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Construction Risk Analysis

 

Risk analysis has become an integral part of project controls. Why Risk Management? The simple answer is that failure to properly manage risks can result in a negative impact to three critical project variables, being cost, time and quality.

 

By taking what often are just simple mitigation measures project risks can be dramatically reduced or even eliminated.

 

Definitions of risk and risk management

 

Risk is “an uncertain event or set of circumstances that, should it occur, will have an effect on the achievement of the project’s objectives”.

 

Risk Management is “the process whereby responses to the risks are formulated, justified, planned, initiated, progressed, monitored, measured for success, reviewed, adjusted and closed”.

 

The risk management plan can be summarized as risk identification, quantification and management.

 

 

Risk identification workshop

 

A crucial part of the risk management plan is the participative element which starts with the kick-off risk identification workshop. This ideally would occur early in the project life and preferably prior to contract award during the tendering stage.

 

At the risk meeting the focus would be on the qualitative aspects of project risk and possibly also evaluating the quantitative aspects also. Though for the later it might be preferable to cover the quantitative aspects afterwards at a separate meeting since the quantitative aspects can generate a lot of time consuming subjective and sometimes argumentative discussions that do not necessarily contribute to the end goal: that is, the identification and management via the necessary public awareness of the full spectrum (from contractual to execution to financial) of potential risks.

 

Ideally the risk workshop attendees should include individuals from different departments. The right number of people for the risk workshop is very important. Too few people can result in unilateral thinking with an insufficient range of views, while at the other spectrum too many people (besides using up too many manpower resources without much value in return) can create too much noise and significantly drag down a meeting. Typically a meeting group size of about 6 people is quite effective, with 5 being the lower threshold and 8 being the higher threshold.

 

 

Guidelines for Brainstorming Success

 

Brainstorming may be structured and is typically conducted on the basis that:

 

1. No idea is a bad idea.

2. Deliberation and discussion are to be deferred until the next step of the qualitative process.

3. Avoid telling war stories.

 

Ideas generated in brainstorming should be recorded on a medium, e.g., butcher paper/ flip charts or on-line as the ideas are generated, so that there is a real-time capture of all ideas. Stating risks on a flip chart can help people visually connect to the process.

 

 

Risk Register & Major Risk Summary

 

During and right after the risk identification workshop a risk register should be created with corresponding narrative detailing the risks and mitigation measures.

 

Qualitative – Risk Assessment

Qualitative Assessment Dimensions

 

There are primarily three dimensions used to assess the importance of a risk:

 

Probability – The likelihood that a risk will occur.

Impact – The effect that risk will have on the project if the risk occurs.

Manageability – The extent of control or influence the project team has over a risk.

 

 

Quantitative – Risk Assessment

 

The objectives of quantitative risk assessment are to numerically evaluate the probability and impact of each risk and to prioritize risks using the outputs from Monte Carlo modeling methods. The models provide another basis for prioritizing risks and allocating resources to manage them.

 

Care should be taken to put the quantification of the risks in perspective: more often than not the values used are rough order of magnitude as a result of lack of historical data for the costs of the risk being quantified. While it is desirable and an effort should be made to quantify all risks accurately this is not always possible. However this is acceptable as long as it’s understood by the pertinent parties the underlying accuracy range of the quantification process.

 

When quantifying risks the process can be as important (or even more so) as the actual quantitative results. The process allows the participants to put on their “risk hats” and think and discuss collectively about the project from a risk perspective and hence increase the probability of avoiding, transferring and/ or mitigating risks that can impact the success of the project.

 

Key benefits of quantitative assessments are:

 

• Simulation of risk impact on the project’s cost and schedule

• Developing and testing assumptions / constraints

• Verifying targets and plans for achievability

• Determining key cost and schedule drivers

• Allocating contingencies.

 

 

Associating (Mapping) Risks to Project Scope

 

Once the major risks are identified, the project team associates or “maps” the selected risks to appropriate of schedule activities or to budget line items within a cost estimate. Often times a risk will be pertinent to multiple activities, in which case the same risk will be mapped to multiple activities. If a monetary contingency amount has been allocated to the risk (that is the risk has been quantified.

 

 

Developing Risk Models

 

The objective of creating risk models is to evaluate the potential impact of the major risks upon the cost and schedule estimates. As described above, this is performed by applying ranges of possible costs and durations to the deterministic cost and schedule estimates.

 

 

Developing Risk Model Results

 

The results generated from the quantitative cost and schedule models offer a window into what might be optimistic and pessimistic project outcomes. As with any type of forecast model, the results must be carefully scrutinized and validated against historical benchmarks to ensure the model’s integrity. This validation effort is an iterative and collaborative process between the project team and the analyst.

 

 

Risk Assessment Reports

 

A typical Risk Assessment Report is generally divided into the following sections:

 

• Introduction

• Executive Summary

• Methodology

• Results - Qualitative & Quantitative

• Conclusions

• Recommendations

 

 

Risk Assessment Updates

 

As the project matures along the project life cycle, the qualitative and quantitative risk assessment processes repeat to continually identify and assess both new and existing project risks. By updating the risk assessments on a regular basis, the changes to the cost and schedule drivers can be proactively evaluated and addressed to ensure a more predictable project outcome.

 

 

Risk Treatment Evaluation

Strategies to manage negative risk (threats) include:

 

Avoid – Seeking to eliminate the source of uncertainty.

 

The process of revising a component, system design or plan to eliminate a source of threat. As an example, a lower threat, mature technology may be substituted for a higher threat, new technology.

 

Transfer– Seeking to transfer ownership and/or liability to a third party.

 

The process of reallocating a subsystem, component, requirement or interface responsibility to a third party, program or project team member. Requirements and responsibilities may be transferred to customers, suppliers, or associate contractors. It is important to note that transferring may not always eliminate the impact of the risk to the party that is transferring the risk. When considering this treatment always consider who is best able to manage the risk.

 

Mitigate – Seeking to reduce the size of the risk exposure to below an acceptable risk threshold.

 

The process of reducing a threat’s likelihood and impact levels through the systematic completion of mitigation actions. Usually this consists of attacking the threat elements of the overall risk until the threat is no longer an issue. When mitigation is selected as the risk treatment approach, detailed risk mitigation actions need to be developed and integrated into the project plan.

 

Accept – Recognizing residual risk and developing responses to monitor them.

 

The process of accepting a threat. A threat may be accepted when the likelihood and consequence levels have been reduced to a level that has been determined as acceptable.

 

Strategies to manage positive risk (opportunities) include:

 

Exploit – Seeking to eliminate the source of uncertainty by ensuring that the opportunity has the highest probability of occurring.

 

The process of revising component, system design or plan to exploit a source of opportunity. The aim of the risk treatment is to ensure that the opportunity will be realized as almost certain.

 

Share – Seeking to allocate ownership to a third party who is best able to maximize probability of occurrence and benefit of the opportunity.

 

The process of retaining and sharing appropriate opportunities or parts of an opportunity with others instead of attempting to leave them to chance.

 

Enhance – Seeking to increase the probability and benefit impact by identifying and maximizing key opportunity drivers.

 

This is the primary method of opportunity realization by increasing an opportunity’s likelihood and impact levels through the systematic completion of response plan actions.

 

Accept– Recognizing an opportunity, but developing no plans to promote its occurrence.

 

 

Developing Proactive Risk Response Plans

When developing the risk response plan it’s a good idea to tabulate these to include at least the following information:

 

• Risk Description

• Risk Owner.

• Impacted project tasks/ scope.

• Overall plan.

• Detail actions to be taken to execute overall plan.

• Who is responsible for completing the detail actions - the Risk Action Owner(s).

• Dates or time periods for when an action should start and when it should be completed.

 

Questions that should be asked when revisiting the risk response plan include:

 

• Is the risk still valid?

• Is the risk assessment current?

• Is the selected response plan appropriate based on the current circumstances?

• Is the response plan consistent with other project plans?

 

 

Monitoring & Updating Project Risk Register

It is necessary once the project is being executed to monitor and update the risk response plans. As stated earlier actual process for risk management done right can be as valuable as the actual results and findings from the risk analysis as it facilitates constructive communication between the participants.

 

 

Risk Review Meetings

Communicating and documenting risk information at all steps in the process is essential to effectively implement project risk management. The process of reporting and reviewing the status of risk is the principal mechanism for implementing risk management on a project. Communicating risk status involves presenting the current likelihood and impact assessment for a particular risk as well as the planned risk response plans.

 

Risk Management

Communication

The importance of good communication. Or telepathy as the alternate!

An “armchair scheduler” or frontline messenger?

Why Project Controls

Selected Articles

Meetings

Love them or hate them. How to conduct successful productive meetings.

Funny, but true. Video on the functions of Project Controls.

Enjoy!

Settings do matter: pick the wrong settings and your schedule’s output will be meaningless.

What the text books didn’t tell you
Primavera P6 Settings
Video - Project Controls

Selected Articles

Tips on Scheduling

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