Integrated Risk and Value Management for Decision Making...

Integrated Risk and Value Management for Decision Making on

ProjectsProjectsECRI December 2013 Sponsor’s Meeting - Sydney

Greg Ramsay

Global Director – Risk and Consulting

HATCH

INTEGRATED RISK AND VALUE MANAGEMENT DECISION MAKING FOR PROJECTS

ContentsContents

I t d ti R f l d i k t• Introduction – Re-focus on value and risk management

• Project Failures – why should we be concerned?

• What does research tell us about project failures?

• Risk Management Process

• Value Management Process

• Value and Risk Management Interaction

• Decision Making

• Conclusion

© Hatch Associates Limited, 2006 2

Keep this clip in mind during the presentation – what is value?; what is value for money?; how is it perceived?; and what are the risks associated with the options we may choose?


INTRODUCTION – RE-FOCUS ON VALUE AND RISK MANAGEMENT

Many of our client and customer companies are re-focusing their efforts on value and risk management, especially in the resource industry given the current downturn – we aremanagement, especially in the resource industry given the current downturn we are now witnessing the impact in our industry and our need to also re-focus.

Rio’s new head honcho Sam Walsh has promised an “unrelenting focus on pursuing value for g gshareholders”, including tightening up project protocols and overall capital expenditure.

We need to treat the company’s money like it’s our money. We need to run the business as if we own it,” Walsh said. Feb 2013

Crocodile CEO says a focus on value over ounces will boost prospects in 2014The Gold Report | November 24, 2013

Mark Cutifani, Chief Executive of Anglo American, said (Sept 2013): “Despite our belief that Pebble (copper project in Alaska) is a deposit of rare magnitude and quality, we have taken the decision to withdraw f ll i th h t f A l A i ’ t i i li f l d t d j t ti Ofollowing a thorough assessment of Anglo American’s extensive pipeline of long-dated project options. Our focus has been to prioritise capital to projects with the highest value and lowest risks within our portfolio, and reduce the capital required to sustain such projects during the pre-approval phases of development as part of a more effective, value-driven capital allocation model.

Take away and theme for this presentation:Risk and value management are interrelated functions and processes with value management considering the best way to deliver the “need or benefit” and risk management being used to assist in choosing the best solution


y g g gand the management of the delivery risks to achieve the expected benefit.

INTRODUCTION – RE-FOCUS ON VALUE AND RISK MANAGEMENT Investors are seeking the best risk weighted investment return for their capital with a risk profile that is congruent with their tolerable risk level. The challenge is to develop reliable execution phase capital & schedule risk profiles during the feasibility study phase andexecution phase capital & schedule risk profiles during the feasibility study phase and execute within these profiles.

How Much?

How much do we

Where? How ?

How do we

Why?

Our communicationsC

How Much?

How much do we

Where? How ?

How do we

Why?

Our communicationsC

How Much?

How much do we

How Much?

How much do we

Where?Where? How ?

How do we

How ?

How do we

Why?

Our communications

Why?

Our communicationsC How much do we spend on capital

expenditure?

Financial Structuring

On what projects do we spend our capital

Capital Allocation

How do we spend our capital?

Capital Spending

Our communications about our capital

spending

Reporting

Corporate LevelClient

How much do we spend on capital

expenditure?



Capital Allocation


Capital Spending


spending

Reporting



expenditure?



expenditure?



Capital Allocation


Capital Allocation


Capital Spending


Capital Spending


spending

Reporting


spending

Reporting


g p p p g p g

Project LevelHatch

Due Diligence – risk profile & treatments confirmed Approval - Risk

profile accepted

Monitoring – risk profile and risk treatments

g p p p g p g

Project LevelHatch

Due Diligence – Value analysis, risk analysis and treatments confirmed Approval - Risk

profile accepted

Monitoring – risk profile and risk treatments

gg pp p p gp p g p gp g

Project LevelHatch

-–

Concept Definition

ImplementationStrategy Budgeting Performance

Specification

Implementation& Post

I l t ti

Hatch

Concept Definition


Specification


I l t ti

Hatch

Concept Definition


Specification


I l t ti

HatchFEL1, 2 and 3 FEL4

Definition Strategy Specification Implementation

Cost/ Benefit Analysis






INTRODUCTION – RE-FOCUS ON VALUE AND RISK MANAGEMENT “Gated” FEL project lifecycle processes aim to deliver value added outcomes with tolerable risk profiles. It also facilitates risk based decision making.p g

C it l Eff ti DiCapital Effectiveness DiagramClient Engagement and Communication

FEL 1, 2, & 3 FEL-4 Implementation OutcomesExcellent OperabilityTechnology

St t /S l ti

ExecutionDevelop Scope of

Work to MeetBusiness Objective

OptimalScope of

UtilizeChange

Faster ProjectCycle Times

B tt ROI

Strategy/Selection

Business Objective

Project ExecutionPlanning

Owner/Hatch

BusinessNeeds

MgmtProcess

Better ROI

Enhanced Safety

C it l Eff ti

Execution

Owner/HatchAlignment

Capital Effectiveness

Improved QualityRisk and Value Management used throughout the FEL stages


Timely Involvement of Vendors and Contractors

INTRODUCTION – RE-FOCUS ON VALUE AND RISK MANAGEMENT

Decision Analysis provides a logical and consistent way to incorporate judgments about value, risks and uncertainties into an analysis – however project evaluation practices and a ue, s s a d u ce ta t es to a a a ys s o e e p oject e a uat o p act ces a ddecision analysis policies are still weak links.

Response has been the emergence

Material Science

Response has been the emergence of Decision Analysis processes that incorporate:

Engineering Design FEL & Value Management

Toll Gating Processes

Production Risk Management

Decision Analysis Processes

Project Evaluation

Other Engineering & Scientific Disciplines

Decision Analysis – risks & uncertainties

Other Engineering & Scientific Disciplines


Schuyler – Risk and Decision Analysis in Projects


ContentsContents







• Decision Making

• Conclusion


PROJECT FAILURES – WHY SHOULD WE BE CONCERNED?Some project failures have totally destroyed businesses – some examples are

id b l d th k t f f il th l th ti f thprovide below and the key root causes of failure – these are only the tip of the iceberg.

Project Key FactorsProject Key Factors

Boston “Big Dig” Project Planned cost was US$2.3bn and finally completed at US$14.6bn. Stakeholder management, scope and failure to build a unified owner/contractor team were key issuesy

Channel Tunnel Planned cost of ₤4.9bn and completed for ₤10bn – governance failures

Australian Magnesium Approximately $1 6bn lost and the company destroyed Key factors wereAustralian Magnesium Corporation

Approximately $1.6bn lost and the company destroyed. Key factors were political involvement, technology not proven and poor front end planning

Hot Briquetted Iron Project Project written off – approximately $2bn. Key factors included process technology issues and project organisational issuestechnology issues and project organisational issues.

Airbus 380 Delivery delay of some 2 years, cost impact of over €4bn and revenue loss. Key root causes was organisational structure and culture issues that resulted in technical issues with software and wiring harnessthat resulted in technical issues with software and wiring harness integration.

A survey based on 258 infrastructure projects in 20 different countries indicates that- 9 times out of 10, actual costs are on average 28% higher than planned costs


- similar results for schedule overrun


ContentsContents







• Decision Making

• Conclusion


WHAT DOES RESEARCH TELL US ABOUT PROJECT FAILURES? Independent Project Analysis (IPA) analysis reveals consistently that the root causes of failure occur in the Front End Loading (FEL) stages of the project lifecauses of failure occur in the Front End Loading (FEL) stages of the project life cycle.


WHAT DOES RESEARCH TELL US ABOUT PROJECT FAILURES? The characteristics of 23 technically complex Australian projects (approx $25bn) classed as failures – 16 didn’t work & 7 incurred > 25% cost and/or scheduleclassed as failures 16 didn t work & 7 incurred > 25% cost and/or schedule overrun reveal FEL deficiencies as root cause of failure.


WHAT DOES RESEARCH TELL US ABOUT PROJECT FAILURES?The Collaboratory for Research on Global Projects at Stanford has also l k d t j t f il f l l j t d b d flooked at project failures for large complex projects and observed a range of common failure factors and suggested techniques to alleviate these factors

Success or Failure Factor Management techniquesSuccess or Failure Factor Management techniques

Insufficient advance planning and analysis

• Robust decision making process – a process that engages diverse stakeholders and fosters alignment around value management, project execution and risk managementmanagement, project execution and risk management• Integrated risk analysis of cost, schedule and economics to quantify risks and evaluate execution alternatives and sensitivity profiles

Q tifi ti f i k d d ll ti f i k t d l

Failure to complete advanced detail design engineering

• Quantification of risk and agreed allocation of risk to develop optimal contract structures• Build in downstream flexibility through decision points – use value of information concepts and assess option value

Winner’s curse – ie win the project at too low a price

Failure to build a unified• Recognise the increased co-ordination requirements and risk with fast-tracked projects• Use organisational simulation to understand an organisation’s ability to execute the project

Failure to build a unified owner/contractor team

Organisational bottlenecksability to execute the project• Establish governance processes that: create a shared project team identity, use goal alignment and trust building exercises, align interests around shared risks and incentives, use “fair processes” for decisions use agreed trusted third parties as dispute mediators and

Governance failures


decisions, use agreed trusted third parties as dispute mediators and deploy stakeholder identification and influence strategies.

WHAT DOES RESEARCH TELL US ABOUT PROJECT FAILURES? A 2007 paper by Lawrence and Scanlan, Aerospace Research Centre, Bristol b d j i i f il 10 i d l d d th tbased on major engineering failures over a 10 year period, concluded that the current technology for managing complex projects is inadequate.

Failures typically involved the 8 Deadly Factors:yp y y

• Poor initial planning

• Lack of clear objectives and deliverables

• Lack of understanding of dependencies

• Inadequate resource allocation

• Poor risk analysis

• Poor change management

• Lack of “buy-in” from stakeholders

• Poor understanding of priorities

H th th b li d th t th t d t d dHowever, the authors believed that the root causes were more deep seated and

chiefly the result of technological factors exacerbated by some cultural

issues


issues.

WHAT DOES RESEARCH TELL US ABOUT PROJECT FAILURES? Complexity drives complex dependencies and interactions with iterative and f db k l d l i t l h ’t ll h dfeedback loops – our resource and planning tools haven’t really changed for 50 years and are not adequate for this level of complexity

Example of anExample of an aerospace planning network.

PERT and CPM techniques are not adequate and the result is that schedules will typically be optimistic

Organisational constraints notconstraints not assessed or ignored

Cultural factors often not included and assessed



ContentsContents







• Decision Making

• Conclusion


RISK MANAGEMENT PROCESSKey steps in the risk management process that also parallel the value management and decision analysis processes are establishment of the context g y pand treatment of risk.

Risk Management Process

C i t d C ltWho are the stakeholders and what are their objectives? These three

steps are

Risk Management Process

Communicate and Consult

Evaluate TreatEstablish Identify Analyse

risk assessment

Evaluate the risks

Treatthe risks

Establish the

context

Identify the risks

Analyse the risks

What do we need to

What might

What will they mean

In what order

How should wewe need to

take into account

and what are our

might happen?

How, when and why?

they mean for our

objectives?

order should we deal with

them?

should we best deal

with them?

Monitor and Review

objectives?


Monitor and ReviewHave the risks and controls changed?

RISK MANAGEMENT PROCESSThe risk treatment phase involves the consideration of treatment options and a decision analysis process to select the preferred treatment strategy or option. y p p gy p

Note:

When checking if the risk is acceptable after the implementation of your risk treatment option –check for any “secondary risks”

The risk treatment creates change and change creates risk

This analysis will highlight the need for “fall back plans”



ContentsContents







• Decision Making

• Conclusion


VALUE MANAGEMENT PROCESS – consistently applied to deliver benefitsValue Management and Risk Management are key enablers and interrelated processes for successful decisions and delivery of benefits for an organisation p y gand are used throughout the project lifecycle for portfolios, programmes and projects.

CORPORATE STRATEGY

BUSINESS CASE

PORTFOLIOSPROGRAMMES

PROJECTS

embody launch Risk Management – Applications & BenefitsRisk management is applied across

j t d ti ith

DELIVERABLESCAPABILITYBENEFITS create

execute

operate

validate programs, projects and operations with the risk profile being continually reviewed and used in decision making to select the preferred optionDELIVERABLESCAPABILITY

Ref: Dr David Hillson

p p

Value Management – Applications & BenefitsBenefitsValue management is applied across programs, projects and operations in a consistent manner to ensure that stakeholders are aligned to make


optimal decisions to protect and realise value.

VALUE MANAGEMENT PROCESS - definedAustralian, US and European codes exist for Value Management and VM is an “inclusive phrase” that embraces Value Analysis and Value Engineering – the US p y g gDefense Dept has adopted the same stance.

• Value Management is “A structured and analytical process which follows a prescribed work plan to

hi b t l h i t b tachieve best value or, where appropriate, best value for money” [AS 4183:2007].

For a project this essentially means

• “A structured and analytical process which follows• A structured and analytical process which follows a prescribed work plan to achieve best NPV within constraints and givens agreed between the project g g p jstakeholders”.


VALUE MANAGEMENT PROCESS – what is value?The concept of value is not new and the Australian Code provides a framework for assessing value. The American code takes more of a VE approach using g pp gfunction analysis.

The value of an item must not be based on its price but rather on the utility whichThe value of an item must not be based on its price but rather on the utility which it yields[Bernoulli D. (1738)]

An attribute of an entity determined by the entity’s perceived usefulness, benefits, and importance [AS4183:2007].

Conventional VA / VE asks:• What does it do?• What does it cost?• What does it cost?• What is it worth? – (the lowest cost to provide the function)

Value is sometimes presented by the relationship:Value is sometimes presented by the relationship:Value = Function / cost

This of course has some issues eg does


This of course has some issues eg does Cost = Function / Value?

VALUE MANAGEMENT PROCESS – can be applied to anything by considering the value factorsThe value factor framework can be applied to anything – products, services, projects, a procedure, a job description etc. It helps confirm our objectives, the benefits we j jwant and what is important to us. It aligns stakeholders to address the multiple perceptions of the value factors.

MultiplePerceptions

In summary - these are factors that we must be aligned on and get right to be

Useful Purpose &

successful

Purpose & functions performed

A thi

MultiplePerceptions

AnythingAn EntityA Project

Multiple

Beneficial Outcomes

A Service Important Features

MultiplePerceptions


Outcomes

VALUE MANAGEMENT PROCESS – let’s consider a coal projectOur products and services have value because they’re useful, they produce beneficial outcomes and they have features or characteristics that are particularly important to y p y ppeople – combined they position and differentiate us in the market

Produce saleable resource products with our available resources

D l d f lResource products

delivered to meet ourUseful purpose

• Develop and operate safely• Valued community member• Provides options for expansion• Production flexibility

delivered to meet our customers demands within

an agreed commercial framework

ANY ENTITY

Coal Project

Beneficial outcomes

Important features and characteristics


VALUE MANAGEMENT PROCESS – aligning stakeholdersProjects are now more complex with multiple stakeholders and a collaborative and learning process is required to build shared knowledge and understandingg p q g gfor decision making - VM provides these critical attributes.

E t t f M i G Ri k Attit d b R M W b t & D Hill


Extract from: Managing Group Risk Attitude by R Murray-Webster & D Hillson

VALUE MANAGEMENT PROCESS – value and money are separateValue for money is a measure of the comparative performance of options for the provision of products and services in terms of the extent of value provided by p p p yeach option and the total cost of the option.

Value for Money

$ A

Options

$$ A

Useful purpose

$ BAnything

$Value CBeneficial outcomes

Important characteristics

Value MoneyforN t d i i l i t h i lik i i l i t i t i d i i ki


Note: we can use decision analysis techniques like pair-wise analysis to assist in decision making

VALUE MANAGEMENT PROCESS – framework and study planThe VM process is well defined and a successful study relies on each step being completed. p

Build shared knowledge and understanding (value factors and context)

D 1Create ideas

Evaluate the ideas

Day 1

Develop proposals

T k d i i kDay 2


Take decisions or make recommendations

VALUE MANAGEMENT PROCESS – framework and study planThe VM process can be applied across the whole project life cycle. The focus of the study will align with the stage of project development and the areas that can y g g p j pbe influenced to improve value

When What WhyConcept Business Plan

Key IssuesTechnology /Capacity Location / MarketsProduct / Joint Venture

Pre-feasibilityFeasibility

CapitalSchedulePerformance

Option ValidationSet Engineering objectives & criteriay Performance criteria

Engineering CapitalSchedulePerformance

CapitalReliabilitySpecific function

Contract Award Opportunities for improvement Deliverable managementCapital efficiency

Construction Schedule ConstructabilityConstructionCommission Performance

yProduction ramp up

Operations MaintenanceProduct Development

Continuous Improvement


Product DevelopmentProcess Improvement

VALUE MANAGEMENT PROCESS – framework and study planThe earlier the VM process is applied the greater the potential benefits – the VIP should reflect this application of VM. pp

Front End Loading PhasesBusin

FEL - 1 FEL - 2 FEL - 3 FEL-4Project

Implementation

Start-up &Operations

Feasibility

ess Plan

FeasibilityStudy –DevelopProject

Definition

Pre-FeasibilityStudy – SelectMost Viable

Option

Conceptual/Study – DefineProject Options

nning

Definition

Cost of changes increases with

timeBest VM

opportunities loccur early


VALUE MANAGEMENT PROCESS – framework and study planGiven the benefits of applying the VM process early and across the whole project life-cycle this should be reflected in the VIP Plan.y

VM Process – a consistent approach through the life-cycle


VALUE MANAGEMENT PROCESS – BenefitsThe benefits of a VM or Project Value Analysis programme are many and have been demonstrated repeatedly over time.p y

Add d l h j h h l h l f lif• Added value to the project through lower whole of life costs

• Maximise ROC by eliminating non-value adding and y g glow-value adding components

• Identifies significant project risks

C id ti f• Consideration of innovative ideas & options

• Improves project communication

• Clarifies and confirms project objectivesClarifies and confirms project objectives

• Experience has shown >10% reduction in Capex isachievable

• PVA tends to reduce implementation times• Identifies significant issues to be addressed during the

Study


Study


ContentsContents







• Decision Making

• Conclusion


VALUE AND RISK MANAGEMENT INTERACTIONThroughout the life cycle value and risk management activity are interrelated as summarised below.

Phase VM or VE Activity RM ActivityPhase VM or VE Activity RM ActivityFEL1 Assist stakeholders to develop best value

options to meet a strategic need and to develop an appropriate brief

Focus on strategic material risks to the stakeholders associated with the business opportunity and options.p pp p pp y p

FEL2 To assist in the selection of the best value option that will deliver the required benefits

Risk assessment of the VM alternatives- focus on material risks associated with the design and delivery of the project and the associated risk treatment plansand the associated risk treatment plans to achieve a tolerable risk profile

FEL3 To assist stakeholders to identify innovative ways to add value to designs and project

Review, updating and monitoring of the material risks and treatment plans. Risk

specifications such that the functional needs are met at the lowest cost.

assessments of any material changes arising from VM activity

FEL4 To assist stakeholders to develop innovative value added construction programs

Review, updating and monitoring of the material risks and treatment plans Riskvalue added construction programs.

Selection of best value procurement method and associated contracts.

material risks and treatment plans. Risk assessments of any material changes arising from VM activity

Significantly, as the risk management process considers both threats and opportunities it is


often the initial source for potential value adding project opportunities that can be further evaluated in the VM process.

VALUE AND RISK MANAGEMENT INTERACTIONThe AACE’s Total Cost Management (TCM) framework considers risk and value management as core processes influencing both strategy development and g p g gy pexecution.


VALUE AND RISK MANAGEMENT INTERACTIONThroughout the life cycle value and risk management activity are interrelated as summarised below.

The risks associated with the idea are identified and assessed and considered in the decision on whether or not to accept the idea for implementation.



ContentsContents







• Decision Making

• Conclusion


DECISION MAKING - QUALITATIVEQualitative decision analysis techniques are usually the starting point and a popular method is Kepner Tregoe. The value factors are classified as MUSTS p p p gand WANTS and the WANTS are weighted for scoring.

STEP 2 Objectives STEP 4 Evaluate Alternatives by Filling in Specific Information per Alternative

What is the factual information about this

lt ti t thi

Which objectives are:• Critical (non-

C.B.A.

j y g p pSTEP 3M/W WT SC WT

SC SC WTSC SC WT

SC

alternative to this objective?

If no factual information available, “How does this

alternative satisfy the

negotiable)?• Measurable (clear

limits)?• Realistic? M

alternative satisfy the objective?”

EVALUATION

Whi h lt ti ti fi

Indicate these objectives as musts or critical

What is the relative importance of each objective

10

10

10

• Which alternative satisfies the objective best?

Award this alternative a “10”

• Which alternative satisfies the objective least?

• Which objective is most important for this

decision?Award 10

• Other objectives of equal

10

6

3

8

the objective least? Award appropriate score

• Rate rest of alternatives in between

importance?

• How important is each individual objective

relative to each other –on a scale of 1 to 9?


DECISION MAKING - QUALITATIVEQualitative decision analysis involves reviewing the risk profile for the preferred alternative – if it is not tolerable then we need to assess the cost or impact of the treatment actions required to achieve a tolerable risk profile – then ask is it still the preferred alternative?


DECISION MAKING - QUALITATIVEThe risk profile/s of the preferred option/s needs to be checked as part of the final decision.

For our preferred option – check the following:For our preferred option check the following:• What is the risk profile – ie what are the key risks?• Are we close to any MUST limits?

H d i d t di d fid i th i f ti• How good is our understanding and or confidence in the information for this option – where might this be invalid and what are the consequences?

• If this alternative is chosen what could go wrong that hasn’t been identified in the risk profile

• Are the risks and our control measures acceptable/tolerable for this option

• Would any further controls change our decision?


DECISION MAKING - QUANTITATIVE

Quantitative analysis is particularly useful in FEL2 where it is necessary to l t th “ f d” ti f FEL3 Thi t i ll i l i k b dselect the “go-forward” option for FEL3. This typically involves risk-based

decision making techniques using the risk profiles of the options.

Decision Framing ity

90%Option B

Option ADecision Framing

- Define & agree the decision opportunity - Identify the decision Stakeholders- Agree on decision objectives & criteria- Identify alternatives

Decision Modeling ting

risk

tole

rabi

l

*50%

roba

bilit

y

UpsideOpportunityExpected

Value

g- Develop the decision model or structure- Quantify areas of uncertainty and risk- Develop the valuation model & method (KT,NPV)

Select Preferred Alternative- Calculate the expected value of each alternative on

ana

lysi

s –

set

10%Pr

DownsideRisk

Option B has slightly more risk with a much greater upside opportunity.

- Rethink the problem and analysis- Choose the best alternative based on the criteria

Conduct a Sensitivity Analysis- Vary the key drivers in the analysis - What is the level of sensitivity? gh

out t

he d

ecis

iogi

es

Project KPI (ie Production, NPV, ROCE, IRR etc)

What is the level of sensitivity?- What is the quality of our data – do we need

more?

Is further analysis required

Yes

inte

grat

ed th

roug

reat

men

t stra

teg

required

Implement the Preferred AlternativeImplement the chosen the alternative – ensure the base plans include all treatments considered in the analysis to achieve the tolerable risk profile

No

gem

ent p

roce

ss

deve

lopi

ng ri

sk t


y p

Post analysis of decision & capture lessons learned R

isk

man

agle

vels

and

d

DECISION MAKING - QUANTITATIVE

An integrated Value management and risk management approach was adopted t i l ( t bl t h d l d t iff t t ) f llto improve value (acceptable cost, schedule and tariff structure) for all stakeholders through the Feasibility Studies for a large rail project.

• Risk Mgt and Value Engineering during the FEL 2 and FEL 3:• Risk Mgt and Value Engineering during the FEL 2 and FEL 3:– Right time (first 1/3 of Eng Phase)– Right group dynamics – especially for Alliances with

Industry sponsorship and backing

VE Opportunities

Industry sponsorship and backing– Proven processes– Integration will optimise the risk profile

Schedule Model Capital Model Tariff Model

Value Map – Key drivers established

Schedule Model Capital Model Tariff Model

Value Map – Key drivers established

CAPEX RISK DRIVERS

S h d l Ri k

Protection

Signalling

CoalStream Civil Works

Project Risk Events

CoalConnect Civil Works1

Track Upgrades

CAPEX RISK DRIVERS

Schedule Risk

Protection

Signalling


Project Risk Events


Track Upgrades

Schedule Model

CAPEX RISK DRIVERS

Schedule Risk

Protection

Signalling


Project Risk Events


Track Upgrades

Capital Model Tariff Model

CAPEX RISK DRIVERS

S h d l Ri k

Protection

Signalling


Project Risk Events


Track Upgrades

CAPEX RISK DRIVERS

Schedule Risk

Protection

Signalling


Project Risk Events


Track Upgrades

Schedule Model

CAPEX RISK DRIVERS

Schedule Risk

Protection

Signalling


Project Risk Events


Track Upgrades

Capital Model Tariff Model

Tariff optimisedGAP PROJECT CAPEX RISK PROFILES COMPARED

0 4

0.5

0.6

0.7

0.8

0.9

1

abili

ty o

f Und

erru

n

May-09 Jul-09 Nov-09

GAP PROJECT CAPEX RISK PROFILES COMPARED

0 4

0.5

0.6

0.7

0.8

0.9

1

abili

ty o

f Und

erru

n



0.4

0.5

0.6

0.7

0.8

0.9

1

babi

lity

of U

nder

run


GAP Project Mgt

Telecoms

Escalation

Schedule Risk

GAP Project Mgt

Telecoms

Escalation

Schedule Risk

GAP Project Mgt

Telecoms

Escalation

Schedule Risk


0 4

0.5

0.6

0.7

0.8

0.9

1

abili

ty o

f Und

erru

n



0 4

0.5

0.6

0.7

0.8

0.9

1

abili

ty o

f Und

erru

n



0.4

0.5

0.6

0.7

0.8

0.9

1

babi

lity

of U

nder

run


GAP Project Mgt

Telecoms

Escalation

Schedule Risk

GAP Project Mgt

Telecoms

Escalation

Schedule Risk

GAP Project Mgt

Telecoms

Escalation

Schedule Risk


0

0.1

0.2

0.3

0.4

800 850 900 950 1000 1050 1100 1150 1200 1250 1300 1350 1400 1450 1500 1550Millions

Capex ($M)

Prob

a

0

0.1

0.2

0.3

0.4

800 850 900 950 1000 1050 1100 1150 1200 1250 1300 1350 1400 1450 1500 1550Millions

Capex ($M)

Prob

a

0

0.1

0.2

0.3

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Capex ($M)

Prob

0

0.1

0.2

0.3

0.4

800 850 900 950 1000 1050 1100 1150 1200 1250 1300 1350 1400 1450 1500 1550Millions

Capex ($M)

Prob

a

0

0.1

0.2

0.3

0.4

800 850 900 950 1000 1050 1100 1150 1200 1250 1300 1350 1400 1450 1500 1550Millions

Capex ($M)

Prob

a

0

0.1

0.2

0.3

800 850 900 950 1000 1050 1100 1150 1200 1250 1300 1350 1400 1450 1500 1550Millions

Capex ($M)

Prob

DECISION MAKING - QUANTITATIVE Quantitative risk analysis used during value management on a very large rail project enabled the team to measure and communicate the impact of the PVA programme –project was delivered within the schedule and capital risk profiles.

PROJECT PHASE CAPEX RISK PROFILES

1


0.8

0.9-10.5%-10.2%

0.5

0.6

0.7

y of

Und

erru

n

-7.8%-6%

0.3

0.4

Prob

abili

ty

Th fil h d h i i

Results of the risk analysis were used to identify opportunities for value improvement

0

0.1

0.2 The profiles showed the improvement in both the total capital cost and the level of uncertainty associated with the actual final cost


0MillionsCapex ($M)

DECISION MAKING - QUANTITATIVE The decision tree tool is very useful for key decisions - the value options can be mapped with stakeholders and uncertainty or risk can also be included in the variables. This example is for a modular vs stick built delivery option.

Decision ModelsDecision ModelsDecision Tree Control Panel Input Driver Cost

Low Expected &Hi h V lHigh Values

SummaryTable

L E H

@Risk Probability FunctionFunction

© Hatch Associates Limited, 2006 43Driver Estimate SheetsOptimum Decision

For Minimum Cost

DECISION MAKING - QUANTITATIVE The decision tree tool is very useful for key decisions - the value options can be mapped with stakeholders and uncertainty or risk can also be included in the variables. This example is for a modular vs stick built delivery option.

E i ti Q Shi U d

Brazil

Ship Existing Quay Ship Upgrade

Existing Quay Ship Upgrade

Purpose Built for ShipUS $364.8 MUnloading Option A

ModularBarge

Purpose Built for Ship

Purpose Built for Barge

Existing Quay Barge Upgrade

Option A

Unloading

See note 1

Project XYZSouth Africa

Ship

BUS $342.5 M

US $342.5 M

US $368.0 M

Purpose Built for Barge

Unloading Option B

Unloading Option A

Stick Built

Indonesia

Philippines

Barge

ShipUS $390.7 M

Unloading Option B

Unloading Option A Note 1: Lightering required from ShipStick Built Philippines

ThailandShip

ShipUS $370.6 M US $358.8 M

US $342 5 M

Unloading Option A

Unloading Option A

required from Ship to Barge


44May 2005

China

p

Ship

US $342.5 M

US $366.0 M

Unloading Option A

Unloading Option A

DECISION MAKING - QUANTITATIVE The decision tree tool is very useful for key decisions - this technique provides transparency on how the preferred alternative was rated and what were the key elements driving the decision. It allows stakeholders to review, question and constructively challenge the decision.

Implementation Method

FabricationLocation

ModuleTransportation

Module Unloading

Modular342.5

Purpose built for barge2.9

US$342.5 M

Project XYZ

Thailand

Modular

Shi

329.1j

Ship10.5



ContentsContents







• Decision Making

• Conclusion


CONCLUDING COMMENTS

A greater shared understanding and appreciation of value and risk management frameworks with key project stakeholders will enhance the chance of success y p jand provide a platform for good decision making.

Value Optimised

Impact on a portfolio

Project Risk

TimeHRR

ised

RiskThreats

&

CostProcurement

egra

tion

sk based d

ofile

s A

gree

OpportunitiesComms

QualityHSEC

ScopeInte

decisionsRis

k Pr

o

KPI’s set

Enterprise Risk (ERM) and

Value


KPI s set

Strategic Value

CONCLUDING COMMENTSSir Francis Bacon – “The Father of Modern Science” - his quote below succinctly sums up the challenges we have with large complex projects and how an integrated value – risk management programme can assist us to achieve success.

Sir Francis Bacon (1561-1626)

“If a man will begin with certainties, he shall end in doubts; but if he will be content to begin with doubts ; ghe shall end with certainties”

Thank youy


Integrated Risk and Value Management for Decision Making...

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