The final course of the specialization expands the knowledge of a construction project manager to include an understanding of economics and the mathematics of money, an essential component of every construction project. Topics covered include the time value of money, the definition and calculation of the types of interest rates, and the importance of Cash Flow Diagrams.
Mitigating Risk through Lean Project Delivery Systems
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From the course by Columbia University
Construction Finance
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From the lesson
Lean in Construction Financing
Sam Spata provides an overview of Lean in Construction Financing and describes how to identify and mitigate risk using Lean Project Delivery Systems.
Meet the Instructors
Ibrahim Odeh, Ph.D., MBAInstructor, Department of Civil Engineering and Engineering Mechanics, Columbia University
Director of Research and Founder, Global Leaders in Construction Management
So if construction management financing is subject to risk,
what's the way that we can mitigate risk?
The best way is through Lean Project Delivery Systems.
So let's talk a little bit about Lean and we'll conclude with a very specific
tool that's used to mitigate and manage risk, so that
we don't need to be fearless when we begin a project that we can indeed be flawless.
So, what is Lean?
Well, Lean can be an operation strategy to deliver
increased productivity via flow efficiency.
Lean is project delivery system stripping away unnecessary effort,
delivering what the owner values.
And Lean Design is a creative process to prevent error, and invent value.
But for construction financing, we're going to focus on project delivery.
And less on what the owner values, and
more on that unnecessary effort, time and cost.
How do we manage those risks?
We don't want that those are risks to financing.
Let's look at the lean progression from theory to habit.
We begin with the theory of waste and flow and value.
And flow by the way does exist in two states.
That's explored more deeply in lean scheduling.
But a theory without a vision for project delivery is not enough.
One reason in my opinion,
that TQM did not takeoff 24 years ago in the construction and
design industries, is that it lacked a vision for what project delivery could be.
And the vision that exists today is one of impeccable coordination,
productive systems and collective enterprise.
And that bridges the gap from theory to processes that we can use for
lean project delivery.
And I'm going to spend most of the time here
on the processes leading up to the key tool.
There are many tools that we use in lean, but one in particular is related to risk.
And then finally, there are the universal habits of lean.
We'll look at two of those at the end of this presentation,
when we consider feedback.
But we're going to focus today on the tool of Risk and
Opportunity register, and before we get to that, we'll look at the processes.
The big four last planner systems, target value design, set based design,
choosing by advantages and the condition of satisfaction.
So in our Hierarchy of Process Need, if our foundation is the theory envision of
lean, we build upon that foundation with the conditions of satisfaction.
These have been around for
as long as there have been designers and owners thinking about a project.
Some of the tools that are used today go back to the 1960s.
But in a lean sense they're used in a somewhat different way.
They're extended to be on the product, the building into the process.
But the truly lean processes are the last planner system that's lean scheduling.
Target value design which we touched on lean estimating.
Set based design, and finally, choosing by advantages.
The top four are the big four lean processes that make lean project delivery,
the holistic system that can truly deliver projects at lower risk.
So, we're building up from knowledge bases and
experiences that we already have built into the design and construction industry.
Starting with programming to scheduling to budgeting to problem solving and
finally to decision making.
Which I always place at the pinnacle because we know from experience
that a project where decisions are being made in a timely fashion and
decisions stick is a well running project that takes risk out of the equation.
But lean is more than just our traditional methodologies, it goes way beyond.
Typical programming stops at the product, how the building will function.
Whereas conditions of satisfaction take a value proposition and
extend it beyond the project to things such as the process.
There are conditions of satisfactions for projects today
that say things like everyone will be profitable at the end of the project.
That's a pretty bold statement that goes way beyond the typical programming.
Scheduling is pull-planning.
Push planning creates more risk for your project, but
pull planning can help you manage that risk.
Budgeting by deciding to budget, not simply designing, but getting owner,
constructor and designer involved in that front end, because remember our slope?
The risk are created here, but they don't become visible til later on.
That's what deciding to budget is all about.
And that works hand in hand with problem solving.
Looking at parallel options where we make decisions at that last responsible
moments as identified in our schedule which we develop through pull-planning,
the last planner system.
And then ultimately,
making decisions by looking at the best advantage amongst the alternatives.
These are the heart of lean project delivery systems.
The four basic lean processing building upon the conditions of satisfaction.
Now, conditions of satisfaction
go beyond the immediate team when we're thinking about risk.
And when we're thinking about construction financing.
And it's simple as the project begins with a client and
owner, the king, the queen, we put a crown on that person.
They bring on board at its simplest constructors, designers, and
this is the triad, a very stable triangle, stable form, a tripod.
But when we're looking at construction financing there are more players.
There's someone who brings in the money, a financier, a bank.
And if we're ensuring our risks, there are actuaries.
And what happens as you bring in the other parties is that begins to tilt
the consideration of the owner.
And then we now have to begin, as designers and
constructors, to confront some other items.
Such as lenders and insurers who want a warranty or
a guaranty which are items in professional liability insurance,
remember my perspective is that of an architect, are uninsurable risks.
Certifications.
It's not uncommon for a lender to require
when drawings are going out to bid that the designers say, we certify these things
are compliant with all local regulations and laws, and zoning, and building codes.
You want to know that before you go to print with your bid sets,
that’s something that needs to be in the conditions of satisfaction.
And then finally, there is the moral hazard.
When we manage risks through tools such as insurance,
there's a great temptation to make use of that.
And there are projects that are successful where the owner goes into the insurance
pool and goes to their designer and goes to their construction and
say I love the work you've done for me but I've got these millions of dollars worth
of insurance, I want to take advantage of it, I've paid the premiums.
It creates a moral hazard that when people are able to offset risk and
the traditional process of project delivery, is a process where
each party is trying to take its risk, and put it onto someone else's shoulders.
When you've got the ability to offset risk, it creates a moral hazard.
A tendency to find a way to say, I'm going to take advantage of the fact that I
paid to ensure my risk, how do I do that?
Creates bad feelings, particularly if it's something that gets sprung at the end.
And the point simply is that every stakeholder,
including those that have a relationship only with the owner,
the people who are necessary for managing risk and
construction financing, every stakeholder influences the conditions of satisfaction.
And that must be addressed at the beginning of the project.
That is lean thinking in action.
So the process from earlier, one, identify known risk, two, allow for unknowns and
three, assess probability and mitigate.
We've now reached that point, we're going to look at number three.
How do we assess probability and mitigate?
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