By

Bob Prieto
Senior Vice President
Fluor

Rick Rye
Fluor

Risk is inherent to major capital construction programs.

The initial paper in this Series defined a ten step process to guide consideration of program risks. Collectively, these interrelated processes contribute to successful strategic risk management.

These ten steps encompassed:

• Plan for Risk
• Make Realistic Assumptions
• Utilize Outside Expertise
• Understand Risk Elements and Their Impacts
• Assess and Analyze Risks
• Develop Mitigation and Contingency Plans
• Synthesize the Risks
• Integrate Risk Management
• Establish Clear Metrics
• Manage Risk Continuously

This paper focuses on the fifth and sixth of these steps.

Assess and Analyze Risks

Failing to assess and analyze the particular risks and determining the impacts they will have on the program goals and objectives can be avoided by extending the risk reviews and workshops just discussed. This part of the risk management process includes the assessment of the probabilities of occurrence and potential impacts to cost and schedule of individual project risks.

Risk response planning includes allocation of risks by avoiding, mitigating, transferring, or accepting. By example, risk response strategies can include management actions; contractual arrangements with third parties such as contractors/subcontractors and insurance companies; and the use of contingencies and reserves.

While every effort must be made to develop and implement cost-effective mitigation measures and management actions, it is important to realize that some risks cannot be cost-effectively transferred to other parties, which is why adequate contingencies and reserves must be determined and kept in the project budget. Additionally, the program manager should develop and implement new risk mitigation strategies, while monitoring the performance of mitigation strategies for risks that have already been assessed.

Develop Mitigation and Contingency Plans

Contingency is characteristically an integral part of the budget estimating process. It is typically added to a base estimate of cost, to cover unknowns. This contingency assignment is intended to increase the confidence level in the capability of the project being delivered within the cost budget. Likewise, schedule contingency is intended to cover the uncertainty and risk associated with the schedule for the program.

While some program management practitioners do not necessarily perform rigorous risk analysis, many program management teams will respond to program and project risk by addressing them in a way to mitigate the most serious of impacts. The mitigation factor that is frequently used is assigning an arbitrary contingency and then drawing down funds as needed.

However, in today’s highly competitive program environments, owners and program managers must continually seek new methods to reduce program costs and improve performance. In addition, project management teams must be prepared with mitigation strategies that can be implemented when the program or discrete projects don’t run according to plan.

One of the key objectives of the risk management effort is to measure the adequacy of the allocated budget for executing the program’s scope of work. One accepted way to do this is by evaluating whether the program’s contingency sufficiently compensates for program risk as measured by the mitigated probabilities and impacts. Mitigated probabilities and impacts should be by consensus of the program team on recognizing the nature of the risk, as well as the program manager’s and owner’s ability and willingness to pursue mitigation measures.

In a disciplined risk management process the step in determining the adequacy of a program’s budget estimate and schedule is the development of a cost contingency model. This model can be developed in a spreadsheet format and can include separate sections for budget, event and scope elements.

• Budget elements: Modeled by including the program cost estimate at a level of detail that line items with similar risk profiles and behaviors are grouped. Each line item is assigned a triangular probability curve that is defined by expected, minimum, and maximum parameters.
• Event and scope elements: Modeled by including all the event and scope risk items that have been identified. The probability curves that best match the expected behavior of risks and their descriptive parameters are chosen in consultation with expert resources.

Once the contingency models are developed and updated, a probabilistic analysis is run for the entire project. This results in providing information related to:

• The probability that the program will meet its established budget
• That the contingency in the total budget would be adequate to meet the program objectives.

Unmitigated risks can also exist because the assessment finds that there is no alternative project management action or alternative whatsoever. Its important to note that extreme caution should be taken when dealing with unmitigated risks because contingencies can be grossly underestimated or overestimated.