Practical project risk

assessment

Simon White

APM North West branch & APM Risk Management SIG

A world in which all projects succeed - but not without risk management

10th October 2016, Alderley Park Conference Centre

• Introduction

• Project risk …

– Assessment

– Analysis

– Awareness

• Summary

A g e n d a

Poll – your role and experience

• What is your role?

– Risk manager (specific “risk” role)

– Project team member (engineer, analyst, …)

– Project manager (project controls, PMO, support, …)

– Other

• Have you been in a risk workshop?

– Yes / No

• If yes, did you see any output from a QRA (e.g. a P90, or S-curve)?

– Yes / No

• If yes, did you believe it?

– Yes / No

Key concepts

• probability

• expectation

• three-point estimate

• impact

• exposure

• contingency

• mitigation

• probability distribution

• P10, P50, P90

Poll – key concepts

• What do you mean by “mitigation”? – Plans put in place in advance to make it better

– Avoiding it

– Dealing with it when (or if) it happens

• What do you mean by “contingency”? – The cost if it happens

– The amount we set aside for risk

– The amount we spend to mitigate risk

• What do you mean by “fall-back”? – Dealing with it when (or if) it happens

– The plan if the contingency fails

– Plans put in place in advance to make it better

Introduction

Risk …

• Assessment

– Beliefs: what do we believe about the risk?

• Analysis

– Effects: what does it mean to the overall project?

• Awareness

– Actions: what should we do about it?

Expressing risk

• Two popular ways of expressing risk: 1. Probability and impact (risk register)

2. Three-point estimate

“Three-point estimate”

VH

Major

scope

change

H

DECC

requires

recycle

M

Delay to

lift vessel

arrival

LSIMOPS

issues

L M H VH

Probability

Imp

act

Expressing risk

• Never been done before

• Challenging conditions

• Uncertain regulations

• Early phase

• Been done before

• Easy conditions

• Established regulations

• Mid-execution

P10P50

P90

Base

P10P50

P90

Base

• “Cheaper but

more risky”

• “More expensive,

less risky”

X

X

Assessment

The risk workshop

• Valuable discussion: assumptions, inter-discipline issues, allows honesty

• Structured approach, best practice

• Engage project team, management and stakeholders

• Skilled facilitation, ensuring contribution from all team members, keeping focus

• Identify, discuss and qualify risks

– Cause, risk, effect

– Probability (H / M / L …)

– Impact on schedule, cost and safety, production, operations (H / M / L …)

• Capture mitigation options and fallback options

– Effect of mitigation

– Agree action owners and deadlines

– Make decisions – is it worth mitigating?

Probability Impact Score

Major scope change M VH 25

SIMOPS issues H L 17

DECC requires recycle L H 15

Delay to lift vessel arrival L M 9

… …

The risk workshop

• Risks can be ranked and summarised

• Give focus on response / mitigation

• Establish agreement

• Demonstrate robustness

• What are our top risks?

• A useful live project document

• Track response actions

• Keep risk visible throughout planning and execution

• But …

• Quantitative risk assessment adds more value …

VH

Major

scope

change

H

DECC

requires

recycle

M

Delay to

lift vessel

arrival

LSIMOPS

issues

L M H VH

Probability

Imp

act

The quantitative risk assessment

• Base cost estimate (CBS) – Around 20-50 high-level cost elements

– Allowances / contingency identified

• Optionally: Base schedule (WBS) – Around 50-300 activities

– Allowances / contingency identified

– “Forward-driven” logic

– Can use existing schedule, or create in a workshop

• Any risks already identified

The quantitative risk assessment

• Quantify significant risks – Probability (%)

– Cost impact in £: P10, P50 and P90 (if it occurs)

– Schedule impact in days: P10, P50 and P90 (if it occurs)

• Associate the risks with the schedule activities (WBS) – E.g. “Delay to lift vessel arrival” will impact installation activities

• Associate the risks with the cost elements (CBS) – E.g. “Delay to lift vessel arrival” will impact topsides cost

(optional)

The quantitative risk assessment

• May or may not happen (probability)

• Deviation from base, if it happens (impact)

“Impact”

“Pro

babili

ty”

“Impact”

“Pro

babili

ty”

• Further quantitative assessments – Cost variance (-5% / +10% for jacket fabrication cost)

– Schedule variance (-10% / +30% for engineering activities)

– Variance accounts for:

• Estimating uncertainty

• Risks not specifically modelled

• Deviation from base

– Correlation (all fabrication costs are uncertain because of common

causes)

The quantitative risk assessment

Base cost

“Three-point estimate”

The quantitative risk assessment

• Use the uniform or triangular distribution, or better

Single value 1-point estimateMore knowledge /

less uncertainty

Beta Pert(larger shape parameter,

default shape parameter of 4)

3-point estimate

Triangle / Trigen 3-point estimate

Beta Pert(smaller shape parameter)

3-point estimate

Uniform 2-point estimateLess knowledge /

more uncertainty

Credit: from Centrica Energy’s QRA training manual

Analysis

Quantitative risk analysis

• The risk model shows the effect of the risk assessment,

on the overall project

Base

estimate

(MM USD)

Bulks 2.3

Fabrication 5.7

Transportation 1.9

Heavy lift vessel 1.6

Hook-up and

commissioning

4.3

Project services 0.6

Total 16.4

The P90 is a "reasonably likely" worst case.

Contingency at P90 = 6.6

“Exposure”

“Probability distribution”

Example project risk analysis

• Simple schedule

– Activities, durations, logic

– Costs (lump sums and day rates)

– Risks, variance, associated with activities and costs

• Risk analysis gives us

– Probabilistic finish date

– Probabilistic costs

– Much more

Other analysis outputs

• The total contingency can be shown (on average)

against the individual costs

Other analysis outputs

• The total contingency can be shown (on average)

phased over time

Awareness

Awareness

• Never been done before

• Challenging conditions

• Uncertain regulations

• Early phase

• Been done before

• Easy conditions

• Established regulations

• Mid-execution

P10P50

P90

Base

P10P50

P90

Base

• “Cheaper but

more risky”

• “More expensive,

less risky”

X

X

Awareness

Base

(MM USD)

Bulks 2.3

Fabrication 5.7

Transportation 1.9

Heavy lift vessel 1.6

Hook-up and

commissioning

4.3

Project services 0.6

Total 16.4

- % + %

Base

- % + %

Base

P10P50

P90

Base

Mitigate

“Response

/ mitigation”

X

Base

(MM USD)

Bulks 2.3

Fabrication 5.7

Transportation 1.9

Heavy lift vessel 1.6

Hook-up and

commissioning

4.3

Project services 0.6

Total 16.4

- % + %

Base

- % + %

Base

P10P50

P90

Base

Mitigate

X

Base

(MM USD)

Bulks 2.3

Fabrication 5.7

Transportation 1.9

Heavy lift vessel 1.6

Hook-up and

commissioning

4.3

Project services 0.6

Total 16.4

- % + %

Base

- % + %

Base

P10P50

P90

Base

Mitigate

Awareness

• Given the risk as we have expressed it:

– How valuable is response x?

– How much overall contingency is likely needed?

– Where is it likely needed?

– And when?

– What’s our biggest risk at P50?

– At P90?

– What contractual incentivisations are appropriate?

Contingency

Credit: from Centrica Energy’s PACE guidelines

“Contingency”

Contingency

Credit: from Centrica Energy’s PACE guidelines

Contingency

Benefits of risk assessment

• A valuable process

– Challenge project teams and base estimates

– Express uncertainty in the team’s base assumptions

– Capture risks, assumptions, issues, and their consequences

– Encourage open discussion amongst integrated team

• Demonstrate awareness of risk – Agree and communicate the team’s view of the risk

– Justify contingency and mitigation efforts

– Allow challenges, discussion and negotiation

– Set realistic stakeholder expectations

• The risk assessment and analysis represents the perceived risk, and its

logical consequences

Summary

Quantitative risk analysis

• The risk model shows the effect of the assumptions on

the overall project

Base

estimate

(MM USD)

Bulks 2.3

Fabrication 5.7

Transportation 1.9

Heavy lift vessel 1.6

Hook-up and

commissioning

4.3

Project services 0.6

Total 16.4

The P90 is a "reasonably likely" worst case.

Contingency at P90 = 6.6

About Simon White

• Over 20 years’ experience in risk management and risk analysis

– Wide variety of industries and major projects

– Three years as UK Risk Analyst for ConocoPhillips

– Previously Senior Risk Management Consultant and trainer for Pertmaster,

Primavera and Oracle

– Risk analyst for current major oil / gas projects such as Cygnus, Clair Ridge and

Jasmine, and a major government infrastructure programme

• Recognised as one of the leading practitioners of integrated project schedule

and cost risk management and analysis

– Methods allow project risk models to be interrogated and understood by project

teams and senior management

– Designed and built commercial risk software: Predict!, Arrisca, and a contributing

architect to Primavera Risk Analysis (Pertmaster)

– Develops tools for more practical and valuable project and business risk

management.

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