A METHODOLOGY FOR PROJECT CONTROL THROUGH RISK ANALYSIS: THE CASE OF A PIPELINE PROJECT.

S.O. Ogunlana’ , M.T. Tabucanon2 and I? De?

‘School of Civil Engineering Asian Institute of Technology Bangkok 10501, Thailand.

Abstract - Projects exposed to uncertainties can be effectively controlled with the application of risk analysis during the planning stages. The Analytic Hierarchy Process (AHP), can be used to analyse risks associated with such projects. The results from risk analysis along with activity analysis are combined to develop a logical contingency allowance for the project through the application of probability theory. Effective control of the project is possible by limiting the changes within the allowance for each work package and the utilisation of contingency through proper appropriation. This methodology has been applied to a pipeline laying project in India. The example application demonstrates the effectiveness of the methodology for project control.

2School of Advanced Technologies Asian Institute of Technology Bangkok 10501, Thailand.

that can result from incorrect implementation, length (needing to cross several boundaries), changes in economic and political situation, and international trading (finance, currency fluctuations and inflation). The pressures for on-time completion, cost limitations and the need for quality reporting often do not permit detailed planning to mitigate against the effects of uncertainties on the project. Although risks to projects are analysed at the planning stages, the risk analysis procedure is done at the project level with contingency provisions which can have two effects on the project: excessive provision of contingency may make proposal unattractive and low contingency may result in fund shortages at the later stages. A procedure for risk analysis and contingency provision in line with the risks associated with projects of this nature is needed.

1. INTRODUCTION The objectives of this work are:

Time, cost and quality are the three major objectives of any construction project. The main barriers for their achievement are the changes in the project environment necessitating cost, time and quality tradeoffs based on management decisions.

Changes in the project environment cause plans to be updated when:

- there are additional requirements and changes which are necessary but were not foreseen at the early stages; - there is work that was not firmly estimated earlier due to Unavailability of necessary information; and - productivity changes and market fluctuations indicate variations from the data used to produce early estimates.

Uncertainties are inherent in today’s projects due to size, complexity, technology, external factors and international trading [l]. A cross-country petroleum pipeline project is characterised by its complexity in execution due to: limitation or unavailability of experience, influence of external factors beyond human control, limitations of technology, the high penalty (economic and technical)

18

- to establish a procedure for risk analysis at the work package and the activity levels of a project; - to derive contingency provision for the project based on the result of the risk analysis; and to - formulate a project control procedure using risk analysis and contingency management.

To facilitate its understanding, the procedure has been applied to a pipeline project in India.

II. A METHODOLOGY FOR PROJECT PLANNING UNDER RISK ENVIRONMENT

The proposed methodology for project planning under risk environment can be described in nine logical steps:

1. 2. 3.

4.

Determine the scope of the project. Prepare a WBS for the project. Identify risk factors related to specific work packages. Assess the effect of risk factors on project objectives by estimating the probability and severity of risk factors for the work packages from a construction perspective.

5.

6.

7.

8.

9.

The

Derive a base cost estimate for the project using design specifications and detailed survey documents. Perform activity analysis for the work packages based on the scope definition. Make contingency provisions for the work packages and the project as a whole using the results of the risk analysis and activity analysis. Formulate a three-level (project, work package and activity) hierarchical plan for the project identifying the effect of changing risk environment on each level. Formulate a risk management policy for the project

overall methodology is depicted in Figure 1. The

nature of the risk factors. The contingency allocation model is formulated by probabilistic approach. The execution planning model is developed based on goal programming to take advantage of utilizing the aspiration level of project personnel in deciding optimum trade-off of time, cost and performance goals of project achievement. The risk management model is the outcome of an overall planning model through which coping with risk, miniimizing risk, distribution and transferring of risk is possible by coordination among each module. Risk management provides the basis for control of the project during the occurrence of specific risk and updates the planning model through information flow as and when required. The risk analysis model, the WntinCVNcy allocation model and the control model are described further in the following sections.

methodology leads to the formulation of four separate models, namely: Risk Analysis Model; Contingency Allocation Model, Execution Planning Model and Risk management Model.

The risk analysis model is based on the Analytical Hierarchy Process (AHP) because of the subjective

THE PROJECT

The project under study is the laying of a cross-country petroleum product pipeline of length 1331 Kms. emanating from the U"-Idla W a r a t State and terminating at Bhatinda Of Punjab State in the western

Figure 1. Methodology for Project Planning Under Uncertainties.

ASS SSINGTHE EFFECTOFRM

FACTORS ON WIP

CONTINGENCY

FOR THE W/PS

I 1.1 1 Id-.- ---I

part of India. The pipeline size is 22 ins outside diameter (OD) between Khandla and Karnal and 18 ins OD between Karnal and Bhatinda for a length of 1113 Kms and 218 Kms respectively. A branch line of 10.75 ins OD will be laid from Kot to Jodhpur for a length of 123 Kms. The pipeline will traverse through the states of Gujarat, Rajasthan, Haryana, and Punjab. Intermediate delivery fqcilities will be provided at Sidhpur, Jodhpur (via branch line), Sanganer (Jaipur), Rewari, Karnal and Sangrur. The pipeline is designed for a capacity of 5 Million Metric Tons per Annum (MMTPA) in the Khandla-Karnal section and 2 MMTPA in the Karnal-Bhatinda section. Detailed description of the project is available elsewhere [2].

THE RISK ANALYSIS MODEL

Risk analysis is normally done in two phases: risk identification and risk assessment. T models currently available for risk analysis have been classified by Kangari and Riggs [4] into: (1) classical models based on probability and simulation; and (2) conceptual models based on fuuy set theory. They noted that probabilistic models require detailed quantitative information which is usually not available at the planning stage, thus making the model difficult to apply in the real world. Fuzzy techniques on the other hand involve uncommon mathematics. To handle the subjectivity involved in project risk assessment, the AHP developed by Saaty [6] is adopted.

-

The AHP first requires formulating the decision problem in a hierarchical structure. A typical hierarchy involves representing the,overall objective of the decision in the top level; the elements affecting the decision in the intermediate level; and the decision option in the lower level. A prioritization procedure to determine the relative importance of the elgments in each level of hierarchy then follows the structuring. Elements in each hierarchy are pairwise compared with respect to their importance to the decision making. AHP uses a verbal scale which enables the decisiom maker to incorporate subjectivity, experience and intuition in a natural way. After a matrix has been formed, the relative weights of each element needs to be derived. The relative weights of the elements of each level with respect to the element in the adjacent upper level are computed as the components of the normalised eigen vector associated with the largest eigenvalue of their comparison matrix. The composite weight of the decision alternatives are then determined by aggregating the weights through the hierarchy. This is done by following a path from the top of the hierarchy to each alternative at the lowest level and multiplying the weights along each segment of the path. The outcome of this aggregation is the normalised vector of the overal! weights of the options. The mathematical basis for determining the weights has been established [6].

20

The AHP has been applied to the analysis of risk on a construction project by Mustafa and Al-bahar [5] from the evaluative perspective. The approach being used for the pipeline project is to analyse project risks at the work package level as means for aidhg project control. The steps required are:

1. Classifying the scope of the project through work breakdown structure. The pipeline project has been divided into 19 work packages. 2. Identifying the risk factors and sub-factors for specific work package and establishing hierarchical risk structure for each work package. See Figure 2 for the risk factors and subfactors in the pipeline construction. 3. Developing the relative weights of the various risk factors and sub-factors by p a i r w i s e c o m p a r i s o n according to their importance in respect of risk severity. 4. Determining the likelihood level of each'sub-factor with respect to high, medium and low level risk. This is done through the subjective evaluation of 30 deckion makers (see Table 1). 5. Synthesizing and determining the likelihood levels of risk. This is done for each level of risk by aggregating the relative weights through the hierarchy. (Table 2) 6. Sensitivity analysis which may be aided by a package like Expert Choice. 7. Combining the likelihood levels of risk and the weights of the different levels of risk to establish the overall risk for the work package (Table 2). 8. Using the result of the overall risk of work package to rank the work packages according to risk probability and severity (Table 2). Through this procedure, the pipelne construction has been ranked as the most susceptible to risk.

THE CONTINGENCY ALLOCATION MODEL

Nearly all projects use contingency provisions as a means of mitigating the effects of uncertainty. The traditional method of providing a flat rate, of say lo%, for the whole project is now being questioned as estimators often do not have sufficient justification for such provision. Ye0 [7] proposed a two-tiered contingency allocation model for construction. The model, combined with the result of the AHP based risk analysis, has been adopted for the pieline project. The steps involved are:

1. 2. computing estimator's base estimate; 3. 4. assigning classes of risk; 5.

6.

organising and analysing estimating parameters;

assessing the level of risk;

deriving even-chance estimate and engineering contingency allowance; and establishing probability of success, management contingency and cost target.

The exact procedure for the contingency allocation has been detailed elsewhere(3). The allocation for the first six work packages is shown in Table 3.

RANK

LIKELIHOOD LEVEL

HIGH

MEDIUM

LOW

PROJECT CONTROL THROUGH CONTINGENCY MANAGEMENT

1 2 3

25 5 0

6 20 4

2 ' 6 22

It is expected that the result of the risk analysis will aid the provision of adequate contingency fund for each activity, work package and indeed the whole project. Since contingency fund is not the main cost provision for

MEDIUM LEVEL WEIGHTAGE : W2 = 0.3

LOW LEVEL WEIGHTAGE : W3 = 0.1

Table 1. Ranking of Risk Levels for Weightage Calculation.

GOAL

r I i

the cost center, it is to be used only when the changes in the project environment causes cost overrun. This will depend on the amount of risk in the cost center. The owner retains control over the contingency fund. The project management need to give adequate proof, clearly detailing the risk factors responsible for cost overruns when seeking permission for contingency appropriation.

Suppose the effects of changes in the environment results in a forecast of cost overrun in one activity. Management should first determine if the overrun can be covered within the contingency provision for the activity. If this is possible, a request is made for contingency appropriation. In the event that the contingency provision for the activity is not enough to cover the cost increase, other activities in the work package are examined for possible utilisation of their contingency provisions. If there is scope for utilizing the contingencies within the work package, it should be requested. If however, the provision for the work package is not enough to cover the need, other work packages are examined. Only in the event that request for cost increase is more than the total provision for the project, will cost increase for the project be sought. At each level during project execution, unutilized contingency provision for activities are added to the contingency pools for the work package and the excess in a work package added to the pool for projec!.

Through, this procedure, the owner can judge the effectiveness of project management in terms of proper risk analysis and judicious management of contingency.

ASSESS qlSKlNfSS OF

PIPELINE CONSTRUCTION

1

I I

I I I I i I

SC13 : Y A T E W

Figure 2. Risk Structure for Pipeline Construction.

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io0L)OFRlsK WBGHTAGE

AEDlUM LOW HK3H MEDIUM L W

0.209 0.188 0.600 0.200 0.100

0.367 0.124 0.600 0.200 0.100

0.434 0.167 0.600 0.200 0.100

0.472 0.173 0.600 0.200 0.100

0.340 0.348 0.600 0.200 0.100

0.379 0.336 0.600 0.200 0.100

OVERAU

WT.

0.422

0.391

0.344

0.324

0.289

0.281

- w<n

HIGH

0"

0.508

0.400

0.354

0.31 1

0.286 -

5L 10.

1.

2.

3.

4.

5.

6.

WORKPACKAGE

PtPELlNE C O " . (SPREAD I) PIPELINE CONSTN. (SPREAD 11) PIPELINE CONSTN. (SPREAD 111) KANDLAPS.

SIDHPUR D.S.

ABU ROAD P.S. __ . Table 2. Risk Ranking of Some Work Packages.

XPECTB)

COST

gW6.35

1144.3a

513.00

1105.58

M7.m

1105.56

COSTYORE FROU E S " E VARlANcE SD.

431399.91 W.81

8982.n 0 3 . u

1327.71 3a44

z048.58 46.28

ZU74.40 45.55

2040.54 45.25

0.42

0.39

0.34

0.32

0.29

1.

2.

3.

4.

5.

PIPELINE CONSTN

( S P W 0 PIPEUNE CONSTN (SPREM 11) PIPEUNECONSTN (SPREM 111) MN0LAP.S.

SIDHPUR D.S.

I 6. IhL3""P.S. 1 C.28 I 0.78 I 0.77 I 1069.90

0.92

0.09

0.84

0.82

0.79

1.75 9613.04

1.17 1103.U

1.14 521.80

0.83 1 m . w

0.81 955.00

Table 3. Contingency Calculation for Some Work Packages.

111. SUMMARY

A methodology for project control through risk analysis has been presented in this paper. The method requires the anlysis of project risk at the work package level using a procedure that allows the incorporation of subjective evaluations in a group situation. The AHP has been adopted in this paper. To mitigate against the effects of uncertainty, a two-tiered contingency provision is made using procedure developed by Ye0 [7]. The results of the risk analysis serves as basis for defensible provision of contingency at the activity and the work package levels.

Field project control is achieved through the careful management of contingency allocation at the activity, package and overall project levels. This provides a system for both the client and project management to control the project thus preventing excessive cost overruns. This methodology has been applied to a petroleum pipeline construction project in India.

152273

138.56

6274

/

77.76

68.75

m.51 -

E

w - 15.84

12.58

12.02

7.27

7.19

0.59 -

REFERENCES

1. R.W. Barker, "Handling uncertainty," lnternational Journal of Project Management., vol. 4 No.4 pp.205-210, 1986.

2. P.K. Dey, Project planning through Risk analysis: the case of a petroleum pipeline laying project. MSc Thesis, AIT No: IE-92-13, 1992.

"Planning for project control through risk analysis: the case of a petroleum pipeline project in India," lnternational Journal of Project Management. (Forit"nng, 1994).

4. R. Kangari and L.S. Riggs. "Construction risk assessment by linguistics," /€€E Transactions on Engineering Management., vol.

3. PK. Dey, M. Tabucanon and SO. Ogunlana,

36'No. 2 pp.126-131, 1989. 5. M.A Mustafa and J. Al-bahar "Project risk assessment

using the analytic hierarchy process," IEEE Transactions on Engineering Management. vol 3% No.1, 1991.

6. T.L. SaaW. The Analytic Hierarchy Process. New York: McGraw Hill, 1980.

7. K.T. k k "Risks, classification of estimates and cont~ WenCY." Journal of Management in Engineering, ASCE, VOI. 6 N0.4 pp.458-470.

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3

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6

8