Introduction to Risk Management inPower Plant Investment Projects

Murat Kandaz, PMPMay 2013

PresenterMurat Kandaz, MScME, PMP

• B.Sc. 2003, M.Sc. 2006 – Department of Mechanical Engineering, METU

• Have held various positions regarding engineering, construction andproject management in;

– Baku-Tbilisi-Ceyhan Crude Oil Pipeline Project

– Ashgabat Power Plant Project

– Damlapınar, Kepezkaya, and Kumköy Hydro Power Plant Projects

– Demircili and Sarpıncık Wind Power Plant Projects

• Have held various positions in business development and proposaldepartments

• Works as the PM of Wind Power Plant Projects of Çalık Energy

Project Management (PM) Presentation Series

1. Introduction to Implementation of Project ManagementBook of Knowledge (PMBOK) Guide in Power PlantInvestment Projects

2. Introduction to Risk Management in Power PlantInvestment Projects

3. Project Management in Multi-Cultural Teams

4. Project Feasibility and Development within Project Management Offices (PMO’s)

5. Project Management at Construction Jobsites

Outline• Introduction

• Risk Management Activities

• Risk Management in Wind Power Plant

Projects

• Conclusions

• Discussion Panel / Future Work

Before We StartWhat do you think would be the most important work of

a PM regarding handling problems?

Dealing with the problems effectively and efficientlyas they occur?

Preventing them, or having a plan to deal withthem beforehand?

Against Possible Problems• What if we can say: “No problem. We

anticipated this, and we have a plan in place that will resolve it”*

• Savings in money and time that wouldhave been spent addressing theproblem

• Efforts focused on being proactiverather than solving problems

• Less stress

• Reduced uncertainties and estimates

* PMP Exam Prep, Rita Mulcahy, 7th Edition, 2011, RMC Publications

Importance of Risk Management

• Risk is an uncertain event or condition that, if it occurs, has an effect (+ve / -ve) on at least on project objective, i.e. scope, schedule, cost, quality!*

• Among many examples, consider the interactionbetween cost and risk management, just duringplanning!

* PMBOK Guide, 4th Edition, 2008, PMI

Cost Budget & Risk Planning€ … € … € … € …Activity

estimates:

€ … Work package estimates: € …

€ … € …

€ …

€ …

Control account estimates:

Project estimate: € …

€ …

€ …

Contingency reserves(for known unknowns)

Management reserves

CostBaseline:

CostBudget:

(for unknown unknowns)

Risk Management Processesper PMBoK

Sequential and recurring processes:1. Plan Risk Management2. Identify Risks3. Perform Qualitative Risk Analysis4. Perform Quantitative Risk Analysis5. Plan Risk Responses6. Monitor and Control Risks

Process Interactions

0

2

4

6

8

10

12

14

16

18

20

‐1 4 9 14 19 24

Initiating Planning Executing Monitoring & Controlling Closing

Inte

ract

ion

Time

1. Plan Risk Management2. Identify Risks3. Qualitative Analysis4. Quantitative Analysis5. Plan Risk Responses

6. Monitor & ControlRisks

Always Keep In Mind

The processes overlapand interact in many ways

during a project or a phase!

Hence the PM should be proactivelyand consistently perform risk management

with continuous updating!

Risk Management Processes:1. Plan Risk Management

What is the best approach in power plant investmentprojects, to come up with a plan that is fit for purpose, trackable, and comprehensive?

What must this plan include?

Who among the companyshould be included?

Output: Risk Management Plan

Methodology

Roles & responsibilities

Budgeting

Timing

Risk categories

Definitions of risk probability and impact

Stakeholdertolerances

Reporting and trackingprocedures

Risk Management Processes:2. Identify Risks

Technicale.g. New technology or

materials, test failures

Environmentale.g. Weather conditions,

traffic restrictions

Operationale.g. New

systems/procedures, need for training

Culturale.g. Established customs

and beliefs, holidays

Financiale.g. Bankruptcy, currency

fluctiation

Legale.g. Local laws, lack of

clarity of contract

Commerciale.g. Changes in market

conditions or customers

Resourcee.g. Shortage of staff, operatives, materials

Economice.g. Slow-down,

change in prices

Politicale.g. Change in

government/policies

Securitye.g. Theft, safety

Risk Identification Methods• Documentation reviews• Information gathering techniques

BrainstormingDelphi

InterviewingRoot-cause analysis

• Checklist analysis

• Assumptions analysis

• Diagramming techniques (C&E, PFD, etc)• SWOT analysis

• Expert judgement

Output: Risk Register

• Main document on which the risks aredocumented, updated, analyzed, planned. It is the major document on which most of the risk information is kept.

• At this point (2. Identify Risks – without anyupdating and further proceeding), what does risk register include?

Risk Register (Initial)

• List of risks• List of potential responses

It is not always logical to seperate risk management works! Hence, some potential responses may be added as risks are identified.

• Root causes of risks• Risk categories

Risk Management Processes:3. Perform Qualitative Risk Analysis

We should create a shortlist of risks depending upon:

Are we supposed to do something about all therisks that we have identified?

• Probability: Probability of each risk occuring• Impact: Amount at stake (+ve/-ve)

To perform a subjective evaluation of risks

Tools for Qualitative Risk Analysis

• Probability and Impact Matrix: Standard ratingsystem

• Risk Data Quality Assessment: “How accurateand well understood is the risk information?”

• Risk Categorization: “What will we find whenwe categorize the risks by categories? Bywork packages? By any other category?”

• Risk Urgency Assessment: Order by urgency

Probability & Impact Matrix - 1

Prob

ability

109876543210 1 2 3 4 5 6 7 8 9 10

Impact

Probability & Impact Matrix - 2

Prob

ability

Severe

Medium

Low

None Low Medium High

Impact

Risk Register (updated afterQualitative Analysis)

• List of prioritized risks and their P & I rating

• Risks grouped by categories

• Risks needing near-term responses/analyses• Risks needing further responses/analyses (to be

further proceeded with or not?)• Watchlist• Trends• For portfolio management: Risk ranking of project

Risk Management Processes:4. Perform Quantitative Risk

Analysis• Expected monetary value (EMV) = P x I

• Similar techniques as in risk identificationand qualitative analysis

• Leads to detailed risk analysis such as Monte Carlo simulations and Tornado diagrams, showing which activites arequantified how

Combined Frequency/Time Histogram

An Example to Quantitative Risk Analysis

• To perform model test / prototyping or not?

PrototypeSetup Cost = € 100.000

Do Not PrototypeSetup Cost = € 0

Failure = 10% and € 20.000 impact

Pass = No impact

Failure = 10% and € 2.000.000 impact

Pass = No impact

Qualitative vs QuantitativeRisk Analysis

Qualitative Quantitative• ~Subjective • ~Objective• Risks may be defined by

numbers• Risks defined by EMV

• Performed for eachproject / phase

• Determine thequantified probabilityof meeting projectobjectives

Risk Management Processes:5. Plan Risk Responses

• What are we going to do about each top / major / prioritized risk?

• Do something before the risk happens• Do something to make sure the opportunity happens• Decrease the P and/or I of threats, increase those of

opportunities• For the remaining (residual) threats that can not be

eliminated:o Do something if the risk happens contingency plano Do something if the contingency plan do not work

fallback plan

Risk Response Strategies

Avoide.g. Remove a risky

activity / workpackage / resource

Mitigatee. g. Provide training to a

non-experiencedresource

Transfere.g. Purchase

insurance, outsource work

Exploite.g. Move a work

package per an experienced

resource’s availability

Enhancee.g. Begin negotiation

earlier than plannedso as to secure a

lower price

Sharee.g. Outsource a

work package toform a

partnership via an opportunity

Accepte.g. Notify management that the

risk is accepted

Risk Management Processes:6. Monitor and Control Risks

• Risk reassessments – regularly sheduled• Risk audits – regularly scheduled• Variance and trend analyses – analyses of

deviations from baseline plan• Reserve analyses – adequacy of

remaining contingencies• Status meetings – the more the merrier

Sample Risk Register

Key: H‐high; M‐medium; L‐low

Project:

Prepared by:

Reference:

Date:

Type of risk

Description of risk

Probability Impact Risk reduction strategy

Contingency plans

Risk ownerH M L Perf Cost Time

Some Actions• Look for occurance of risk triggers

• Monitor residual risks

• Indentify new risks and thenanalyze and plan for them

• Look for occurance of risk triggers• Evaluate the effectiveness of the

risk management plan – are theRM processes working?

• Develop new risk responses –“That plan no longer seemsapplicable, let’s plan a differentresponse”

• Collect and communicate risk status• Check initial assumptions

• Reevaluate risk identification if theproject misses the baseline

• Update risk management plan, response plans, and so on

• Create a database of risk management tools and documentsfor lessons learned

• Perform variance and trend analyses on project performance

• Look for any unexpected effects orconsequences of risk events

PMBOK Ed. 4th 5th

• Plan risk management: improved set of tools and techniques (expert judgement of stake holders)

• Risk related contract decisions taken out of outputs included in PMPlan in procurement management

• Control risks

Risk Management in Wind Power Plant Projects

• Risk management plan prepared• 200+ risks identified

via information gathering, diagramming, and expert judgement techniques

• Qualifiedvia expert judgement using other tools

• Quantification in progressvia 3-point estimates by expert judgement

Sample Risks – 1/3# Risk Item Risk Category

Probability Qualification

(0-none; 1-low; 2-med; 3-high)

Impact Qualification

(0-none; 1-low; 2-med; 3-high)

PxI

24 Radar interference - need for additional radar software / hardware Technical 1 3 3

165 Change in anticipated currency rate - more than 10% Financial 1 3 3

45 Violation of environmental Laws by subcontractors Legal 2 2 4

91 Increase in land costs that are to be obtained by Owner Administrative 3 2 6

21Incompatibility of Materials and Works with technical exhibits of the Contract - noticed at testing and installation

Technical 1 3 3

142Carbon certification deemed to be impossible because of non-Owner related and non-force-majeure events

Legal 1 1 1

88 Decrease in feed-in tariff for the WPP commercial operation period Financial 0 3 0

Sample Risks – 2/3# Risk Item

Probability for Expected Monetary

Value Analysis(Quantification -only for PxI >= 3)

Impact for Expected Monetary Value

Analysis (Quantification - only

for PxI > 3)

EMV

24 Radar interference - need for additional radar software / hardware 2% € 100.000 € 2.000

165 Change in anticipated currency rate - more than 10% 4% € 1.750.000 € 70.000

45 Violation of environmental Laws by subcontractors 38% € 133.333 € 50.667

91 Increase in land costs that are to be obtained by Owner 80% € 200.000 € 160.000

21Incompatibility of Materials and Works with technical exhibits of the Contract - noticed at testing and installation

10% € 250.000 € 25.000

142Carbon certification deemed to be impossible because of non-Owner related and non-force-majeure events

N/A N/A -

88 Decrease in feed-in tariff for the WPP commercial operation period N/A N/A -

Sample Risks – 3/3# Risk Item

List of Potential

Precuations

List of Potential

Responses

Risk Mitigation Strategy

Response Trigger Event

Secondary Risk?

Res.Risk?

24 Radar interference - need for additional radar software / hardware

165 Change in anticipated currency rate -more than 10%

45 Violation of environmental Laws by subcontractors

91 Increase in land costs that are to be obtained by Owner

21

Incompatibility of Materials and Works with technical exhibits of the Contract - noticed at testing and installation

142

Carbon certification deemed to be impossible because of non-Owner related and non-force-majeure events

88 Decrease in feed-in tariff for the WPP commercial operation period

Conclusions

• Risk assessment – decreases costs (sometimes saves projects!)

• PM’s best strategy to be proactive and to perform actual PM work

• PMBOK risk management ~best way for investors in power plant projects (given HSE, CAPEX, OPEX concerns)

• Importance of contingency and management reserves (known/unknown unknowns)

References

• PMBOK Guide, 4th Edition, 2008, PMI

• PMBOK Guide, 5th Edition, 2012, PMI

• PMP Exam Prep, Rita Mulcahy, 7th Edition, 2011, RMC Publications

• Project Management, Planning and Control, 5th Edition, 2007, Butterworth-Heinemann Publications

• www.projectmanager.com

Discussion Panel / Future Work

• Any more problems / issues you could think of, and any recommendation, if any?

• Could you kindly write the risks in investment projects, so that we can compare with the ones in wind power projects?

Finally..

Thank you for your attention and hope to seeyou in the next presentation of PM Series

Q & A..