Dr. Alexia Nalewaik FRICS CCP CCA

November 2015

Framing the project success ‘problem’

Risk assessment and management

Types of risk

Auditing risk

Questions and Answers

Projects are often unique, complex, complicated, dynamic

Projects rely on people

Change is a constant

Different stakeholders have different definitions of success

Risk exists

There are many variables in projects and project management that are difficult to capture ◦ … especially the ‘people’ part

Risk: vulnerability to the possibility of loss, as a consequence of inherent uncertainty when undertaking an endeavor or course of action

“Risk is 1. A hazard, danger; exposure to mischance or peril. 2. The chance or hazard of commercial loss. 3. An allowance made to cover accidental deficits.” (OED, 2015)

“Something bad could happen” (Hubbard, 2009)

Multi-faceted Inter-dependent Constantly changing

Any action has more than one possible outcome

and impact

Any action may affect existing risks or generate subsequent risks

Risks may be project-specific, or related to the organization

Risk can be objective or subjective

Risks can be unknown, then become known ◦ Black swans can become grey swans

Risk requires professional judgment regarding

severity and consequence ◦ … that’s the problem …

Risk quantification tends not to focus on extreme-impact statistically-unlikely events such as: ◦ war, terrorism, political instability, corruption, earthquake,

tsunami, stock market crash ◦ extreme operational risks of the type discussed in Basel II (et seq.) ◦ space alien invasion, zombie apocalypse

Technical ◦ Internal ◦ Related to the design of the project, and the materials &

equipment needed to make that design a reality

Financial / Economic ◦ Internal and external ◦ Related to the economic environment, market factors, financing

Statutory / Political ◦ External ◦ Related to the political, cultural, and regulatory environment of

the project and players

Statutory & political risk

• local law or government policy • government influence on disputes • environmental regulations • property acquisition • permitting • external stakeholder influence • testing & certification • official and unofficial holidays • religious observance • customs (import / export) • visas (immigration)

Financial & economic risk

• inflation

• funding/financing

• market forces

• labor & material costs

• labor & material availability

• interest rate

• currency fluctuation

• bankruptcy

• alternative approaches to insurance

Technical risk

• proven/unproven technology

• implementation methodology

• equipment & material performance

• planning & design complexity

• commissioning & testing

• evolving requirements

• tie-in to existing project or interface

• scope change

• engineering & design change

• metric vs imperial measurement

• differing standards

• specialized equipment & materials

• long-lead equipment

• project in an operating facility

• design conflict / interference

• information technology systems

• scalability

• security vulnerabilities

Organizational ◦ Internal ◦ Related to the structure of the organization, culture, relationships,

management, and capability

Contractual ◦ Internal ◦ Related to the structure and language of legal agreements

implements on the project

Other ◦ Internal and external

Contractual risk

• contractual liability • warranties • liquidated / consequential / punitive

damages • construction defect • risk transfer • conflicting contract language • inadequate contract protections • intellectual property • new contract / delivery method

Organizational risk

• project team capability

• contractor failure

• contractor/vendor/consultant failure or

default

• mergers & acquisitions

• staff turnover

• stakeholder turnover

• degree of unfamiliarity

• schedule acceleration

• gaps in responsibility or scope

• communication

• executive support of project

• business processes

• delegated authority

• organizational culture

Other risk

• climate • safety • unknown conditions • archaeological findings • contamination • local customs • infrastructure • theft • translation error • productivity • competition

Reg

ID

Maj Cat Type Description Consequence % Cost Time Score Rank Priority Business

Risk

14

Labor New employee integration Difficulty in hiring quality/skilled

people, efficiency decrease, delayed

startup, no budget to advance hire,

management issues90 3 3 270 High 2

46

Planning &

SchedulingFailure to meet scheduled down time

windows and / or overrun of down

time schedule

Production loss. No more downtime

is available. Need to accelerate,

increase overtime. 90 3 2 225 High 3

20Design Quality issue - pumping hot product

over long distance

Cost/schedule impact to fix

contamination and mold50 2 3 125 Medium

55

Planning &

SchedulingMech/Electrical permits not received

on time

Delay to construction causing

delayed completion and increased

overtime costs 50 2 2 100 Medium

30

Planning &

SchedulingGMP's (existing lines) Contamination, air flow change when

areas are partitioned ; BUSINESS

ISSUES 50 2 2 100 Medium YES

42

Design Inadequate floor loading to take new

Fermentation tanks

Additional rebar / structure

80 1 1 80 Low

2

Generic Risk Changing market forecast Scope change, equipment layout

affected25 3 3 75 Low 1

35

Design Inadequate fire main capacity with

increase of potable water

requirements

Fire pump needed to increase

pressure 35 3 1 70 Low

Impact

3

4

42

43

45

46

48

49

50

51

53

54

55

56

57

58

59

60

61

63

64

65

66

68

70

75

76

77

78

79

80

88

91

92

93

94

95

97

A B E G H I M

MARK # SUBSYSTEMORIGINAL

ESTIMATEMIN. M.L. MAX. Probability

15 BUILDING 13,365,000 13,111,952 13,763,739 15,023,257

1505 Site Works 495,037 432,978 455,766 495,037 100%

1505 Excavation 342,890 220,000 259,410 342,890 100%

1505 Paving 626,782 520,000 541,283 626,782 100%

1510 New Building 823,383 900,859 948,272 995,686 100%

1510 Precast Concrete 3,600,000 3,600,000 3,750,000 4,125,000 100%

1510 Cast-in-Place Concrete 0 1,087,750 1,145,000 1,259,500 100%

1510 Foundations & Curbs 710,568 329,460 346,800 364,140 100%

1510 CMU 419,208 300,960 316,800 348,480 100%

1510 Structural Steel & Metal Platforms 296,751 238,083 250,614 275,675 100%

1510 Roofing & Weatherproofing 381,565 526,738 554,461 582,184 100%

1510 Flooring, Tiles 600,391 568,910 598,853 600,391 100%

1510 Freight Elevator 80,350 76,333 80,350 92,403 100%

1510 Dock Equipment 171,920 150,000 153,040 171,920 100%

1510 Building Electrical 448,174 335,635 353,300 388,630 100%

1510 Building Lighting 552,691 440,783 463,982 510,380 100%

1515 HVAC 832,856 832,856 848,288 890,702 100%

1515 HVAC Electrical 155,968 155,968 166,861 175,204 100%

1520 Storm Water 20,000 20,000 20,000 40,000 100%

1525 Sanitary Sewer 400,000 380,000 400,000 450,000 100%

1530 Utility Rooms 137,000 106,564 112,173 137,000 100%

1535 Fire Protection 185,000 175,000 185,000 200,000 100%

1545 Raw CIP Room 40,000 37,000 40,000 60,000 100%

1565 Recycle & Compactor Area 60,000 130,055 136,900 143,745 100%

1580 Bulk Bag Unloading Area 0 104,500 110,000 115,500 100%

1585 Process Area (Batch Tanks) 0 157,523 165,814 174,105 100%

1599 Building Expense 205,000 97,822 102,970 113,267 100%

Risk 44 Danger of trucks hitting columns 75,000 87,500 100,000 90%

Risk 32 NPDES storm run-off requirements 250,000 425,000 600,000 100%

Risk 13 Addiitional building foundation too shallow 200,000 240,000 250,000 100%

Risk 11 Public utility Commission approval delay 50,000 75,000 100,000 50%

Risk 21 Packaging flow materials capacity 100,000 175,000 250,000 25%

Risk 7 Seismic Issues (investigative works only) 67,000 67,000 67,000 100%

Risk 12 Capped oil well 25,000 75,000 150,000 10%

Risk 45 Insufficient strength in roof to take loads 50,000 150,000 250,000 10%

Risk 52 Fire hydrants needed at back of building 30,000 40,000 50,000 80%

Cost Risk Analysis

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

45.00 46.00 47.00 48.00 49.00 50.00 51.00 52.00 53.00 54.00

Values $ Million

Pro

ba

bilit

y

Base Estimate Base Estimate With Contingency Risk

Deming cycle of identification, quantification, modeling, management, and monitoring

Risk Management Plan should include: ◦ risk description ◦ likelihood of occurrence ◦ potential impact ◦ consequences ◦ risk owners ◦ root causes ◦ early warning signs ◦ action plans

Risk Entry Form Date :

Risk # : Risk Owner :

Current Impact

Risk Description Probability (Percentage)

Consequence Time Impact (1 to 3)

Current Mitigation Cost Impact (1 to 3)

Notes Field Business Impact (Yes/No)

Fallback Plan

Risk Reduction MeasuresAction #: Action Manager Description Target Date Actual Date Status

1

2

3

4

Results generated from compliance audit more frequently surface human error than fraud

Review scope can be fine-tuned to address the specific needs of the project ◦ Directs team resources to areas that can benefit the most

◦ Tailored to the specific needs of the project at key milestones in the project lifecycle

◦ Focus on obtaining value and return on investment from the review process

Risk-based methodology includes evaluation of any activity that consumes program resources

Largest school district in the country ◦ Knew they had monies in contingency & reserves for

old projects

◦ Wanted to fund new projects

Issues ◦ Quantify needed contingency and reserves

◦ Formalize processes

◦ Find existing contingency, reserves, & other monies

Infrastructure project with global impact ◦ Client wanted to develop a five year audit plan

◦ Performance review done at the time of bid award

Issues ◦ Risk

◦ Governance

◦ Additional concerns

Dr. Alexia Nalewaik alexian@qsrequin.com