The Value of Project Risk Management

THE VALUE OF PROJECTRISK MANAGEMENTWEDNESDAY FEBRUARY 25, 2015

0

100

Proj

ect P

redi

ctab

ility

Risk Implementation Maturity

Improve project delivery Improve communications Better balance strategic

needs with capital planning

Goal for TodayDiscuss Value of Applying Risk Management to Projects

PMA CONSULTANTS LLC | 2

Agenda

Introductions

What is project risk

Intro to project risk management

The value of risk management

Deploying a risk management process


INTRODUCTIONS


Presenters

• Dax Ponce de Leon, PMP, LEED AP BD+C– 12 years experience in project management, project controls, planning, scheduling,

risk management

• Dane McBaine, PMP, LEED AP– 11 years experience, including in risk management process on large capital program

• Herschel Baxi, PMP, LEED AP– 20 years experience, including in deployment of risk management process on large

capital program


About PMA Consultants

Top 50 ENR Program / Construction Management Firm

Specializing in owner representation, project controls, claims management, and project risk management Projects in rail, ports, aviation, infrastructure, oil/gas,

pharmaceutical, higher education

RISK EXPERIENCE


15YEARS

250RISK ASSESSMENTS

$50BPROJECT VALUE

WHAT IS PROJECT RISK


Project Risk

Uncertain events that, if occurring, have an impact on one or more project objectives such as scope, schedule, cost, and quality

Project risk collectively causes fluctuation in capital expenditure and forecasting

SOURCE: PMBOK 5TH ED. PMA CONSULTANTS LLC | 8

How Does Risk Affect Projects?

REASONS FOR COST OVERRUN

60%

55%

40%

36%

32%

19%

6%

4%

2%

26%

0% 10% 20% 30% 40% 50% 60% 70%

Material Price Escalation

Poorly Defined Scope

Contractual Disputes

Time Delay

Design Creep

Achieving Productivities

Lack of Approvals

Weather

Industrial Relations

Other

REASONS FOR SCHEDULE DELAY

57%

57%

36%

34%

21%

17%

15%

13%

2%

19%

0% 10% 20% 30% 40% 50% 60%

Poorly Defined Scope

Design Creep

Lack of Approvals

Contractual Disputes

Weather

Time Delay

Achieving Productivities

Material Price Escalation

Commissioning Process

Other

SOURCE: KPMG GLOBAL CONSTRUCTION SURVEY 2008 PMA CONSULTANTS LLC | 9

Risk Response Strategies


INTRO TO PROJECT RISK MANAGEMENT


Project Risk Management Process


PROJECT COMMUNICATION

Risk Management

Planning

Review Process

Risk Identification

Risk Quantification

Risk Response Planning

Summarize

Risk Monitoring & Control

Comprehensive strategy for identifying and controlling risk on a project

Identify Prioritize Model

Summarize

SimulateRange

Possible risks & response plans

Critical & risk-sensitive sequences

Cost breakdown, variables, distributions

Activity durations Cost variables: scope,

price, productivity

PertMaster, NetRisk, @Risk

Report, graphics, options to mitigate risks

Recommended cost/schedule contingencies

Estimate issues, possible risks, response plans

Review

Scope, assumptions Schedules, estimates Execution Plans &

strategy

Risk Management

Plan

QUALITATIVE RISK ANALYSIS QUANTITATIVE RISK ANALYSIS


Typical Risk Assessment Process

Results of Quantitative Cost Risk Analysis

Objective: evaluate likelihood of completing project within a certain cost

Current project estimate (MM) $10

Methodology: Cost Risk Analysis

Likelihood of completion at $10MM 10%

Project cost for 90% confidence (MM) $15

Output: project contingency informs capital planning

New project contingency (MM) $5


Results of Quantitative Schedule Risk Analysis

Objective: evaluate likelihood of completing project within a certain time

Current project schedule (months) 24

Methodology: Schedule Risk Analysis

Likelihood of completion in 24 months 24%

Project duration for 90% confidence (months) 28

Output: project cash flow informs capital planning

Revised schedule contingency (months) 4

Adjust project cash flow for additional 6 months


Distribution of Project Completion Date

The project schedule deterministic date of 16-Sep-14 is in the 24th

percentile of the simulation results


A Risk-Focused Mindset Improves Project Delivery

Clarity in scope assumptions

Better estimates

Better schedules

Improved project controls

Project Document Review

Focus on project agenda

Recognition and transparency in project challenges

Early risk warnings and mitigation strategies

Brainstorming and innovative solutions

Risk Register as a project team’s tool

Key stakeholders to the table

Qualitative Assessment

Risk-based, quantified project contingencies

Support to project change management

Quantitative Analysis


THE VALUE OF RISK MANAGEMENT


Project Contingency and Capital Planning

Source: Flyvbjerg, B. - Survival of the Unfittest, 2009 PMA CONSULTANTS LLC | 19

45%

34%

20%

0%

10%

20%

30%

40%

50%

RailBridges and TunnelsRoad

Average Co

st Overrun

Budget overruns contingency, which impacts capital planning

In any given period, inadequate or excessive capital dollars are reserved

Risk Workshops – Multiple Benefits

TRANSPARENCY

COLLABORATION

ACTION

Early risk warnings and opportunities

Improves other project management processes

Improves project communication

Collaborative problem solving

Include all stakeholders

No agenda other than project success

Added transparency in project challenges

Probabilistic Simulation is only one component


Service Provider

External Stakeholders

Senior Management

Business Units

Project Risk Management Improves Communications

• Risk process – transparent, collaborative, proactive

• Funding requests include clear view of risks, impacts, and mitigation strategies


The Bottom Line - Improved Capital Planning

Strategic Capital Needs

Annual Capital

Forecast

Judicious Capital

Reserves

Reasonable Annual Spreads

Capital Project Contingencies Based on Cost Risk Analysis

Project Cash Flow Based on Schedule Risk Analysis


DEPLOYING A RISK MANAGEMENT PROCESS


Need For A Flexible Project Risk Management Process


Gradual change in processes and organization

Tailored to project size, type, complexity

Need not be expensive!

Phased Scalable

Deploying A Risk Management Program

Risk Management is implemented

piecemeal

Nurture Risk Management

processes

Risk Management becomes a

mature project management

process

Start here

“Low-hanging fruits”Look for quick successes


Independent Analyst vs. Self-Performed by Project Team

• Independent Analyst can bring– Unbiased perspective– Outside perspective– Cold-eyed review of project plan– Standard process

• Usually, project members are willing to share concerns more openly with an independent analyst

• In collaboration with project team, can help to identify challenges


Leveraging An Independent Analyst

Facilitate risk assessments on larger, complex projects

Drive adoption of qualitative risk analysis within project teams (develop & maintain risk registers)

Design, implement, and hand-off a comprehensive risk management process which is phased, scalable, and robust

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Value of Applying a Project Risk Management Process

Strategic Capital Needs

Annual Capital

Forecast

Judicious Capital

Reserves

Reasonable Annual Spreads

Transparent, scalable, collaborative risk management process improves project predictability

Funding requests include clear view of risks, impacts, and mitigation strategies

Balanced capital plans

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Service Provider

External Stakeholders

Senior Management

Business Units

The Value of Project Risk Management

Engineering

Transcript of The Value of Project Risk Management