Project Risk and Financial Analysis

Question 1

One of the key success factors for risk management is establishing the right strategy for assessing the project risks at the onset. Some of the strategies used by construction project managers include:

(a)    Assessing every risk but model the price via probabilistic consideration
(b)    Assessing the main risks only
(c)    Benchmarking by using a template
(d)    Adjudication in risk evaluation
(e)    Reactive risk assessment
(f)    Pro-active risk assessment

Distinguish between the above strategies and discuss why practitioners claim that using a blend of these strategies for any given project is the best option.
(25 marks)

Question 2

As part of financial risk management for major construction projects, clients normally use the following risk mitigating tools:
1.    Guarantees
2.    Letter of credit
3.    Bid bonds
4.    Performance bonds
5.    Surety bonds
6.    Insurance
7.    Risk premium (contingency sum)
8.    Risk-adjusted discount rate

Using appropriate examples from practice briefly explain the situation when each of the above tools is used by clients as a risk mitigating tool.
(25 marks)

Question 3

Small and medium size (SME) construction companies rarely use the variety of sophisticated quantitative and qualitative tools and techniques for financial risk analysis.

Discuss the differences between quantitative and qualitative risk analysis and suggest reasons why quantity surveyors in SME construction companies find it difficult to use the quantitative tools and techniques for financial risk analysis.
(25 marks)

Question 4

Businesses are judged in terms of their profitability and liquidity. Explain the terms profitability and liquidity and examine, with the use of figures, the extent to which they adequately measure business performance
(25 marks)

Question 5

a)    Explain the concepts uncertainty, unfamiliarity, variability and incomplete specification in the context of risk analysis.

(15    marks)

b)    Compare the discounting and non-discounting methods of investment appraisal.

(10 marks)

Question 6

(a)    Explain the circumstances when it would be appropriate to use decision trees for analysing problems.
(8 marks)

(b)    Illustrate the application of a decision tree to a problem requiring no fewer than three primary decisions and at least one follow-on decision.
(17 marks)

Question 7

Risk management requires appropriate strategies used at the appropriate time. Project managers normally use one or a blend of types of risk assessment strategies.

Identify any five and explain using examples when and why they are required for effective project risk management.
(25 marks)

Question 8

Project managers employ a variety of risk mitigating tools at different stages of the project. Some of these tools include:
1.    Letter of credit
2.    Bid bonds
3.    Performance bonds
4.    Surety bonds
5.    Risk-adjusted discount rate

Using appropriate examples from practice briefly explain the application of each risk mitigating tool and critically evaluate its benefits and problems.                (25 marks)

Question 9

Correct identification and analysis of risk items is essential, but their appropriate allocation to the right stakeholder is often considered more important by risk managers.

Identify the seven key requirements for successful project risk allocation and critically explain why each requirement must be used.
(25 marks)

Question 10

a)    In project risk management, explain what is meant by “there are risks of comfortable inaction”.
(5    marks)

b)    Explain the concepts uncertainty and risk in the context of financial management.
(10 marks)

Question 11

Successful project delivery hinges on how well the project stakeholders are managed throughout the project life cycle.

(a)    Stakeholders are broadly categorised into internal and external groupings. Distinguish between demand-side internal and supply-side internal stakeholders and give typical examples for each.
(7 marks)

(b)    Describe the key processes for an effective stakeholder influence mapping and explain why it is essential for project managers to continue to keep track of its variability over the project lifecycle.
(8 marks)

(c)    Explain the implication of contract type on risk apportionment between client and contractors.
(10 marks)

Question 12

(a)    Explain how the concept of risk is incorporated into the appraisal of investment projects
(12 marks)

(b)    With the use of suitable figures, use risk appraisal techniques to compare two mutually exclusive investment schemes and explain how one scheme is to be preferred over the other.

(13 marks)

Question 13

(a)    Explain with the use of graphs, the application in the use of sensitivity margins in short-term and long-term decision making.

(10 marks)

(b)    Illustrate with suitable figures, the use of sensitivity margins in the case of short-term decisions
(10 marks)

(c)    Critically review the use of sensitivity margins as a risk appraisal technique.

(5 marks)

Question 14

Small and medium size construction companies rarely use the variety of sophisticated quantitative and qualitative tools and techniques for risk analysis.

Discuss the differences between quantitative and qualitative risk analysis and suggest reasons why construction companies find it difficult to use the available tools and techniques for risk analysis.
(25 marks)

Question 15

There is a wide range of types of construction contracts that can be used to link various stakeholders directly involved in construction projects.

(a)    Distinguish between direct and indirect stakeholders and give typical examples for each.
(7 marks)

(b)    Describe the key processes for effective stakeholder analysis.
(8 marks)

(c)    Discuss the implication of contract type on risk apportionment between stakeholders.
(10 marks)

Question 16

Explain, with an example of each, the role of and the relationship between the following financial statements of a business organisation:

•    Balance sheet
•    Income statement
•    Cash flow statement

In the recording of events throughout the accounting period

(25 marks)

Question 17

(a)    Illustrate how financial ratios are used to analyse the performance of a business organisation from the point of view of profitability and liquidity and evaluate their reliability as performance measures.

(15 marks)

(b)    Examine, with an example, the claim that gearing is a more cost effective way to finance a business.

(10 marks)

Question 18

(a)    Explain, with the use of an example, how a developer determines whether or not to proceed with a scheme expected to provide an economic life of twenty-five years.

(25 marks)

Question 19

(a)    Explain the concepts certainty, probability and variability in the context of risk analysis.

(8 marks)

(b)    Outline the key areas of risk for a commercial building client throughout the whole life of the building and suggest, with reasons, the risk management techniques appropriate to each area identified.

(17 marks)

Question 20

Use examples to outline and critically review the methods of project cost control available to a:

1. Building client
2. Main contractor

(25 marks)

Question 21

(a)    A civil engineering contracting company is considering investing in major plant. The choice of plant depends on an assessment regarding future net cash benefits from its use, which in turn depends on the level of use and reliability.  Illustrate, with an example, how a choice can be made between two items of plant employing probability analysis and coefficient of variation.

(15 marks)

(b)    Explain the concept sensitivity analysis in the context of project risk and illustrate its application.

(10 marks)

Question 22

There is a wide range of types of construction contracts that can be used to link various stakeholders directly involved in construction projects.

(g)    Distinguish between strategic, key and ordinary stakeholders and give typical examples for each.
(15 marks)

(b)    Discuss the implication of contract type on risk apportionment between stakeholders.
(10 marks)

Question 23

Describe the process of financial risk analysis for a construction project and explain how the outputs of risk analysis process are used by project managers to monitor and control the effects of risk on the project outcome. Support your discussion with examples of good practice.
(25 marks)

Question 24

Success of Private Finance Initiative (PFI) projects hinges on successful management of risks throughout the project life cycle, especially the stage of allocation of risks.

Discuss why public sector clients consider risk transfer as a key driver for value for money in PFI projects.
(25 marks)

Question 25

Discuss how the cost of construction projects can be modelled using systems thinking methodology through the different phases of project development to avoid financial risks to the client.
(25 marks)

Question 26

(a)    Briefly discuss the anatomy of cost of construction projects.
(10 marks)

(b)    Explain how the accuracy of project cost estimation can be improved through the different phases of project development.
.
(15 marks)

Question 27

There is a wide range of types of construction contracts that can be used to link various stakeholders directly involved in construction projects.

(a)    Distinguish between demand-side and supply-side internal stakeholders and give typical examples for each.
(7 marks)

(b)    Describe the key processes for an effective stakeholder influence mapping and explain why it is essential for project managers to continue to keep track of its variability over the project lifecycle.
(8 marks)

(c)    Explain the implication of contract type on risk apportionment between client and contractors.

(10 marks)

Question 28

As part of financial risk management for major construction projects, clients normally use the following risk mitigating tools:

1.    Letter of credit
2.    Bid bonds
3.    Performance bonds
4.    Surety bonds
5.    Risk-adjusted discount rate

Using appropriate examples from practice briefly explain the situation when each of the above tools is used by clients as a risk mitigating tool and critical evaluate the benefits.
(25 marks)

Question 29

John F Kennedy stated that:

“there are risks and costs to a program of action, but they are far less than the
long-range risks and costs of comfortable inaction”.

Provide a critical appraisal of the above statement in the context of managing risks and decision making in construction projects.

(25 marks)

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