Managing Risks in the Project Pipeline

Minimizing the Impacts of Highway Funding Uncertainties

Larry Redd, P.E.Tim McDowell, WYDOT, P.E.

Larry Redd LLC

Uncertainties Can Ruin Your Asset Management Plans

ProjectProgramming

ProjectDeliveries

STIP—”Project Pipeline”

201220162017 2015 2014 20132017+

Best Laid Plans• Optimized project selection• Intended performance benefits• Assumed revenue by year

Unplanned Outcomes• Actual Revenue?• Missed deliveries• Holding Costs• Obsolete projects• “Hurry-up” projects• Low performance

Pipeline Uncertainties• Scope growth and project cost• Labor and Materials price volatility• Environmental or ROW issues• Unplanned political priorities• Construction cost inflation• Uncertain or variable revenueLarry Redd LLC

Larry Redd, P.E.970-219-4732larryredd@earthlink.net

Costs of “Being Too Lean”-- -Loss of Stimulus Funds, Block Grants, Special Legislative Funds-”Hurry-up” design and devel. costs-Non-optimum advanced const.

Amount of Projects “On-the-Shelf” Ready to Go

Holding Costs –-“PE 10 yr Limit List”$Millions at risk, and $Billions in projects may not get done-Lost permit costs-ROW and EA costs-Development costs-Obsolete projects-Redesign costs

Costs

“Optimum”Range

Non-Optimum Project Pipeline Costs

Objectives

• Identify cost elements (holding and hurry-up costs) and uncertainty factors to reduce or trade off or mitigate.

• Identify controllable factors to optimize (examples) – – How to operate the pipeline (loading, project mix, draining, etc.)– Cost factors to reduce (holding, hurry up)– Reduce time delays in getting projects onto the shelf

• Bottom line – Determine how to deliver intended projects, with expected performance, on time; in the midst of uncertain and/or variable funding

• Not “Business as usual…” – Instead, using low impact solutions/methods to manage risks and uncertainties

Uncertainty Factors

• Scope growth• Political priorities• Material price volatility• Labor costs• Other construction cost escalation• Legal issues• Environmental or regulatory issues• Right-of-way issues• Funding issues

Simulation Cartoon

1R2R Project Loading Rate

1R2R Design Completion Rate

1R2R Paving Rate

1Rs and 2Rs in Design

1Rs and 2Rs “On-the-Shelf”

1R2Rs Paved

3R4R Project Loading Rate

3R4R Design Completion Rate

3R4R Paving Rate

3Rs and 4Rs in Design

3Rs and 4Rs “On-the-Shelf”

3R4Rs Paved

Higher Risk if delayed.

Lower Risk if delayed.

Available Funding – WYDOT Scenario

J an 01, 2012 J an 01, 2022150,000,000

200,000,000

250,000,000

300,000,000dollars/ yr

Available

Fundin

g

Sensitivity of Losses to Key Parameters

Parameter Initial Value Sensitivity Value Reduction in Losses

Design Time for 3R4Rs

5 yrs 3 yrs Up to 22% or more

Pipeline (Shelf) Draining Logic

Proportional based on intended Mix

“Keep the Critical Projects Moving”

Up to 16 % or more

Holding Cost factor (per year)

5% for 3R4Rs and 2% for 1R2Rs

2.5% for 3R4Rs and 1% for 1R2Rs

20 to 30%

Hurry Up Inefficiency

40% inefficiency 20% inefficiency 25% or more

Use of Projected Revenue

No Projections used

Projected two years out

Up to 30 % or much more

“Smoothness” of Funding

“Bumpy” or “Blocky” funding

Smoothed or flattened funding

Ideally this would eliminate losses

Observations and Conclusions

• Latest results verify that total Project Pipeline losses can be about 3% per year or more (off-nominal cost assumptions).– A 3 percent savings is representative based on the findings of the analysis. This would

amount to a total savings of $90 million,for example, for a budget of 3 billion dollars over a 10-year period.

• Multiple methods have been shown to be effective in cutting these losses:– Using (accurate) forward projections of available revenue, or reducing

design times in the pipeline (especially for 3R4R projects)– Reducing the values of the factors of Hurry Up and Holding Costs– The “Critical Project Method” of stabilizing the flow of major projects

has proven effective. Don’t delay the largest and more complex projects.

• Questions?????