My favorite college professor was Dr. Jamie Dinkelacker. One of his frequent admonitions in the production of written work was, “Tell me what you know, tell me how you know it… so what?” I’ve written quite a few blog entries on the topic of schedule risk analysis, but so far I have not addressed the “so what.” So here goes…
In past blogs, I have discussed many aspects of schedule risk management, such as the difference between Latin Hypercube and Monte Carlo, the upside of risk (opportunity), and what certifications and experience to look for in a professional risk consultant. But I have not covered why schedule risk is an important component of construction project management.
Two key reasons: first, you have to follow the advice given to Woodward and Bernstein by the informant code-named Deep Throat: “Follow the money.” Unlike other contracts, construction contracts have real costs for both the owner and the contractor if the project is delayed. Most of the construction delay claims argued in the resolution of disputes associated with delay around the country come down to an argument about who caused or is responsible for the delay that caused the completion of the project to be late. If the contractor caused the delay, then he may have to pay the owner liquidated damages – sometimes thousands of dollars for every day of delay. If the owner caused the delay, then the owner may have to pay the contractor general conditions which also may be thousands of dollars for every day of delay.
In other words, when a construction project is late, usually somebody will be paying for the costs associated with that delay, and it can add up quickly; one well known project I worked on in New York cost $300,000 per day for the delay. Because the stakes are so high when a contractor and an owner sign on the dotted line, it literally pays to establish a target probability of completion which all parties are comfortable accepting in the contract.
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The second reason a schedule risk analysis is so important also involves money, but from a different source. Most major construction projects are built to perform, or enable some sort of economic purpose.
Pharmaceutical companies build manufacturing plants to produce new blockbuster drugs, the sales of which are the basis of their revenue projections. A delay in the construction of the plant means a delay in the associated revenue, and that is not good for business. The same holds true for semiconductor plants, which are designed to produce the next generation of computing power. A missed deadline could mean a loss of more than just revenue but a loss of market share as well, if a competitor gets their chip out first.
In some cases, a delay can cost an entire year of revenue! Private developers who are creating student housing can lose out on an entire school year of rent by missing a completion date. On top of that, the developer has to find places for the students they pre-booked there to live!