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 ninth and tenth of these steps and summarizes the recommendations of this entire series.

Establish Clear Metrics

Many appraisals of program assume, or pretend, that programs exist in a predictable world of cause and effect where things go according to plan. In reality, major capital construction programs are high risky undertakings where things happen with certain probability and rarely turn out as originally intended. Major capital construction program executives have found that a number of risks are commonly embedded in the program environment and are frequently the major cause of variances. The common risks include:

• lack of realism in initial cost estimates
• length and cost of delays underestimated
• contingencies too low
• geological risks or natural elements are not clearly defined
• environmental, safety, and existing conditions are unclear.

The primary reason for these common risks are that no one wants to be the messenger of bad news, and information is filtered as it goes up the hierarchy. Furthermore, because those intimately involved with a program are not likely to distribute unflattering and less-than-optimistic forecasts, information is also biased at the source.

Manage Risk Continuously

Any program can expect to face numerous potential impacts compounding already identified risks. As the capital program transitions into the execution phase, the risks can change. Therefore, risk management cannot be looked upon as an independent function, but rather it should be planned from the beginning as an integrated part of program management. The absence of evaluating continuously the effects of risks through the progress of the program and intervening when necessary to ensure their mitigation and resolution is where the risk management process starts breaking down. There can be many risks outside of the control of the program team that have the potential to cause impacts if not continually monitored. Fundamental principles of a sound, integrated risk management process require the ongoing evaluation and reevaluation of risks as conditions change and having a process in place for implementing new mitigation strategies and options.

A continuous integrated risk management process will help reduce the potential for unidentified negative impacts, will improve program management’s continuous efforts of obtaining consensus, continue coalition building, and maintain a steady focus on the program’s constraints and objectives. Integrating risk analysis methodologies into the program management applications help program teams from making avoidable catastrophic mistakes.

Summary

It is not reasonable to think that risk can be eliminated from major capital construction programs. However, risk events can be acknowledged much more explicitly and managed a great deal better with more accountability than is typically the case. As program manager’s we must embrace risk. We know it is going to happen. The challenge is to recognize risk, decide what to do about it and manage it. To enhance program delivery and performance, an integrated risk management process should be one of the tools strategic goals used with the program management applications. The benefits of the risk management process are expected to include:

• provide a disciplined framework for systematically guiding the process of identifying and managing risk that may not otherwise be considered
• helps avoid/reduce large losses, as well as lessening the frequency of smaller losses
• improves decision making through clarifying responsibilities and authorities
• supports a better understanding for managing risks leading to increased program confidence and improved allocation of resources.

Although most program managers recognize the importance of risk management processes and use some method for program and project analysis, program management teams must redefine their risk management processes in terms of another program management tool kit. That is, to make iterative risk assessments that quantify the potential risks, and to build a program organizational culture that focuses on potential risk impacts and its associated mitigation and contingency planning.