Practical Approaches To Risk Management CMAA W/WW Summit July 19, 2010 Ken Fredrickson PE, CCM

Practical Approaches To Risk Management

CMAA W/WW SummitJuly 19, 2010

Ken Fredrickson PE, CCM

Agenda

• Some Definitions• Objectives• Tools• Process• Why Do This

What is Risk

Risk typically has a negative connotation – “potential loss”•A broader view is that risk is the chance of an event happening which would cause actual events to differ from those assumed during planning – this allows for positive or negative impacts on the project•Risk is defined by the Province of B.C.’s Enterprise- Wide Risk Management Policy as:

"the chance of something happening that will have an impact upon the achievement of objectives"

What is Risk Management

Risk management is the process of identifying, analyzing and addressing significant risks on an ongoing basis. •Risk can be practically defined as the product of the probability of an event occurring and the consequences if the event does occur•To fully define a risk it is necessary to understand its two component elements:

– The likelihood of a particular risk actually happening– The impact or consequences if it happens

The Objective of Risk Management

A disciplined process that can help avoid negative outcomes and help recognize emerging opportunities.

An action plan that may help to mitigate the probability of a risk happening and the consequences of when it happens.

Improved decision making Better allocation of resources

You will not rid the project of all risk!

Alligators, Swamps and Keeping focus

Picking the Right Analysis Tools

Many tools are now available for risk analysis:• Sophistication is consistent with input quality and reporting

needs• Easy to use and understand• Clearly communicate project uncertainty and impacts• Flexibility to account for changing conditions

What are you trying to analyze:•Technical performance risk (manufacturing)•Cost •Schedule

New Tools Help and Hinder

The Good• Models uncertain events and creates a statistical assessment• Able to do multiple iterations summed in convenient curves• Able to identify specific project risk drivers• Good for reporting• Good for contingency evaluation

The Bad• We are dependent upon assignment of a variety of variables that

usually lack accuracy• Precision without accuracy may make you feel good but …

– Always works, even with bad data

Statistical Risk Distribution

• Typical probability distribution models are the Triangular, Normal and Lognormal distributions

• This is where the guesswork starts

There are Budget Planning Benefits

Traditionally, project risks and uncertainties are handled by establishing a contingency budget:•Estimated as a percentage of various project components•Sometimes mandated by regulation or policy•Does not provide an indication of the level of confidence granted by such budget•Often calculated as a "gut feel" amount, without much consideration for the real risks involved

Risk Based Budgeting

Looks at each project component:1. Break the cost estimate down into workable categories2. Define the Most Likely Cost, the Low Cost, the High Cost

– the Likely Cost is the cost that occurs more often than any other particular cost – the cost that has the highest probability of occurring.

3. Define the statistical distributions of the estimated costs for each category

4. Use analytical or statistical analysis to determine the cost probability distribution for the project as a whole

Risk Based Budgeting

• Reasonable confidence in permit costs

• Low confidence in piling costs

• High confidence in concrete costs

Likelihood of a Particular Cost

65 70 75 80 85

90.0%

Impact (cost and schedule)

Level of Confidence in a Project Cost

0.0

0.2

0.4

0.6

0.8

1.0

1.2 1.4 1.6 1.81.0

5% 90% 5%

The Process

How to Get Started

• Establish a risk management philosophy• Identify key stakeholders that can contribute to

the process• Establish a tracking and reporting mechanism• Start the identification and collection process

– Ad hoc collection of information– Workshops– Checklists

Risk Registers

• A structured way to record and identify risks• Facilitates the assessment and evaluation of risks• Provides a tool for communicating the risks to key

stakeholders and decision makers.

The Steps

– Validation of cost and schedule– Identification– Quantification– Mitigation– Monitor, Evaluate & Report

Validation

Review of project documentation, schedules, cost estimates:• This is really to ensure that you are starting from a reasonable

baseline• Refinement of poor information will not improve the result• Helps to collect assumptions and decisions that have been

made in the developmental stages of the project that should be moved forward to the risk register

Identification

• Identify issues that will impact the project – Recognize that risk issues have been generated since

initial project planning – may have to dig into project history

• Break things into manageable parts– Broad issues do not allow for specific solutions

• Not limited to cost and schedule issues– There may be risks that are unacceptable no matter

what

Identification

Quantification

• Determine the impact– Cost– Schedule– Other – environmental, social,

safety

• Establish the probability– Not well understood– Often not based on consistent

practice

Quantification

Impact– Ask the “Old Guy”– Rigorous review of

possible outcomesProbability– “Use the program

defaults”

A Word About Schedule

There is software that allows similar reviews of schedule risk

– Best, most likely, worst assessments– Various approaches are being refined

Schedule impact assessments have two steps1. The actual time requirement or incremental change

resulting from the issue2. Whether the issue impacts the critical path of the work

element or changes the project critical path

Sensitivity Analysis

Shows Greatest Contributors to Overall Risk

Non-Quantifiable Impacts

Issues that may occur on the project whose impact cannot be reduced to cost and schedule:

• Safety concerns– closing or disturbing a busy interchange

• Potential impact on sensitive nesting and breeding areas• Potential of protests, delays, lawsuits from politically astute

citizens• Right-of-Way issues

Prioritization

Not all issues require equal attention

• Severity of a risk will vary by project

– Percentage of budget vs. absolute $ value

• Likelihood assessment is often inconsistent

• Some issues are unacceptable regardless

Mitigation

• Decisions need to be consistent with the risk management policy

– Allocate risk to the party best able to handle it

• Mitigation measures change over time– Revisit these as the project develops– Don’t lose the sight of the impact of the original issue

• Potential problems– Teams are often overly optimistic

Mitigation Strategies

Mitigation Options•Avoid•Mitigate•Transfer (share)•Accept

Considering:• What can be done and what are the

options• What are the trade-offs• How will it impact future decisions

What Are We Trying To Do?

Impact (cost and schedule)

Increase the probability of a better outcome

Reduce the potential impact

ManagedUnmanaged

Avoid

This is not the same as transferring the risk to another team member•Design around environmentally sensitive areas•Use funding sources without particular restrictions

This does not mean shifting the problem to the contractor – most likely the risk is still there and you

are paying for it one way or another

Mitigate

Reducing the risk impact by:• Additional geotechnical investigation to refine foundations

issues• Community outreach to prevent public opposition• Paying over time to speed permit reviews

These are the difficult ones – you need to have enough confidence in your estimates and probabilities of impact that

you can justify investing (probably unbudgeted) time and funds to prevent (or encourage) something from happening

Transfer/Share

Shifting an issue w/o the anticipation of mitigation is just moving the cost

• Changing delivery processes• Split responsibility for weather delay

Other transfer mechanisms:•Insurance•Cost sharing agreements

Don’t ignore transferred risks – rarely is the entire impact transferred

Accept

Items that can be accommodated through allowances and contingencies:

• Potential over-excavation requirement • Increases in commodity prices• Work disruption due to environmental or archeological

discoveries

The cost of mitigation may be bigger that potential cost of the occurrence

What to Do?

– Avoid• Spread footings

– Mitigate• More geotechnical

assessment– Transfer

• Specialty foundation – Accept

• Unit prices

Monitor, Evaluate, Report

The process is valuable•The process highlights the issues•Brings people together to focus on solutions

Implement a Risk Management Plan•The process is not static – things change as a project evolves

Report regularly•Issue progress reports•Include risk discussions in progress meetings

Monitor, Evaluate, Report

• Assign an Owner to each issue

• Keep track of activity associated with the issue to monitor management activity

• Know when to declare victory

Risk Management Plan

A typical plan would include:• Introduction• Description of Project• Major Risks to the Project Summarized• Roles and responsibilities• Schedule• Risk Register• Mitigation Contingency Plans• Reporting

Who is Responsible

Various parties have differing interestsFocus on the issues that you have the ability or responsibility to control (with some overlap)

• Owner issues – Right-of-Way– Funding

• Contractor issues– Estimate accuracy– Material, labor and equipment costs

The CM can be an honest broker of issues

Who Does It?

Departments of Transportation for numerous states

Federal Transit Administration (FTA) Federal Highway Administration (FHWA) Air ForceDepartment of EnergyMajor Public Utilities - SFPUC

Why Bother?

Improve project performance Encourage accountability Promote of innovation Improve capacity to manage risk with limited

resources Reduce the need for crisis management Pass forward lessons learned

Questions?Most of our challenges were obvious if we had looked a little harder