Abstract
Risk management in infrastructure projects has been a very important process to achieve the project objectives, namely: time, cost, quality, safety and environmental sustainability. Huge investments are made in infrastructure construction projects like roads, railways, ports, airports, electricity, telecommunication, oil gas pipelines and irrigation. This growing Increase in investment in infrastructure investment projects demands requires close monitoring of costs to ensure a net return. The evaluation of returns on investment at the conceptual stage plays a vital role in this phase. Software tools help in bringing out near accurate analysis of returns on investments and to support project viability under multiple circumstances. The paper presents an analysis of how software was applied to evaluate and mitigate risk during the case of a six lane road infrastructure project. The unit of analysis was the impact of cost of construction cost, interest rates for loans, methods of depreciation, revenue sharing on various financial indices: IRR, MIRR, DSCR and payback period. The interpretation was that software tools can be used to perform risk analysis, sensitivity analysis and scenario analysis. The case study makes a contribution to the body of knowledge by developing guidelines for using software tools in risk management.
TopLiterature Review
The risk can be defined as generic risk or project risk. The generic risk can be defined as the exposure to an uncertain situation that could have an effect which is a deviation from the expected. Risk is calculated as the socio-economic or other cost multiplied by the probability of quantified uncertain future events (Goodwin & Strang, 2012).
In general, project risk is defined as an uncertain event or set of circumstances that, should occur, will have an effect on the achievement of one or more of the project’s objectives (Christine, 2008). Project risks may also be classified as external or internal, the former usually being uncontrollable and the latter referring to the team resource capability (Strang, 2012). Risk may be a positive as well as a negative impact on the project. Typical internal positive risks would include expected project duration with low task time standard duration that is earlier than the required deadline (Strang & Symonds, 2012), while a common external negative project risk would be delays caused by political events (Strang, 2010).
Financial risk analysis is carried out using various financial models which monitor cost as well as revenue from the project. Financial models can provide public sectors and private partners with an analysis tool to evaluate the potential returns of investments and financial feasibility of the projects (Weiyuan Yuwen & Zhanmin Zhang, 2013). It allows business options and risks to be evaluated in a cost-effective manner against a range of assumptions. It helps in identifying optimal solutions and evaluating financial returns.