Project Risk Management Basics: Cost And Schedule Impacts

Project Risk Management Basics:Cost and Schedule ImpactsCSVA 2011 ConferenceToronto, OntarioNov 14 -16, 2011Robert E. Rocco1

Contents Background Fundamentals Process Tools/Supporting Documentation Risk Register Introduction to Quantitative Analysis Contingency Management Questions

Risk Management Background

What is Risk? A risk is something that may happen, and if it does, will have either apositive or negative impact on the project Risk is an uncertain event that, if it occurs, has an effect on at leastone project objective (e.g., time, cost, scope, quality – PMI 2004)Consideration: There are one or more active conditions that influence the risk’sprobability of occurrence and one or more response conditions that influencethe risk’s impact

What is Risk Management? An intuitive process A “good management practice” tool to enhance the chances for anendeavor’s success A systematic, disciplined process that satisfies strategic objectivesthrough management of life cycle risks

Experienced Project Manager Risk Management? I’ve Always Done That! What do they want me to do differently?

Benefits of Risk Management Prioritizes risks for Senior Managers to focus Provides managers with the means to decide where best to invests theprogram’s time and money Complies with owner’s and funding agency’s requirements,(e.g.: validating funding requirements) A rational method for calculating realistic and defendable contingencybudgets (cost and schedule) Forces the team to think collectively and collaboratively in mitigatingrisks, proactively Ensures that procurement and contract terms and conditions reflect theclient’s risk appetite and project objectives

Core to AECOM Program Management AECOM’s Risk Management practice is guided by:– “Practice Standard for Project Risk Management” ProjectManagement Institute (PMI)– ISO 31000:2009 “Risk Management - Principles and Guidelines”– Practical experience managing over 200 capital programs with totalCapex of over US 340 billion AECOM has applied Risk Management to capital programs with Capexvalues of approximately US 100 billion.

Risk Management Experience in Capital ProgramsProgramSecond Avenue Subway, New York, USAPATH Permanent World Trade Center Terminal, New York, USAValue (US millions) 16,000 2,000Dallas Area Rapid Transit Airport Extension, Dallas, USA 300Dallas Area Rapid Transit Extension-Rowlett, Dallas, USALincoln Center Redevelopment, New York, USA 300 750San Diego International Airport Terminal Expansion, San Diego, USAAmtrak Vent Structures, New York, USACentral Corridor Light Rail Transit, Minneapolis, USARoute 9A West Reconstruction, New York, USA 1,000 100 1,000 100Tappan Zee Bridge Environmental Review, New York, USACentral Subway, Phase 2, San Francisco, USA 5,000 1,500Water Improvement Program, PUC, San Francisco, USA 4,500National Network of Highways Program, Trinidad and Tobago 4,000Afghanistan Infrastructure and Rehabilitation Program, AfghanistanDoha Port Qatar, Qatar 150 7,000Capital District Infrastructure Project, Abu Dhabi, UAE 20,000Saadiyat Island Cultural District, Abu Dhabi, UAEAbu Dhabi Metro, Abu Dhabi, UAE 20,000 5,000

The Fundamentals

The IONSACTIVITIESUNFAVORABLEOUTCOMES(Risks)Exposure to loss

The Fundamentals– Meet )– Contribute toEconomic GrowthDECISIONSACTIVITIES– Meet IMIZERISKS MINIMIZERISKS– Within Budget– Within Schedule(Risks)– Satisfy EnvironmentalExposure to lossObjectives– Meets QualityObjectives– No SignificantAdverse Reaction

The Process

Risk Management ProcessIDENTIFY RISKMANAGE RISK- Mitigate- Assess Efforts- Measure Progress- Status- Reset Priorities, goalsESTABLISHMITIGATIONPLANS E(Assessment)RANK RISKS(Evaluation)

Two Approaches to Risk Assessment Qualitative– May be used initially to set up a ProjectRisk Program Quantitative– Necessary to provide contingencyrequirements (cost and schedule) andisolate individual risk contributions

Supporting Elements of RM ProcessGuidanceRiskPlan

Supporting Elements of RM ProcessGuidanceProcessInitial ,Procedures

Supporting Elements of RM ProcessGuidanceProcessInitial ,ProceduresOngoing Activities for Project LifeWorkshopsBrainstormingIdentify, Assess,Mitigate eMitigation Effort,Focus, Goals,Priorities

Supporting Elements of RM ProcessGuidanceOutputProcessInitial ActivitiesOngoing Activities for Project LifeAssessmentGroup Reports MeasuredReduction ofRisk Action e(RAC) Cost/ScheduleConfidence Levels Cost Contingencyand schedule floatmanagement

Risk IdentificationRISK REGISTERSTRATEGICPOTENTIALRISKSMeans To Execute- ProjectUnderstanding- BusinessPractices- Organization- Resources- Viability- PreconditionTECHNICALProject Execution- Design- Construction- ON PLANSMANAGEMENTCOST/SCHEDULECost and ScheduleMeasure- Confidence Level- Cost Contingency- Schedule Float

Tools for Risk Identification Interviews Industry knowledge base Project Team workshops Influence diagrams Brainstorming Post-project review / lessonslearned / historical information Project documents review Risk Breakdown Structure Check lists Cause and effect diagrams Questionnaire SWOT analysis Root-cause analysis Force field analysis List of assumptions andconstrains Delphi technique (anonymouspolling)

Risk Assessment The objective here is to communicate the “expected impact” that willhappen if no proactive mitigation plan is implemented in theprogram/project. And the steps are as follows:– Select impacted variable per risk factor(e.g.: cost, schedule, quality, etc.)– Calculate expected consequences per risk factorExpected Value (EV) Likelihood x Consequence

Risk AssessmentDESCRIPTION OF FREQUENCYOF EVENTPROBABILITYSCALEVALUEAlmost CertainEvent occurs many times duringperiod of project or single event hashigh likelihood of occurrence 70%5OftenEvent occurs several times duringperiod of project or single event hasmoderate likelihood of occurrence40 – 70%4LikelyEvent could occur during period ofproject20 – 40%3PossibleEvent is unlikely to occur, but it ispossible during period of project10 – 20%2RareEvent is so unlikely that it can beassumed not to occur during periodof project.0 – 10%1LIKELIHOOD

Risk AssessmentDESCRIPTION OF EFFECT OF dds up to 250Adds up to 100SCHEDULESAFETYPROJECT PERCEPTION/POLITICAL REACTIONSCALEVALUEPublic perception very poor.Project seriously jeopardized.Serious political consequence to-- Owner5Adds 12monthsMultiple publicaccidentsAdds 6monthsSingle publicProject jeopardized. Requiresaccident andconsiderable effort to regroupmultiple workforcepublic/political supportaccidents4Some concern for projectSingle publicviability. Some politicalaccident orconsequence experienced bymultiple workforceOwner. Moderate effort requiredaccidentsto re-establish viability.3ModerateAdds up to 50Adds 4monthsMinorAdds up to 25Adds 2monthsInsignificantAdds up to 10Adds 1monthMinor concern for projectviability and effect on OwnerpoliticallyLittle or no concern for projectLittle possibility ofviability and effect on OwneraccidentpoliticallySingle workforceaccident21

Traditional Practice of Risk RankingCONSEQUENCEPROBABILITYINSIGNIFICANT(1)MINOR (2)MODERATE(3)MAJOR (4)CATASTROPHIC(5)RARE (1)12345POSSIBLE (2)246810LIKELY (3)3691215OFTEN (4)48121620ALMOST CERTAIN (5)510152025

Risk Allocation Mitigate Transfer (e.g.: Share, Insurance) Accept AvoidIdentify party best able to implement the allocation

Manage Risk Primary Risk MitigationThis is the risk mitigation accomplished by implementing the riskmitigations placed in the Risk Register. Secondary MitigationThese are the items identified in advance by the project aspossible areas in which to reduce scope in an effort to savemoney or time to replenish contingency (cost and/or schedule)that is being used more rapidly than planned.

Tools/SupportingDocumentation

Risk Program DocumentsRisk Identification Workshops Informal processRisk ManagementPlanRisk Assessmentand EvaluationRisk: OwnershipMitigation StrategiesAllocationsContingencyManagement Reporting RemediesRisk ManagementRisk Mitigation MeetingsRisk Assessment Committee Approve Allocations Direct, evaluate mitigations Change L,C Secondary MitigationsRisk Register Risks Mitigation Strategies Allocation- Mitigate- Transfer- Accept- Avoid StatusRisk MitigationReportRisk Mitigation Status logsSupporting documentation

Risk Mitigation Meetings Risk Mitigation Meetings– Regular interval (monthly)– Includes key project personnel– Establish priority risks and place on the agenda– Minutes capture essential risk / mitigation discussions

Sample Risk MitigationMeeting Minutes

Risk Mitigation Status Log

Assessment CommitteeMeeting

Risk Register

Sample Risk Register

Quantitative Analysis

Risk Analysis Provides confidence level for cost estimate and schedule Rational approach to establish cost contingency and schedule float Means to manage contingency and float Addresses oversight agency requirements

Risk Analysis Input1.Cost Estimatea. Contractor Costs (pre-Award Contingency)– Labor– Material– Equipment– Indirects– Profit– Riskb. Owner Costs2.Risk Events (post-Award Contingency)3.Schedule

Cost Estimate Uncertainties Matrix

Risk Events

Risk Events

Risk Analysis OutputCCLRT ProjectEntire Plan : CostCCLRT ProjectEntire Plan : Duration100% 978,143,363350100% 276395% 926,525,78730095% 260630090% 913,495,63290% 255785% 905,911,42085% 252380% 898,605,01480% 249425075% 246270% 887,757,78970% 2435200Hits55% 876,545,03850% 873,195,25045% 870,261,46215040% 867,547,18820060% 240455% 2389Hits60% 879,671,83865% 2420Cumulative Frequency65% 883,051,47650% 237515045% 236340% 235035% 864,141,85730% 860,865,8281000 900,000,000Distribution (start of interval)30% 233025% 232220% 854,591,43820% 23135015% 230210% 846,859,23810% 22925% 840,271,1155% 22800% 810,627,650 800,000,00010025% 857,802,89415% 850,794,1975035% 234000% 2194220024002600Distribution (start of interval)Cumulative Frequency25075% 892,516,291

Risk Analysis OutputCCLRT ProjectCost SensitivityCC 65701 - CCLRT Project Schedule91%0780 - SCC 70 Light Rail20%0630 - SCC 40 Materials16%0450 - SCC 10 Materials14%0770 - SCC 60 ROW13%0710 - SCC 50 Materials10%0790 - SCC 80 Owner Cos ts10%0550 - SCC 30 Labor9%0700 - SCC 50 Labor8%0750 - SCC 50 Risk7%

Mitigation & EffectIncrease confidence of 3.833 billion estimate by18%. (from 59% to 77%)UnmitigatedReduce P90 by 160million. (from 4.18 to 4.02 billion)

Contingency ManagementContingency Management Includes: Recording actual values of remaining contingency on a month bymonth basis Forecasting contingency values into the future based on possibleopportunities and risks Identifying options to address any significant variations in contingencyusage Implementing the options to restore contingency usage to plannedlevels

Contingency ManagementCost Contingency Drawdown Forecast 550515.371 500492.150472.495 450 400 350Updated PlannedCurve 300 2502010Planned Drawdown2011Minimum ContingencyBufferQ1Q4Q3Q2Q1Q4Q3Q2Q1 2002012Actual Drawdown

Contingency ManagementCost Contingency Drawdown Forecast 550 500515.371Hold Point90% Bid50%ConstructedQ1 2012 220M492.150472.495 450 400 350 300 250Forecast2010Planned Drawdown2011Minimum ContingencyBufferQ1Q4Q3Q2Q1Q4Q3Q2Q1 2002012Actual Drawdown

Tools and Resources Software– @RISK A Palisade Corporation Windows-based tool, which is an ‘add-on’ toMicrosoft Excel It is AECOM Standard software for conducting cost risk analysis andmodeling– Oracle Primavera Risk (Formerly PERTMASTER) / @RISK forProject Oracle Primavera Risk Analysis (Formerly PERTMASTER) or @RISK forProjects are both AECOM standard tools used for conducting schedulerisk analysis and modeling References– (2009) “Practice Standard for Project Risk Management” publishedby the Project Management Institute (PMI)– ISO 31000:2009 “Risk Management-Principles and Guidelines”robert.rocco@aecom.com

Project Risk Management Basics: Questions and AnswersOptional Presentation TitlePhoto SlidePresenter’s Name

Core to AECOM Program Management AECOM’s Risk Management practice is guided by: – “Practice Standard for Project Risk Management” Project Management Institute (PMI) – ISO 31000:2009 “Risk Management - Principles and Guidelines” – Practical experience managing over 200 capital programs with total Capex of over US 340 billion