Project Risk Management Presented by Harold Dorbin, Marsh Risk Consulting Co-sponsored by Project Risk Management Agenda 1. Owner and Contractor Risk Perspective 2. Project Risk Governance and Systems Owner Considerations & Structure Contractor/Vendor Considerations & Structure Observations/Recommendations 3. What is a Project Risk? Project Specific Risk Identification Observations/Recommendations
4. Managing Project Risk Through the Project Life Cycle Considerations for a Workable Plan Observations/Recommendations 5. Wrap-up & Questions 2 Section 1 OWNER AND CONTRACTOR RISK PERSPECTIVE 3 Owner and Contractor Risk Perspective Owners Project Perspective Owners make money from the completed project.
Project objectives are longer term. On-Stream reliability. Usable life. Cost of use/operation. Schedule and cost may or may not be critical. Project is the asset. Funding structure/equity exit. Industry/business needs. Success for the project defined by both: Corporate objectives. Business justification for project. 4 Owner and Contractor Risk Perspective Contractors Project Perspective Contractors make money by completing the project:
Project objectives are usually shorter term. Defined by contract compliance. Longer term objectives are real. Execution reputation. Technology supplied/experience. Success for the project defined by both: Contract compliance. Corporate objectives. 5 Section 2 PROJECT RISK MANAGEMENT AS A RISK GOVERNANCE SYSTEM 6
Project Risk Governance and Systems Project Risk Governance Objectives Capacity of a management organization to positively influence the project toward a successful outcome. Information engage and make decisions. Accuracy - acceptable to make decisions. On-Time late decision or assumptions. 7 Project Risk Governance and Systems Project Risk Governance Objectives This is easy .
What decisions do I need to make? When do I need to make them? What information do I need to make them? How accurate does the information need to be? 8 Project Risk Governance and Systems Project Risk Governance Objectives 9 Project Risk Governance and Systems Project Risk Governance Objectives
10 Project Risk Governance and Systems Owner Considerations & Structure 11 Project Risk Governance and Systems Owner Considerations & Structure Stage Gate I Concept: Decision: fund feasibility study. Information: Risk assessment. OOM estimate of project. Scope and feasibility estimate. Market and ROI assessment. Regulatory overview (high level).
Class 4 project schedule. Schedule to accumulate sets the timeline. 12 Project Risk Governance and Systems Owner Considerations & Structure Stage Gate II Feasibility: Decision: fund preliminary engineering. Information: Risk assessment/gaps closed. +/- 50% estimate of project. Major equipment resourced. Resource availability. Scope and pre-engineering estimate. Refined market and ROI analysis. Regulatory analysis (mid level).
Class 3 project schedule. Insurance/finance/currency. Schedule to accumulate sets the timeline. 13 Project Risk Governance and Systems Owner Considerations & Structure Stage Gate III Preliminary Engineering: Decision: fully funded/committed project. Information: Risk assessment/gaps closed. +/- 20% estimate of project. Major equipment committed quote. Resources confirmed. Scope, work breakdown structure. Confirm market and ROI analysis.
Regulatory analysis/permits. Class 2 project schedule. Insurance/finance/currency. Schedule to accumulate sets the timeline. 14 Project Risk Governance and Systems Contractor/Vendor Considerations & Structure 15 Project Risk Governance and Systems Contractor/Vendor Considerations & Structure Stage Gate I Bid/No Bid: Decision: fund the bid/respond to RFB. Information:
Proposal schedule. Preliminary risk assessment. Go/get vs. proposal budget. Resource/technology availability. +/- 30% execution estimate. Scope statement/contract plan. Regulatory analysis/permits. Class 2 project schedule. Insurance/finance/currency. 16 Project Risk Governance and Systems Contractor/Vendor Considerations & Structure Stage Gate II Schedule/Budget/Scope/Risk Update: Decision: continue with proposal. Information:
Proposal schedule update. Risk assessment update. Proposal budget update. Resource/technology confirmed. +/- 20% execution estimate. Scope/contract plan defined. Regulatory/permits defined. Class 1 project schedule w gaps. Insurance/finance/currency. 17 Project Risk Governance and Systems Contractor/Vendor Considerations & Structure Stage Gate III Bid Close Out: Decision: submit bid. Information:
Contract exceptions/acceptance. Terms impact on execution. Insurance/finance/currency. 19 Project Risk Governance and Systems Observations/Recommendations In order for management to have project governance and manage project risk effectively; project procedures and how they are implemented must be: Industry Best Practice.
Consistent remove approach/application variation. Accountable know who is to do what. Transparent allows management intervention. 20 Project Risk Governance and Systems Observations/Recommendations 21 Project Risk Governance and Systems Observations/Recommendations Each Stage Gate is defined by all the decisions that must be made before the next stage can proceed. Contractors must consider bid cycle and information delivery schedule early in the bid process.
Bid exception? Best Procedures define requirements broadly. For smaller/less complex projects, it states not applicable. Keep submissions at each Stage Gate for audit. 22 Project Risk Governance and Systems Observations/Recommendations Track exceptions to procedure and close out as a priority. Generally an exception cannot go through two Stage Gates without being resolved. All assumptions treated as a risk in risk register. 23
Section 3 WHAT IS A PROJECT RISK? 24 What is Project Risk? Definition A Project outcome of a probability less than 1 that results in something other than Plan. Risks can yield positive or negative variation from plan. 25 Sources of Project Specific Risks Success for the Project
Owner Sources Contractor Sources Business justification for the project. Corporate objectives. Contract compliance. Corporate objectives. 26
Sources of Project Specific Risks Risk to Project Specific Goals Risk is something that prevents the goal from occurring: Example: Owner Concern Example: Contractor Concern Maintain the relationship with the aboriginal communities in zone. Corporate objective driven.
Meet Performance Test Criteria within 60 days of turnover. Contract compliance driven. 27 Sources of Project Specific Risk Risk to Project Specific Goals Manage risk to project specific goals: Yields more key goal focused risk assessment than checklist. Provides alignment of stakeholders needs (JV partners, lenders, regulators, governments). Provides a framework to make future key project decisions.
28 Sources of Project Specific Risk Risk Sources/Management 29 Sources of Project Specific Risk Definitions Scope relationships: Risk that evolves from how the project contracts are organized (project delivery method). Risk that evolves through non-contractual parties (government agencies, special interest groups, etc.). Contracts: Mechanism used to influence the performance of another party.
Environment: Site specific, resource availability, financial condition, etc. 30 Observations/Recommendations Project Scope & Relationship Diagram Test and Inspection Test and Inspection Employers and Employers Contractorsand Contractors Subcontracts Subcontracts
Principal Principal Employer Employer Contractor Contractor Material Supplies Material Supplies Regulators, Agency and Regulators, Agency and Local, Governmental Local, Governmental
Principal Principal Structural Steel Structural Steel Turbine Turbine Electrical I&C Electrical I&C Boilers Boilers Mechanical Mechanical
Others Others Civil Civil Others Others 31 Observations/Recommendations Risk Management Fundamentals Project risk management should embrace all of the key corporate and business/contract goals for each undertaking not just cost and schedule. Risk management processes that are focused on the project goals allow for early development of project strategy best risk fit decisions.
Simple tools PCSRD, contract overview, etc., provide a consistent baseline for those participating in identifying project risk. 32 Section 4 MANAGING PROJECT RISK THROUGH THE PROJECT LIFE CYCLE 33 Managing Project Risk Through the Project Life Cycle Considerations for a Workable Plan Snap shot project risk management. Project risk management systems must be updated. Frequency depends on what stage the project is in.
Quantitative models vs. qualitative assessments. The need for numbers vs. strategy. Do not put all of the obligations on the project manager, the proposal manager or executive team. Executive management must captain the ship not row the boat. 34 Considerations for a Workable Plan Risk Committee Reports to executive management only. Make-up:
Project manager. Counsel. Project controls expert. Other experts part time. Set up risk screening tests at each stage gate. If a high risk condition exists: System engages risk committee. Defined interaction between project and risk committee. Risk committee makes recommendations to project and executive management at each stage. 35 Example
Proposal Decision Flow Chart LEVEL 3 Preliminary decision made on Proposal Level 1, 2, 3 LEVEL 1 AND 2 PM completes Pre RA Form and submits for comment/approval REJECT PM includes pre
approved Liability Limits etc. ACCEPT END Commitment made to providing proposal Bid/No Bid Assessment BID LEVEL 3 PM completes
Pre RA Form Pre RA approve/reject and comments via procedure 123 Proposal Level Confirmed via procedure 123 1 or 2 Notify Risk Review Group based on Pre RA Responses NO
YES Notify Risk Review Group immediately after bid decision Risk Review Group provided the Pre RA & Proposal Documents GATE ONE ~ ~
~ 36 ~ ~ Proposal Management Plan Updated Example Proposal Decision Flow Chart GATE THREE Proposal Management
Plan updated and sent to RRG Gate 3 Risk Checklist Forms completed, All documents required via Procedure 123 completed Do Gate 3 Risk Checklist Forms or updates to the Procedure 123 Risk Documents require RRG engagement Gate 3 Risk Checklist Forms completed, All documents required via
Procedure 123 completed YES PM provides Gate 3 Risk Checklist Forms and all documents per procedure 123. NO Project Risk Analysis completed and contingencies defined by procedure 234 PM submits Project Risk Analysis and other bid data
Risk Review Group provides remarks to PM for consideration Project Risk Analysis completed and contingencies determined per procedure 234, then provided to RRG. Risk Review Group provides recommendations on specific Risk Action Plans and RA Continued PM determines which RRG recommendations
to include PM supplies revised Project Risk Analysis and contingencies to RRG RRG accepts revised Project Risk Analysis NO Risk Review Group recommends No Proposal YES PM submits contingencies, PRA and other data
37 Considerations for a Workable Plan Lessons Learned Spending more on resources does not guarantee better results. Simple lessons learned system aids with risk identification. Sort able risk data for easy identification of project specific risks. Project risk management will tell you what worked and what did not. Link project risk management with project controls. 38 Observations/Recommendations System Usage Considerations when deciding how often the project risk management system should be updated: How often risk assessment output is needed?
How much risk is changing? During execution as often as project controls is updated/at least monthly. Let managers manage and let the experts apply their expertise. Engage risk committee only when well defined screening processes indicate the project is high risk this includes execution. 39 Observations/Recommendations System Usage Retain all screening tools filled out by planning/proposal team and by project execution teams. These are subject to audit and should be reviewed for learning purposes if a project goes wrong. Focus executive time on the projects that present the largest risk.
Not always the largest projects. Will help ensure project risk governance over the entire operation. 40 Section 5 WRAP-UP 41 Wrap-up Conclusion Owners and contractors have different perspectives on projects. Why rely on a contractor to manage your project risk management system with his concerns?
Project risk management, in order to be project specific, should be: Project goal oriented. Use simple tools focusing on: Scope relationships. Contracts. Project environment. Well-structured project risk governance processes: Stress test each project. Focus executive time toward the critical few. Provide risk committees that apply independent expert analysis through procedures. 42 DISCLAIMER K&L Gates includes lawyers practicing out of 38 offices located in North America, Europe, Asia and the Middle East, and represents numerous GLOBAL 500, FORTUNE 100, and FTSE 100 corporations, in addition to growth and middle market companies, entrepreneurs, capital market participants and public sector entities. For more information, visit www.klgates.com.
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