Risk management for a dredging contractor

Abstract

BHD is an international contractor with core activities in the construction and maintenance of ports and waterways, the creation of new land in coastal waters, the protection of sea- and rivershores and support to the offshore oil industry. BHD decided to start applying risk analyses in the year 1995. However, it would be more correct to use the term 'risk management', the analysis and control of risks. The hypothesis of the study is that SHO's risk management strategy can be improved. The goal of the study was to validate the hypothesis and improve, where necessary, the risk management activities of BHO. The dredging world has some unique characteristics. Important ones are: 1. A project is awarded to the contractor who makes the most appealing bid to a possible client for executing a project; 2. There are few big contractors, less than ten, in the dredging world; 3. The time pressure is high during the tender phase of a project. This discourages experts from giving optimal input; 4. In a lot of contracts, the contractor and the client agree on a penalty-structure. This means that if the contractor fails to finish the project before a certain date, he has to pay the client a fine, often per day. These penalties are called LO'S2. A new risk management strategy has been developed in the study, which is adapted to these characteristics. The risk management strategy also has to provide accurate results. A balance has to be struck between the amount of time risk management activities are allowed to take and the desired accuracy. The risk management cycle consists of two management cycles plus the system description and the tender description. Chapters 3, 5 and 6 of the master's thesis describe these elements of the risk management cycle in detail. The goals of the risk management cycle are: 1. Acquiring an overview of the risks concerning the project and their contribution to the project uncertainty; 2. Optimising the work methods for projects in the portfolio of projects and optimising the resources of the contractor; 3. Determining the risk overhead on the project that is tendered for; 4. Determining the conditions under which the contractor agrees to execute the project. The biggest achievement of the study is the development of a concept, which makes the relationship between the 'technical' risk management cycle and the 'economical' determination of the profit overhead more explicit. It has to be stressed that the concept as suggested in this study is still conceptual. This study does not pretend to provide the final, closed, theory. The CAPM3 argues that a trade-off exists between risk and return. The profit overhead and the risk overhead on a project that is tendered for should not be determined in isolation. With a variant of the CAPM requirement the desired profit overhead on a project that is tendered for can be determined.