The Value of Project Risk Management
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This document discusses the value of applying risk management to projects. It outlines how risk management can improve project delivery by providing better estimates, schedules, and project controls. It also improves communication and transparency. Applying quantitative risk analysis allows for more accurate project contingencies, which supports better capital planning. Risk workshops provide early risk identification and collaborative problem solving. Implementing a risk management process gradually and tailoring it to each project provides the most value. An independent risk analyst can help identify challenges and establish a standard process.
The Value of Project Risk Management
- 1. THE VALUE OF PROJECT RISK MANAGEMENT WEDNESDAY FEBRUARY 25, 2015
- 2. 0 100 ProjectPredictability Risk Implementation Maturity Improve project delivery Improve communications Better balance strategic needs with capital planning Goal for Today Discuss Value of Applying Risk Management to Projects PMA CONSULTANTS LLC | 2
- 3. Agenda Introductions What is project risk Intro to project risk management The value of risk management Deploying a risk management process PMA CONSULTANTS LLC | 3
- 5. Presenters • Dax Ponce de Leon, PMP, LEED AP BD+C – 12 years experience in project management, project controls, planning, scheduling, risk management • Dane McBaine, PMP, LEED AP – 11 years experience, including in risk management process on large capital program • Herschel Baxi, PMP, LEED AP – 20 years experience, including in deployment of risk management process on large capital program PMA CONSULTANTS LLC | 5
- 6. About PMA Consultants Top 50 ENR Program / Construction Management Firm Specializing in owner representation, project controls, claims management, and project risk management Projects in rail, ports, aviation, infrastructure, oil/gas, pharmaceutical, higher education RISK EXPERIENCE PMA CONSULTANTS LLC | 6 15YEARS 250RISK ASSESSMENTS $50BPROJECT VALUE
- 7. WHAT IS PROJECT RISK PMA CONSULTANTS LLC | 7
- 8. Project Risk Uncertain events that, if occurring, have an impact on one or more project objectives such as scope, schedule, cost, and quality Project risk collectively causes fluctuation in capital expenditure and forecasting SOURCE: PMBOK 5TH ED. PMA CONSULTANTS LLC | 8
- 9. How Does Risk Affect Projects? REASONS FOR COST OVERRUN 60% 55% 40% 36% 32% 19% 6% 4% 2% 26% 0% 10% 20% 30% 40% 50% 60% 70% Material Price Escalation Poorly Defined Scope Contractual Disputes Time Delay Design Creep Achieving Productivities Lack of Approvals Weather Industrial Relations Other REASONS FOR SCHEDULE DELAY 57% 57% 36% 34% 21% 17% 15% 13% 2% 19% 0% 10% 20% 30% 40% 50% 60% Poorly Defined Scope Design Creep Lack of Approvals Contractual Disputes Weather Time Delay Achieving Productivities Material Price Escalation Commissioning Process Other SOURCE: KPMG GLOBAL CONSTRUCTION SURVEY 2008 PMA CONSULTANTS LLC | 9
- 10. Risk Response Strategies PMA CONSULTANTS LLC | 10
- 11. INTRO TO PROJECT RISK MANAGEMENT PMA CONSULTANTS LLC | 11
- 12. Project Risk Management Process PMA CONSULTANTS LLC | 12 PROJECT COMMUNICATION Risk Management Planning Review Process Risk Identification Risk Quantification Risk Response Planning Summarize Risk Monitoring & Control Comprehensive strategy for identifying and controlling risk on a project
- 13. Identify Prioritize Model Summarize SimulateRange Possible risks & response plans Critical & risk- sensitive sequences Cost breakdown, variables, distributions Activity durations Cost variables: scope, price, productivity PertMaster, NetRisk, @Risk Report, graphics, options to mitigate risks Recommended cost/schedule contingencies Estimate issues, possible risks, response plans Review Scope, assumptions Schedules, estimates Execution Plans & strategy Risk Management Plan QUALITATIVE RISK ANALYSIS QUANTITATIVE RISK ANALYSIS PMA CONSULTANTS LLC | 13 Typical Risk Assessment Process
- 14. Results of Quantitative Cost Risk Analysis Objective: evaluate likelihood of completing project within a certain cost Current project estimate (MM) $10 Methodology: Cost Risk Analysis Likelihood of completion at $10MM 10% Project cost for 90% confidence (MM) $15 Output: project contingency informs capital planning New project contingency (MM) $5 PMA CONSULTANTS LLC | 14
- 15. Results of Quantitative Schedule Risk Analysis Objective: evaluate likelihood of completing project within a certain time Current project schedule (months) 24 Methodology: Schedule Risk Analysis Likelihood of completion in 24 months 24% Project duration for 90% confidence (months) 28 Output: project cash flow informs capital planning Revised schedule contingency (months) 4 Adjust project cash flow for additional 6 months PMA CONSULTANTS LLC | 15
- 16. Distribution of Project Completion Date The project schedule deterministic date of 16-Sep-14 is in the 24th percentile of the simulation results PMA CONSULTANTS LLC | 16
- 17. A Risk-Focused Mindset Improves Project Delivery Clarity in scope assumptions Better estimates Better schedules Improved project controls Project Document Review Focus on project agenda Recognition and transparency in project challenges Early risk warnings and mitigation strategies Brainstorming and innovative solutions Risk Register as a project team’s tool Key stakeholders to the table Qualitative Assessment Risk-based, quantified project contingencies Support to project change management Quantitative Analysis PMA CONSULTANTS LLC | 17
- 18. THE VALUE OF RISK MANAGEMENT PMA CONSULTANTS LLC | 18
- 19. Project Contingency and Capital Planning Source: Flyvbjerg, B. - Survival of the Unfittest, 2009 PMA CONSULTANTS LLC | 19 45% 34% 20% 0% 10% 20% 30% 40% 50% RailBridges and TunnelsRoad Average Cost Overrun Budget overruns contingency, which impacts capital planning In any given period, inadequate or excessive capital dollars are reserved
- 20. Risk Workshops – Multiple Benefits TRANSPARENCY COLLABORATION ACTION Early risk warnings and opportunities Improves other project management processes Improves project communication Collaborative problem solving Include all stakeholders No agenda other than project success Added transparency in project challenges Probabilistic Simulation is only one component PMA CONSULTANTS LLC | 20
- 21. Service Provider External Stakeholders Senior Management Business Units Project Risk Management Improves Communications • Risk process – transparent, collaborative, proactive • Funding requests include clear view of risks, impacts, and mitigation strategies PMA CONSULTANTS LLC | 21
- 22. The Bottom Line - Improved Capital Planning Strategic Capital Needs Annual Capital Forecast Judicious Capital Reserves Reasonable Annual Spreads Capital Project Contingencies Based on Cost Risk Analysis Project Cash Flow Based on Schedule Risk Analysis PMA CONSULTANTS LLC | 22
- 23. DEPLOYING A RISK MANAGEMENT PROCESS PMA CONSULTANTS LLC | 23
- 24. Need For A Flexible Project Risk Management Process PMA CONSULTANTS LLC | 24 Gradual change in processes and organization Tailored to project size, type, complexity Need not be expensive! Phased Scalable
- 25. Deploying A Risk Management Program Risk Management is implemented piecemeal Nurture Risk Management processes Risk Management becomes a mature project management process Start here “Low-hanging fruits” Look for quick successes PMA CONSULTANTS LLC | 25
- 26. Independent Analyst vs. Self-Performed by ProjectTeam • Independent Analyst can bring – Unbiased perspective – Outside perspective – Cold-eyed review of project plan – Standard process • Usually, project members are willing to share concerns more openly with an independent analyst • In collaboration with project team, can help to identify challenges PMA CONSULTANTS LLC | 26
- 27. Leveraging An Independent Analyst Facilitate risk assessments on larger, complex projects Drive adoption of qualitative risk analysis within project teams (develop & maintain risk registers) Design, implement, and hand-off a comprehensive risk management process which is phased, scalable, and robust 1 2 3 PMA CONSULTANTS LLC | 27
- 28. Value of Applying a Project Risk Management Process Strategic Capital Needs Annual Capital Forecast Judicious Capital Reserves Reasonable Annual Spreads Transparent, scalable, collaborative risk management process improves project predictability Funding requests include clear view of risks, impacts, and mitigation strategies Balanced capital plans 0 100 ProjectPredictability Risk Implementation Maturity PMA CONSULTANTS LLC | 28 Service Provider External Stakeholders Senior Management Business Units