MEGAPROJECTS & RISK - JOHN REILLY US
Transcript of MEGAPROJECTS & RISK - JOHN REILLY US
2018 BSCE Lawler, BostonJohn Reilly
Slide 1
2018 BSCE Lawler LectureMegaprojects - Characteristics, Cost/Risk Management, Supporting Systems
Boston , May 30th 2018
John Reilly, P.E., C.P.Eng.
MEGAPROJECTS & RISK
WMATA Dupont Circle Station Lake Mead TBM
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Previous Papers & Presentations
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Presentation will cover
1. Megaprojects – US and International Characteristics Key Goals & Objectives, Requirements Successful Examples: DC Metro, Boston Southwest Corridor Lessons-learned
2. Management Tools and Systems – Cost & Risk■ Cost Validation and Probable Cost (CEVP) Risk Identification, Response and Management
– Contracting and Delivery Methods– Team-Alignment and Partnering
Example – Applications from Lima Airport Expansion, Peru
3. Conclusions, Questions & Discussion
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b1. Megaprojects - Examples
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Characteristics of Megaprojects (*)
Very large - multiple billions $$ Extended schedule
– multiple political cycles High level of public involvement
and media coverage Multiple stakeholders
Federal involvement, requirements Complex and/or unusual in many respects Multiple contractors/sub-contractors/suppliers Complex and specific contractual structures Complex risk structures e.g. interdependent risk events Require advanced management capabilities Require specific procedures and applications
(*) See “Gigaprojects”, ed. Galloway, Nielsen & DignumAnd “Megaprojects” ed. Hatem & Corkum
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Goals & Objectives, RequirementsNeed to create Public understanding and acceptance of the project – “buy-in”, support, funding, resilience for problems. Requires : Political strategy – stakeholders,
key goals, public process, support Ability to determine a realistic budget
and schedule (CEVP®) Funding – approval, availability + stability
(deal with political changes) Ability to meet budget and schedule
(Management Tools, Risk Processes) Alignment of Owner/designer/contractor Communication, media involvement
Sydney Airport Tunnel
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Megaproject References
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1.1 DC Metro - WMATA
Cut and Cover; Earth Tunnels; Rock Tunnels, Rock Stations; Elevated Track, Precedent-breaking underpinning of Monumental Structures, Control Center Building (Phase 1)
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DC Metro –Tunnels/Stations Project engineering for
13 Metro contracts. Downtown core:
Rock arch station D4 Dupont Circle; D1 Earth tunnels; D2 Cut-and-Cover across the Mall; D4 Earth tunnels Smithsonian to Capitol; L1 Potomac Crossing; Operations Control Center Building
Secretary to the Board of Engineering Experts
New technologies – slurry wall underpinning, NATM tunnels, TBM technology
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Management, DC Metro 101 Mile System
Transit Authority based on US Corps of Engineers experience and procedures
General Consultants for Engineering, Architecture, Geotechnical
Board of Experts for all underground work.
Rolling updates to cost and schedule estimates
Leadership – Jackson Graham, Carman Turner, Richard Page
Last 40 years - Inadequate maintenance funding
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1.2 Boston - MBTA Southwest Corridor
Project Budget for Management, Design & Construction - $750 million US (current cost approximately $2.5 billion)
Final Project Cost - $743 million US Initial Project Schedule (1977) - November 1986 Actual Project Operations – May, 1987 (+6 months) Consistent with the Boston Transportation Planning Review 1972
Project included rapid transit systems (facilities, vehicles, signals, electrification); civil, structural and tunnels, arterial roadway, 3 high-speed rail lines, urban development, community outreach, educational training, park and parklands + political changes
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Project Layout
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Civil, Line & Station Structures, Underpinning , Electrical, Train Control Systems (Retrofit to Orange Line Vehicles), Urban design, Landscaping and Support contracts, Community involvement, Educational Training Program.
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SWCP Elements, Design Details Function, Aesthetics, Character, Context, Unique
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SWCP Management
Separate office of Southwest Corridor Development established by Secretary Salvucci (reporting to Fred)
Interstate Highway funds diverted to Rail & Transit (a first)
Guided by Boston Transportation Planning Review 1972
Responsive to community input and requirements
Construction expertise of MBTA managers (ex Turnpike extension)
Experienced designers (Architecture, Urban Design, Transit Systems, Civil, Structural, Environmental)
Innovative Educational Training & Community Outreach Programs
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2. MANAGEMENT PROCESSES
Management processes include strategy, design & construction systems, cost & schedule control, quality and safety systems, technical/financial audits, value engineering, expert panel & peer reviews.
Not so common (but seeing now more often) : Cost Validation + Probabilistic Range Cost Evaluation Risk Identification, Characterization and Mitigation Disputes Resolution / Escrow Bid Documents Team Alignment Processes - Working in Partnership Advanced Contracting & Delivery
• Early contractor involvement (ECI)• Fixed Price Incentive Fee (FPIF) • Alliancing (Relationship Contracting)
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2.1 Management - The Cost Issue
Planning & Scoping – we are optimistic. A PMI study found that the real scope, cost – for
a wide range of projects - was about TWICE the initial scope/cost/schedule estimated
See NASA 2009, “Symposium – the Joint Confidence Level Paradox, a History of Denial”
Results: Low estimate in the beginning
– leads to problems: Cost and schedule over-runs Resource competition
– deprives other projects Media – investigations,
negative publicity
NASA, Apollo 11(James Webb)
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Cost – Background, 1990’s to 2002+
International Tunneling Association, Working Group 13 – survey of costs of International transit systems, mid-1990’s
Led to a 2000 survey of the costs of international projects(difficulty getting valid data)
US Underground Construction Association, 2001 Seattle conference on cost of underground projects
Presentations / discussions in:Vienna, Basel, Melbourne, St. Petersburg, New York, Oslo, Frankfurt, Mexico City, Durban, Boston, Salzburg, Beijing, Ferrara, Milan, Rome, Stockholm, London, Seattle, Amsterdam, Sydney, Singapore, Istanbul, Prague, Budapest, Toronto, Vancouver, Helsinki…
Led to the basis of new, specific risk-based cost methods in Washington State – CEVP 2002
Let to a better understanding of risk and risk management
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Examples- AUA Conf Seattle 2001
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Megaprojects Most at Risk Many large, complex transportation projects have significantly
exceeded their budgets and schedules – a major problem!
London JubileeLine +67%
Channel Tunnel +80%
Boston Central Artery / Tunnel
+80-100%Percent is added cost over first
announced budget.Many other examples.
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Not All Projects Exceed Their Budget Boston Projects(1) (you normally only hear of the CA/T)
SW Corridor Project – 1% under budget, close to schedule Logan Airport Modernization Program
– within a “few percent” of budget MBTA Red Line – 9% under budget MWRA Boston Harbor Project – 4% over budget, on schedule Central Artery / Tunnel – 80 to 100% over budget, years late
Lessons-learned: We can deliver complex megaprojects on budget and schedule Advanced management & contractual systems are required The stakeholder / political environment is a key determinant Strategic approach & risk-based costing is critical in early
planning – a range of probable costs, no single point numbers Early “commitments” are remembered by the public and media Continuity of management policy is essential
(1) See the foreword in the Gigaprojects Book
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Better Cost Estimation, WSDOT WSDOT was planning several mega-projects, possible total
value over $20 billion – concerns regarding the out-turn costs Doug MacDonald asked us to develop a better cost estimating
process. Mike McBride brought Cost-Validation from the MWRA Metrowest tunnel, I brought risk identification/risk management.
We called it CEVP® (Cost Estimate Validation Process)
Questions that we asked:1. Can we improve the cost estimating process?2. Who can be objective (unbiased) about an estimate?3. How can we include risk and “validate” costs?
Key Conclusions:1. We need to examine cost estimates and assumptions,
using independent experts to “validate” the base costestimate
2. We need to include risk (i.e. uncertainty) using statistical risk and decision analysis methods
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Key Policy – “range of probable cost” In the beginning there is a large potential range for a
project’s ultimate cost - depending on events that may occur
Future costs must be represented by a probability distribution - a range of costs
Prob
abilit
y
Range of Probable Cost
A single cost number represents only one possible outcome, depending on circumstances and risk events
These circumstances and risk events are not directly controllable or absolutely quantifiable
The risk events, if they occur, produce consequenceswhich add cost/time to the project (sometimes opportunities)
Therefore, cost estimation must include risk (i.e. account for uncertainty) using a logical, structured process
Cost
Base Cost
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We presented results to the public June 3 2002
Presentations to Politicians and Newspaper Editorial Boards
Release of the CEVP results, overview, process, questions & answers to the Public
Document included probable results for 20 programs
1-page summaries for all Positive public response
CEVP Process published in the BSCE Journal 2004
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Giving citizens a range of costs, including full disclosure of the variables, “is not only politically smart, but it’s common sense”
-Reilly, quoted in the Seattle Post-Intelligencer, June 9 2002
TM
TUESDAYJune 4, 2002
- Seattle Post-Intelligencer Editorial
SUNDAYJune 9, 2002
Shocking or not, the Department of Transportation has performed an unprecedented public service with these latest costestimates. It is a much-needed dose of fiscal reality. The department offered realistic cost-range estimates.
CEVP® - Washington State DOT
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CEVP : Explicit Management, Cost and Risk
Risk mitigation / cost-containment actions can be taken, addressing those risks driving high costs – reducing the “range of probable cost”
Allows structured risk and cost management to approved budgets
Risk Management:Work to reduce the probability and/or consequence of these high-impact events
Seattle Monorail
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CEVP+ Process = Value Engineering + Risk Mitigation + Scope Changes (2+ Cycles)
Risk ID & Characterization
Modeling Design Definition, Cost Estimate Results
Value Engineering, Risk Management & Mitigation, Scope & Other Changes
Changes to Design, Cost Estimate, Risk Profile
Base Cost Validation
CEVP process at a point in time
CEVP+ Advanced Application, Megaprojects
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CEVP+ Results (2010)
60% mitigated probable cost $1.96 billion
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Doug’s view regarding CEVP & MWRA CEVP’s foundation was grounded in a strong commitment
to collaborative problem solving — fix the problem and advance the job, other than paralyze a job in friction, dispute, adversarial behavior, etc.
No better example from MetroWest was the expeditious and relatively cheap (all things considered) replacement of the failed main bearing deep underground on one of the TBMs. No rescue shaft, no “lawyering up” to stop the quick fix.
For WSDOT, CEVP was used as an instrument to embody that kind of thinking right into the very first kernels of project planning.
In that respect it was an outgrowth of established (though not everywhere consistent) best practices in the underground industry.
in putting together WSDOT’s CEVP we were able to leverage that larger approach to project management and add risk-sensitive assessment into an estimating and risk anticipation, mitigation and minimization approach
From Doug MacDonald, recent email.
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Who Developed & Implemented CEVP? Colleagues who developed, funded and implemented
WSDOT’s Cost Estimate Validation Process
Doug MacDonald, David Dye, Michael McBride, Jennifer Brown, John Reilly + (not shown) Cliff Mansfield, Dwight Sangrey, Bill Roberds, Travis McGrath, Keith Sabol, Art Jones
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2.2 - RISK, RISK MANAGEMENT CEVP led to more explicit risk management practices Basic risk process now well understood and are being applied ITA WG 2 – Guidelines for Tunnelling Risk (Soren Eskesen) Chapters on risk: UCA (Reilly),
Mechanized Tunnelling (Guglielmetti et. al.)
Decision Aids for Tunnelling (Einstein, Grasso et. al.)
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Risk Response“Risk can be managed, minimized, shared, transferred, or
simply accepted - but it cannot be ignored.”
likelihood or probability
cons
eque
nces
or
impa
ct
Initial risk
Residual risk
Probability: Chance of an event occurring
Impact: The effect on the project or its objectives, measured in terms of safety, cost, schedule delay, quality of construction or other requirement (+ or -).
Risk: Combination of probability and impact
Residual risk: Risk remaining after initial risks are mitigated
ALARP Principle “As low as reasonably practicable”
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Risk – Historical Development
Some historians believe the concept of risk arose through gaming. People in ancient civilizations played games with dice and bones –
games that evolved into chess and checkers over 2000 years ago. It is possible to trace the use of insurance back to ancient times -
mutual aid and burial societies have been documented from the earliest days of ancient Rome. These are considered the precursors of modern insurance companies.
Some historical evidence that gaming gave rise to probability theory comes from writings by Dante and Galileo (many others).
The mathematicians, Pascal and Fermat, wrote each other about games of chance in the 1600s - a correspondence that is believed to have given rise to modern probability theory.
See: "Against the Gods: The Remarkable Story of Risk,"
Peter L. Bernstein
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Risk - Advanced Guidelines/Processes
Continuing Risk Improvements Guidelines, Manuals, Procedures, etc.
Results Cost
Cost Estimation Risk Assessment
Cost Impact
Time-related Cost
Schedule Impact
Direct Cost
Probability of Occurrence
DelayMarkup
for Unknown Knowns onBase Cost
Object Cost
Set Uncertainty for Baseline Costaccording to Object Class
TunnelStationsSubstations
WBS and Cost Schedule
StationSubstationTunnel...
Equipment Cost Labor Cost
Full Closure
Tunnel Section 1
Stations
Tunnel Section 1 Risk
Tunnel Section 1 Baseline Cost
Stations Risk
Stations Baseline Cost
Schedule Before Risk Assignment
Schedule After Risk Assignment
Contractor Risks Owner Risks
Baseline Activities
Results Schedule
Mitigation
Predicted Completion Date
Predicted Delay Caused by Contractor
Predicted Delay Caused by Owner
Delay
Completion Date / DelayCost
Identified Risk Unknown
Substations
Substations Risk
Substations Baseline Cost
Pre-Award Risk
Deadline
Two Alternatives
New risk characterization, definitions….risk correlations, dependencies, multiple occurring…
Chapter 4 – Risk Management (Reilly 2009)
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Lake Mead Risk - in PARTNERSHIP – Lake Mead Tunnel Awarded March 2008
$447 million Compliance with ITIG
Risk procedures Starter tunnel problems
2010-2011 + delay, cost Agency & Contractor working “in
partnership” joint risk workshops. Project finished successfully,
opened to the lake, September 2015.
Tunnel Drive plan/layout TBM in chamber - production to 391’/week; Tremie concrete 12,000 cy, 11 days,
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Risk Management - Lima Airport Peru,
New Airport Terminal + 2nd Runway, fast-track, FPIF Contract, non-Governmental Owner, full implementation of advanced Risk Management.
Introduced current risk management practices Initial 4-day risk workshop – Program staff + Executive Define best practices for
Owner (LAP) re Risk: Risk Policy Risk Management Plan CEVP – validate costs,
define risks, model cost & schedule using:
RIAAT advanced modeling –integrated cost & schedule
PRAT Risk Register tool for workshops & input to RIAAT
Lima Airport Risk Workshop Team, June 2017
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Risk Management - Process
Slide 36
Risk Management uses a defined Risk Policy and Process – In Lima this combines CEVP, Cost, Risk and RIAAT processes:
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RIAAT Advanced Cost/Schedule Modeling
Integrated risk modeling software being used in Lima, New York, Europe
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Specific Distributions for each Risk
Scenario one cave-in
Scenario three cave-ins
Scenarios four and morecave-ins
Scenario two cave-ins
Probability that no cave-in will occurDeterministic Approach: 2 x 65,000 = 130,000
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IMPACT OF RARE EVENTS
There are rare, but very high impact events that can be disastrous
Their impact is very much out of proportion to their probability
Because they have very low probability they sometimes are not sufficiently considered
It is important that we give better consideration to such events - but it is difficult to do this.
Additionally, the possibility of “black swan” risk events is real.
Seattle SR99 Tunnel Boring Machine, 17.6m Diameter
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2.3 CONTRACTING METHODS
The contracting method is a critical determinant We need to match the contracting process to the project
environment (considering risk, applicable regulations, agency practice, experience and capability)
Contracting procedures generally used for US Infrastructure: Design-Bid-Build (DBB) – most common Design-Build (DB) – substantial number of projects
Newer contracting procedures being used or of interest: General Contractor / Construction Manager (CM/GC) PPP – Public Private Partnership Early Contractor Involvement Fixed Price Incentive Fee Alliancing / Relationship / Consensus Contracting
Other International applications (FIDIC, NCE-3c, PPC2000 Docs)
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Adversarial vs. Relationship Contracts
Alliancing Partnership (true) Fixed Price Incentive Fee Public Private Partnership CMGC Design–Build (DB)(*)
Design-Bid-Build (DBB)(*)Rel
atio
nshi
p C
ontr
actin
g Pr
inci
ples
Incr
ease
use
of
Adversarial
Relationship
(*) low-bid environment leads to conflicts
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Most Collaborative: ALLIANCING
Greater benefits and performance can be obtained (e.g. over partnering) by contractually defining project relationships
First applied to the offshore oil platforms in the North Sea with the following reported cost savings:
Off-shore Oil Project (All amounts in £M)
Target Cost
Actual Cost
Cost Saving
Percent Saved
Britinnia 1,500 1,200 300 20% BE ETAP 926 742 85 9% BP Andrew 373 287.5 85.5 23% Interconnector 316.5 240 76.5 24%
Wandoo Oil Platform, WA
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Example of Alliancing
Sydney Northside Tunnel Project 19.5 km tunnel, 3 TBMs - 6.3, 6.0, 3.8m dia. Competitive award components Client-engineer-contractor in joint venture simple contract arrangement,
open book accounting Pain-Gain (risk-reward) agreement Comprehensive performance measurement Agency satisfied with outcome
Channel Tunnel Rail Link, UK Completed under target cost,
ahead of schedule See Task Force Report to the
UK Deputy Prime Minister (“Rethinking Construction”),
UK Dept. of Environment, Transport and Regions, London 1998
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Fixed Price, Incentive Fee Contract
From US Dept of Defense procurement strategy -Differentiate 3 types of contractual environments: Well known projects (Firm Fixed Price) Research (Cost-Plus-Fee), Large or complex projects with high risk can combine Early
Contractor Involvement, Ceiling Price and Incentive Fee resulting in a Fixed Price, Incentive Fee (FPIF) Contract.
FPIF combines cost-plus and fixed-price structures to manage (allocate) risk between Owner and Contractor. Negotiated Target Cost and Ceiling Price between Owner and
Contractor plus Pain-Gain share percentages Incentive for Contractor to reduce cost to improve profit Limits the upside potential cost for the Owner.
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60 67 74 82 89 96 103
110
117
125
132
139
146
153
161
168
175
182
189
Range of Probable Cost
Owner’s View
Cont
ract
or’s
Vie
w
Target Cost$ 100
Share 0/100
Share 50/50
Share 50/50 (Owner/Contractor)
PTA$ 144
Total Project Cost
Profit Contractor
Prof
it
Contractor increased profit
zone
Contractor negative
profit zone
Ceiling Price$ 132
Target Profit(10% = $ 10)
Range Project Cost Owner -50% of the overrun cost + profit at PTA-50% of the savings + profit
PTA = Point of Total Assumption(above the point the Contractor pays for all costs)
Total Project Price
Target Profit
Target Price$ 110
Zero Profit
Fixed Price Incentive Fee (FPIF)
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Contracting References
Many available
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US Megaprojects – Investment needed
Generation after generation, giant public works projects have altered the American landscape. In the 1800’s The Erie Canal and the Transcontinental Railroad.
In the 1900’s massive urban sewer and sanitation systems, the Tennessee Valley Authority, rural electrification, the Hoover Dam, the Interstate Highway System, major subway networks in NY, San Francisco Atlanta and Washington DC
However since the mid 1960’s the level of US public investment shown in the graph –around 2.5% - is inadequate.
Lack of vision and a clear responsibility for implementation and funding is a problem.
e.g. the current dispute about the NY-NJ Gateway tunnel - Federal or State responsibility, or both?
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Annual average infrastructure expenditures as a % of GDP worldwide 2008 to 2013
USA 2.4%
Australia, South Africa 4.7%
According to a study by D.A. Aschauer,[3] there is a positive and statistically significant correlation between investment in infrastructure and economic performance. Furthermore, the infrastructure investment not only increases the quality of life, but, based on the time series evidence for the post-World War II period in the United States, infrastructure also has positive impact on both labor and multifactor productivity.
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