mostly negative by nature.
Risk can be defined as the ‘variability of return from an investment’ risk analysis play an important role
in any project. All projects are prone to some kind of risk or the other. All projects are appraised making
certain assumptions and such assumptions are unavoidable since no 2 projects are unique in all respects
and hence a new project cannot be compared with an identical project that was executed in the past.
Though there may be similarities in 2 projects, exactly identical projects do not exist.
KINDS OF RISK IN A PROJECT (in the built environment)
Projects face a host of risks such as,
 PROJECT COMPLETION RISK
Completion of the project in time and within the estimated cost is itself a major achievement. A project
that is delayed will result in time over run which will subsequently lead to a cost over-run. If the project
promoters are not able to pump in additional funds required to meet the cost over-run, then the project
runs the risk of coming to a grinding halt. Also delayed implementation means an increase in interest
commitments on the borrowed funds. When the project promoters find it difficult to meet the interest
commitment during the implementation phase, the lenders may not be prepared to fund the project
additionally to meet the cost over-run.
There can also be technology failures, which may result in the non completion of the project. For
projects with long gestation periods in the field of fast developing technology, there is a risk of project
not being completed due to technological obsolesce during the course of project implementation.
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12.  RESOURCE RISK
Raw material, power, fuel, manpower etc are the resources used by a project. Shortage of raw materials
may lead to a reduction in capacity utilization and higher cost of production which will make all
profitability estimates wrong. Similarly, shortage of power, fuel, and shortage of skilled manpower will
also jeopardize the project profitability, calculations and the project may run the risk of not earning the
estimated returns.
 PRICE RISK
Price fluctuations of both inputs and outputs (ie, raw material and finished products) affect the project.
Unforeseen happenings such as government’s intervention in price fixation ability of competitors to
offer their product to customers at a comparatively cheaper price etc, are likely to have an adverse
impact.
 TECHNOLOGY RISK
Technology risk may appear in two forms. A project that is based on unproven technology may have
hidden defects which may make the project obsolete in technology due to evolution of latest
technology.
 POLITICAL RISK
Political risk is a major risk as it cannot be predicted easily. The government intervenes in many forms
such as levying and regulating taxes, regulating monopolistic trade practices, imposing import duties,
promoting inputs, price – control, ex-proration, nationalization etc.
 INTEREST RATE RISK
Fluctuations in interest rate may bring in an adverse effect. For example, if a project is funded by way of
long term borrowings at a particular rate of interest, and if the interest rate falls down subsequently the
project that availed long term borrowings at a higher interest rate has service the loan only at a higher
rate of interest, unless it makes alternative arrangements to mobilize funds at the prevailing interest
rate and swap the old borrowings which is a difficult proposition. New entrants who set up similar
projects may have access to long term loans at the prevailing rate of interest which may be cheaper. In
such a situation, projects that were implemented with high cost borrowings will find it difficult to
compete with the new entrants.
On the other hand if the interest rate increases in the future, the interest on working capital finance
(which normally carries a floating interest rate) increases which will result in lower profit margins than
estimated at the time of project appraisal. interest rate risks can be managed to some extent by
entering into interest rate hedging agreements like ‘interest cap’, ‘interest swap’ etc.
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13.  EXCHANGE RATE RISK
Exchange rate risk, also called as ‘currency risk’ is the risk arising from currency fluctuations. Volatile
exchange rates can reduce cost and productivity advantages gained over years of hard work. Firms
exposed to international economy face this risk. When a firm has already committed to a foreign
currency denominated transaction, the firm is exposed to a exchange rate risk. The firm will incur a loss
if the exchange rate of the foreign currency has moved adversely and will earn profits if the exchange
rate is moved favorably. Many exchange rate risk hedging tools such as forward cover, leads and lags,
currency options, currency swaps etc are available which can be efficiently made use of to maneuver
exchange rate risk.
TECHNIQUES OF RISK ANALYSIS
BREAK EVEN ANALYSIS
The financial viability of a project is estimated by making various assumptions like the cost of raw
material, cost of consumables, cost of labor, expected sales realization, expected capacity utilization of
the plant etc. after implementation, the project starts earning profit or starts incurring loss depending
on the actual sales volume that it could achieve, the actual cost of inputs, the actual sales realization etc
of these factors, the , the cost of the inputs and the cost of outputs are decided by the cost of market
forces. Of these factors, the only thing that is under the control of the project promoter is the level of
output (ie. Capacity utilization). Hence it is very essential to know the level of operation below which the
project will incur losses. Breakeven point (BEP) refers to the level of operation at which the project
neither incurs profit nor incurs loss. Calculation of BEP for the given cost and price levels indicates the
minimum capacity utilization that the project should aim at in order to be in a no-profit, no-loss
situation. BEP also helps in identifying the level of profit/loss for a specified level of operation and the
level of operation required to attain a specified profit/to avoid a specified loss etc.
Break even analysis starts with dividing the costs into two broad heads, viz, fixed costs and variable costs
Fixed costs: all projects incur certain costs that are fixed in nature. These costs remain constant
irrespective of the changes in the volume of output.
Variable costs: these are those costs that vary directly with the level of output. Raw material cost is a
variable cost since it depends on the level of output.
SENSITIVITY ANALYSIS
It is a technique that measures the changes in the profitability of a project caused by changes in the
factors that affect the cash inflows of the project. If a small change in one factor leads to a major change
in profitability of the proposed investment, the project is considered more sensitive to that factor, in
other words the project is more risky. Sensitivity of a project is checked by observing the response of
any measure of profitability to changes in critical factors.
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14. DECISION TREE ANALYSIS
Decision tree analysis is a graphical technique that can be used for analyzing the pros and cons of
alternative decisions and choosing the best possible course of action. A decision tree is a diagrammatic
representation of the logical relationship between the different parts of a complex situation and the
possible outcomes of different decisions. A decision tree is made up of nodes and branches where nodes
are of two types, viz, decision node and chance node.
MONTE CARLO SIMULATION
‘Monte carlo’ is a code name given by Von Newmann and Ulam to the technique of solving problems
using random numbers. Monte carlo technique can be used to solve a variety of problems involving
stochastic situations. It is a very popular technique and it uses random numbers to solve problems
requiring decision making under uncertainty where a mathematical solution is highly
complex/impossible.
GAME THEORY
In real life situations, business firms compete with one another. Game theory deals with situations in
which two intelligent opponents have conflicting interests. To achieve their goals, the two firms will
form strategies. The strategy that one firm forms will depend on the strategy that the other firm has
already formed / in the process of forming.
The objective of the game theory is to develop a rational criterion for the selection of a strategy/
strategies by each player since games are rooted in conflict of interest, the optimal solution selects one
or more strategies for each player in such a way that any change in the chosen strategies does not
improve the benefit to either player.
SWOT ANALYSIS
SWOT analysis is also known as the strength, weakness, opportunity and threat analysis. Swot analysis
is done in many situations like mergers and acquisitions, take over and declining trends in profit etc.
SWOT analysis can also be done in the absence of the above situations to improve upon the competitive
edge of an organization and also to avoid any pitfalls lying ahead that may hamper the growth of the
organization. Project appraisal is an area where Swot analysis is of immense help, particularly when
project appraisal is done for expansion/ diversification activities.
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15. REFERENCES
School of the built environment, Heriot Watt University, 2009, Value and Risk Management
Project management professional study guide, 1998
Risk management and construction – Roger Flanagan & George Norman
Modern construction management (5th edition) - Harris and Mc Caffer.
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