RISK MANAGEMENT IN INFRASTRUCTURE DELIVERY BEING A PAPER PRESENTED ON NIQS WORKSHOP JULY 2017

Transcription

1 TITLE: RISK MANAGEMENT IN INFRASTRUCTURE DELIVERY BEING A PAPER PRESENTED ON NIQS WORKSHOP JULY 2017 Name: Prof. Emmanuel O. Ofeimun, MBA, JD., Ph.D, FBIM, FCI.arb, F.N.I.Q.S. Address: OFFSHORE CAPITAL & ASSET INVESTMENT LLC 6 TH FLOOR, NICON Insurance Building, Plot 242 Mohammed Buhari Way, Central Business District, Federal Capital Territory, Abuja. ( 1

2 ABSTRACT Infrastructure cover sectors such as energy, roads, telecommunications, etc. The risk management for any of these sectors varies and we will be looking at road transportation infrastructure in this paper presentation with a view that the risk management process can be adapted for other types of infrastructure. Project cost escalation is a serious problem facing highway agencies. The failure to deliver individual project and programs within established budgets has a detrimental effect on later programs and causes a loss of faith in the agency s ability to wisely use the funds earmarked for the project. A comprehensive risk management approach can help project teams identify, assess, mitigate, and control project risks. Among the benefits of a comprehensive risk management approach is the ability to generate range estimates early in the project development process and to establish justifiable contingencies that can be resolved throughout the design and construction process. This paper presents a systematic process to apply risk analysis tools and management practices in controlling project cost. We will be looking at a risk management framework which covers the following: 1. Risk management plan: risk management planning is the process of deciding how to approach and conduct the risk management activities for a project. Planning of risk management processes is important to ensure that the level, type, and viability of risk management are commensurate with both the risk and importance of the project to the organization. There is the need to provide sufficient resources and time for risk management activities, and to establish an agreed-upon basis for evaluating risks. The risk management planning process should be completed early during project planning, since it is crucial to successfully performance of the scheme. 2. Risk identification is the process of determining which risks might affect the project and documenting their characteristics using such tools. 3. Risk assessment/analysis involves the quantitative or qualitative analysis that assesses impact and probability of a risk. Risk assessment assists in deriving contingency estimates. 4. Risk mitigation and planning involves analyzing risk response options (acceptance, avoidance, mitigation, or transference) and deciding how to approach and plan risk management activities for a project. 5. Risk allocation involves placing responsibility for a risk to a party typically through a contract. The fundamental tenants of risk allocation include allocating risks to the party best able to manage them. 6. Risk monitoring and control is the capture, analysis, and reporting of project performance, usually as compared to the risk management plan. 2

3 THE NEED FOR PROJECT RISK MANAGEMENT: What stands between a Borrower that wants to finance a project and a Lender is risk. Capital inflows, growth of corporations depend on risk management. Over the years, financial institutions had relied only on company balance sheet as confirmed by historical financial records to asses a prospective Borrower leaving behind the risk on projects backing up the balance sheet. Balance sheet of corporations is dependent on the cash-flow generated by projects executed by them and there is the need for risk managers to look at the projects in addition to the borrower historical records by involving a specialist before coming up with the credit rating of the corporation. Practitioners like Quantity Surveyors and Engineers also need to update themselves with risk management techniques. Most construction projects are administered based on contract conditions. Actually, there are standard forms of contracts that cover various aspect of risk. Usually, it is a risk register that covers, day works, cost records, provisional items, claims for money over and above contract measurements, due to shortage of quantities or complete omissions, monies due and above contract rates, price fluctuations, Government impositions, ex-gratia payments, contractual claims, force majeure etc. These are usually covered by a contingency sums which is a percentage of the contract. These provisions end up as contractual claims with its attendant arbitration panels and litigations arising from cost overruns. These risks are hardly provided for before the contract take off while the ideal should ensure a proper risk management in place before project execution. When the cost of a project erodes the confidence of the project sponsors tolerance threshold, it ends up with problems. Using a typical highway infrastructure project as example, the foregoing will explain the principles that will be adopted in the project risk management. Risk management start with the formation of: Risk Management Team The team is usually made up of the following: a. The project manager b. The specialist that is highly knowledgeable on a highway project or the scheme under review. c. The Investment Banking Group representative d. Any other competent person with good knowledge and experience on a similar project that is being considered for risk management. The risk management team will draw up a project management charter with the sponsors of the scheme which will clearly spell out the project objectives, cost, cost overruns that can be tolerated on the scheme. The risk management team will assemble relevant documents that will guide the team to advise accordingly and draw up a risk management plan. Risk Management Plan The risk management plan includes methodology, roles and responsibilities, budgeting, timing, risk categories, definitions of risk probability and impact, probability and impact matrix, reporting formats, and tracking. 3

4 Roles and Responsibilities Project Manager Responsibilities include: Incorporate the resources and time required to execute the Risk Management Plan in the project budget and schedule Develop, distribute and implement this Risk Management Plan Develop and update the Risk Register with the support of the Project Team and incorporate it into the workplan Coordinate with the risk owners to monitor risks and implement risk response strategies Risk Officer Responsibilities include: Support the Project Manager in developing and updating the Risk Management Plan and the Risk Register Maintain updates to the Risk Management Plan and the Risk Register Maintain a list of risk and response strategies of all the projects under consideration. Update the Sample Risk List and the lessons learned database Project Team responsibilities include: Identify the risk and describe it Assess the probability that a risk will occur and specify the criteria used to assess the probability Assess the impact of risks on project cost, time, scope, and quality objectives, and specify the criteria used to assess the impact Help identify the risk owners and assist in developing the risk response strategies (Project Team members may be assigned as Risk Owner ) Perform the risk response steps assigned Assist the PM in activities associated with Risk Monitoring and Control Risk Owner Responsibilities include: Develop and/or update the assigned risk response strategy Monitor the risk assigned and inform PM of any threats or opportunities to the project. This includes monitoring the risk trigger and informing the PM, if the risk becomes a real event. The following documents will be useful to the project team on risk management. a. The Planning Report b. Project Designs c. Project Cost estimates d. Environmental Impact Assessment e. Project Charter f. Any other documents that will be required by the project team The project team will now look at the Project Life Cycle (PLC) and come up with Work Breakdown Schedule (WBC) to identify the risk on the scheme. 4

5 Project Life Cycle Should Cover The Following: Table 1.1 Phases, stages, and steps in the project life cycle (PLC) Phases Stages Steps Conceptualization Conceive the product Trigger event concept capture clarification of purpose concept elaboration concept evaluation Planning Design the product strategically Basic designs Development of performance criteria Design development Design evaluation Plan the execution strategically Allocate resources tactically Basic activity and resource based plans Development of targets and milestones Plan development Plan evaluation Basic design and activity based plan detail Development of resource allocation criteria Allocation development Allocation evaluation Execution Execute production Coordinate and control Monitor progress Modification of targets and milestones Allocation modification Control evaluation Termination Deliver the product Basic deliverable verification Deliverable modification Modification of performance criteria Deliver evaluation Review the process Support the product Basic review Review development Review evaluation Basic maintenance and liability perception Development of support criteria Support perception development Support evaluation From the project life cycle, the team will draw up the risk register. A typical risk register applicable to road infrastructure is featured below. Note that this register is to serve as a guide from which the team can select from. Design Risks Design incomplete Unexpected geotechnical or groundwater issues Inaccurate assumptions on technical issues in planning stage Surveys incomplete Changes to materials/geotechnical/foundation Bridge site data incomplete Hazardous waste site analysis incomplete Unforeseen design exceptions required Consultant design not up to Department standards External Risks Landowners unwilling to sell Local communities pose objections Unreasonably high expectations from stakeholders Political factors or support for project changes Stakeholders request late changes New stakeholders emerge and request changes Threat of lawsuits Increase in material cost due to market forces Water quality regulations change New permits or additional information required Reviewing agency requires longer than expected review time Changes to storm-water requirements 5

6 Unresolved constructability items Unable to meet Nigerian Act requirements Project in a critical water shortage area and a water source agreement required Incomplete quantity estimates Unforeseen construction window and/or rainy season requirements New or revised design standard Construction staging more complex than anticipated Environmental Risks Natural Disasters and Weather Implications Environmental analysis incomplete Availability of project data and mapping at the beginning of the environmental study is insufficient New information after Environmental Document is completed may require reevaluation or a new document (i.e. utility relocation beyond document coverage) New alternatives required to avoid, mitigate or minimize impact Acquisition, creation or restoration of on or off-site mitigation Environmental clearance for staging or borrow sites required Historic site, endangered species, riparian areas, wetlands and/or public park present Design changes require additional Environmental analysis Unexpected Native Nigerian concerns Project may encroach into the Coastal Zone Project may encroach onto a Scenic Highway Project may encroach to a Wild and Scenic River Unanticipated noise impacts Project causes an unanticipated barrier to wildlife Project may encroach into a floodplain or a regulatory floodway Project does not conform to the state implementation plan for air quality at the program and plan level Unanticipated cumulative impact issues Project Management Risks Project purpose and need is not welldefined Project scope definition is incomplete Project scope, schedule, objectives, cost, and deliverables are not clearly defined or Permits or agency actions delayed or take longer than expected New information required for permits Environmental regulations change Controversy on environmental grounds expected Pressure to deliver project on an accelerated schedule Labor shortage or strike Construction or pile driving noise and vibration impacting adjacent businesses or residents Organizational Risks Inexperienced staff assigned Losing critical staff at crucial point of the project Insufficient time to plan Unanticipated project manager workload Internal red tape causes delay getting approvals, decisions Functional units not available, overloaded Lack of understanding of complex internal funding procedures Priorities change on existing program Inconsistent cost, time, scope and quality objectives Overlapping of one or more project limits, scope of work or schedule Funding changes for fiscal year Lack of specialized staff (biology, anthropology, geotechnical, archeology, etc.) Capital funding unavailable for right of way or construction Right of Way Risks Utility relocation requires more time than planned Unforeseen railroad involvement Resolving objections to Right of Way appraisal takes more time and/or money Right of Way datasheet incomplete or 6

7 understood No control over staff priorities Consultant or contractor delays Estimating and/or scheduling errors Unplanned work that must be accommodated Lack of coordination/communication Underestimated support resources or overly optimistic delivery schedule Scope creep Unresolved project conflicts not escalated in a timely manner Unanticipated escalation in right of way values or construction cost Delay in earlier project phases jeopardizes ability to meet programmed delivery commitment Added workload or time requirements because of new direction, policy, or statute Local agency support not attained Public awareness/campaign not planned Unforeseen agreements required Priorities change on existing program Inconsistent cost, time, scope, and quality objectives Construction Risks Inaccurate contract time estimates Permit work window time is insufficient Change requests due to differing site conditions Temporary excavation and shoring system design is not adequate Falsework design is not adequate Unidentified utilities Buried man-made objects/unidentified hazardous waste Dewatering is required due to change in water table Temporary construction easements expire Electrical power lines not seen and in conflict with construction Street or ramp closures not coordinated with local community Insufficient or limited construction or staging areas Changes during construction require additional coordination with resource agencies Late discovery of aerially deposited lead Experimental or research features incorporated Unexpected paleontology findings underestimated Need for Permits to Enter not considered in project schedule development Condemnation process takes longer than anticipated Acquisition of parcels controlled by a State or Federal Agency may take longer than anticipated Discovery of hazardous waste in the right of way phase Seasonal requirements during utility relocation Utility company workload, financial condition or timeline Expired temporary construction easements Inadequate pool of expert witnesses or qualified appraisers Engineering Services Risks Foundations utilizing Cast-In-Drilled-Hole or Cast- In-Steel-Shell pile 30 in diameter or greater may require tunneling and mining provisions within the contract documents and early notification Bridges constructed at grade and then excavated underneath may require tunneling and mining provisions within the contract documents and early notification Hazardous materials in existing structure or surrounding soil; lead paint, contaminated soil, asbestos pipe, asbestos bearings and shims Piles driven into fish habitat may require special noise attenuation to protect marine species Special railroad requirements are necessary including an extensive geotechnical report for temporary shoring system adjacent to tracks Access to adjacent properties is necessary to resolve constructability requirements Existing structures planned for modification not evaluated for seismic retrofit, scour potential and structural capacity Foundation and geotechnical tasks (foundation drilling and material testing) not identified and included in project workplan Bridge is a habitat to bats or other species requiring mitigation or seasonal construction 7

8 Delay in demolition due to sensitive habitat requirements or other reasons Long lead time for utilities caused by design and manufacture of special components (steel towers or special pipe) Physical Risks: The risks arising from the Damage to structure, Damage to equipment, Labor injuries, Equipment & material fire and theft etc. are known as physical risks. Condition of the bridge deck unknown For projects involving bridge removal, bridge carries traffic during staging Verify that all seasonal constraints and permitting requirements are identified and incorporated in the project schedule Complex structures hydraulic design requiring investigation and planning Assumptions upon which the Advance Planning Study is based on are realistic and verification of these assumptions prior to completion of the Project Report Design changes to alignment, profile, typical cross section, stage construction between Advance Planning Study and the Bridge Site Submittal Unexpected environmental constraints that impact bridge construction Unforeseen aesthetic requirements Delay due to permits or agreements, from Federal, State, or local agencies for geotechnical subsurface exploration Delay due to Right-of-Entry agreements for geotechnical subsurface exploration Delay due to traffic management and lane closure for geotechnical subsurface exploration Financial Risks: Increased material cost, Low market demand, Exchange rate fluctuation, Payment delays and improper estimation taxes etc. are related to financial risks. Socio-Political Risks: Changes in laws and regulations, Pollution and safety rules, Bribery/Corruption, Language/Cultural barrier, Law & order, War and civil disorder and Requirement for permits and their approval. The above risk falls into the following classifications: Known risks: are those that have been identified and analyzed, making it possible to plan responses for those risks. Known risks that cannot be managed proactively: should be assigned a contingency reserve. Unknown risks: This cannot be managed proactively and therefore may be assigned a management reserve. A negative project risk that has occurred is considered an issue. 8

9 Overall project risk: represents the effect of uncertainty on the project as a whole. It is more than the sum of the individual risks within a project, since it includes all sources of project uncertainty. It represents the exposure of stakeholders to the implications of variations in project outcome, both positive and negative. Organizations perceive risk as the effect of uncertainty on projects and organizational objectives. Organizations and stakeholders are willing to accept varying degrees of risk depending on their risk attitude. The risk attitudes of both the organization and the stakeholders may be influenced by a number of factors, which are broadly classified into three themes: Risk appetite: which is the degree of uncertainty an entity is willing to take on in anticipation of a reward. Risk tolerance: which is the degree, amount, or volume of risk that an organization or individual will withstand. Risk threshold: which refers to measures along the level of uncertainty or the level of impact at which a stakeholder may have a specific interest. Below that risk threshold, the organization will accept the risk. Above that risk threshold, the organization will not tolerate the risk. For example, an organization s risk attitude may include its appetite for uncertainty, its threshold for risk levels that are unacceptable, or its risk tolerance at which point the organization may select a different risk response. Positive and negative risks: are commonly referred to as opportunities and threats. The project may be accepted if the risks are within tolerances and are in balance with the rewards that may be gained by taking the risks. With the risk register completed we can now go to risk assessment. Risk assessment will involve the qualitative and the quantitative approach. A. QUALITATIVE METHODS Qualitative methods for risk assessment are based on descriptive scales, and are used for describing the likelihood and impact of a risk. The main aim is to prioritize potential threats in order to identify those of greatest impact on the project, and by focusing on those threats, improve the project s overall performance. The complexity of scales and definitions used in this examination reflect the project's size and its objectives. During the phases of the PLC, risks may change, and thus continuous risk assessment helps to establish actual risk status. Limitations of qualitative methods lie in the accuracy of the data needed to provide credible analysis. In order for the risk analysis to be of use for the project team, the accuracy, quality, reliability, and integrity of the information as well as understanding the risk is essential. Qualitative methods are related to the quantitative methods, and in some cases constitute its foundations. Four qualitative methods for risk assessment: 1. Risk probability and impact assessment, 2. Probability/impact risk rating matrix, 3. Risk Categorization, and 4. Risk Urgency Assessment. These methods are briefly discussed below. 9

10 Risk Probability and Impact Assessment By applying the method called risk probability and impact assessment, the likelihood of a specific risk to occur is evaluated. Furthermore, risk impact on a project s objectives is assessed regarding its positive effects for opportunities, as well as negative effects which result from threats. This means that clear definitions of scale should be drawn up and its scope depends on the project's nature, criteria and objectives. Probability ranges from 'very unlikely' to 'almost certain, however, corresponding numerical assessment is admissible. The impact scale varies from 'very low' to 'very high'. Moreover, as shown in Figure 1, assessing impact of project factors like time, cost or quality requires further definitions of each degree in scale to be drawn up. Each risk listed under the identification phase is assessed in terms of the probability and the impact of its occurrence. Figure 1: Definition of Impact Scales for Four Project Objective (PMI, 2004) Risk impact assessment investigates the potential effect on a project objective such as time, cost, scope, or quality. Risk probability assessment investigates the likelihood of each specific risk to occur. The level of probability for each risk and its impact on each objective is evaluated during an interview or meeting. Explanatory detail, including assumptions justifying the levels assigned, are also recorded. Risk probabilities and impacts are rated according to the definitions given in the risk management plan. Sometimes, risks with obviously low ratings of probability and impact will not be rated, but will be included on a watch-list for future monitoring. Probability/impact risk rating matrix Probability and impact, which were assessed in the previous step, are used as basis for quantitative analysis and risk response. For this reason findings from the assessment are prioritized by using various methods of calculation which can be found in the quantitative. This is computed as a priority score on the average of the probability and impact. The range of priority score, the rating and color are assigned to indicate the importance of each risk. In order to set priorities, impact is multiplied by probability. The compiled results are shown in the matrix in Figure 2. Such combination of factors indicates which risks are of low, moderate or high priority. Regardless of the calculation method chosen, such a combination of data shows priority of previously identified risks by use of i.e. corresponding colors or numerical system and helps to assign appropriate risk response. For instance, threats with high impact and likelihood are identified as high-risk and may require immediate response, while low priority score threats can be monitored with action being taken only if, or when, needed. 10

11 Figure 2: Probability and Impact Matrix (PMI, 2004) B. QUANTITATIVE METHODS Quantitative methods need a lot of work for the analysis to be performed. The effort should be weighed against the benefits and outcomes from the chosen method, for example smaller projects may sometimes require only identification and taking action on the identified risks, while larger projects require more in depth analysis. The quantitative methods estimate the impact of a risk in a project. They are more suitable for medium and large projects due to the number of required resources such as complex software and skilled personnel. The following methods are applicable to quantitative analysis. i. Scenario technique - Monte Carlo simulation The Monte Carlo method is based on statistics which are used in a simulation to assess the risks. The simulation is used for forecasting, estimations and risk analysis by generating different scenarios. Information collected for the simulation is, for instance, historical data from previous projects. The data represent variables of schedule and costs for each small activity in a project, and may contain pessimistic, most likely and optimistic scenarios. The simulation can be presented as a basket with golf balls. Data (the golf balls) are mixed and one of them is picked each time the simulation is done. The chosen unit is an outcome which is recorded and the ball will be put back into the basket. The simulation is then redone a number of times and all outcomes are recorded. After completing the simulations required number of times, the average is drawn from all of the outcomes, which will constitute the forecast for the risk. The result from this method is a probability of a risk to occur, often expressed in a percentage. The most common way of performing the Monte Carlo simulation is to use the program Risk Simulator software, where more efficient simulations can be performed. This analysis can be also done in Microsoft Excel where a special function is used to pick the data randomly, but the results can be very limited. An example of Monte Carlo simulation in MS Excel The Monte Carlo method is based on the generation of multiple trials to determine the expected value of a random variable. The basis of the method is provided by the following relationship: 11

12 There are a number of commercial packages that run Monte Carlo simulation; however a basic spreadsheet program can be used to run a simulation. In this case the generation of multiple trials is implemented by propagating a basic formula as many times as the number of iterations required by the model. Lets assume that a project has six activities. Each activity has a total cost in a specified range. In some cases the value is fixed (Activity B), but generally it can assume any value within an interval. Each of these variables can have a unique distribution, but as we will see in a moment, we can safely assume a uniform distribution without compromising the result. One important assumption that we make is that each of these variables is independent of the others. This means that the cost of any activity is not influenced by the cost of any other activity. Activity Minimum Maximum A 10,000 20,000 B 15,000 15,000 C 7,500 12,000 D 4,800 6,200 E 20,000 25,000 F 5,000 7,000 Total 62,300 85,200 The total cost of the project is a random variable with a value between the minimum and the maximum. This variable will be normally distributed since it is the sum of a number of random variables. This is also the reason why the individual distribution of each variable is not important. The general scheme of the Monte Carlo method is as follows: Generate random values for each of the activity costs Add each series of random values to arrive at a total project cost. The expected project cost is the average of these values. There are a number of parameters that can be calculated to assess the goodness of the solution. We will discuss some of these parameters later on. The first step is to generate random values for each of the activity costs. Assuming a uniform distribution, we can use the RAND() function to generate random numbers in the interval (0,1) and multiply these by the range of each variable. The range is the difference between the maximum value and the minimum value. The random cost for Activity A will look like this: =RAND()*(20,000-10,000)+10,000 This formula generates a random value between 10,000 and 20,000 If we create one of these formulas for each of the activities, the total project cost will be the sum of all these functions. We can propagate the row of formulas for each iteration of the model. The following table is a sample of the model showing the first seven iterations. Row 4 is the basic model, which is propagated as required. Determining the number of iterations 12

13 The Monte Carlo method provides an estimate of the expected value of a random variable and also predicts the estimation error, which is proportional to the number of iterations. The total error is given by: Where b is the standard deviation of the random variable, and N is the number of iterations. We can estimate an upper bound of b by calculating the standard deviation between the maximum, the minimum and average values of the random variable: σ = STDEVP(H2:H3,AVERAGE(H2:H3)) = 9,349 Note that we used the function STDEVP, which calculates the standard deviation of the entire population, in this case only 2 values. Lets determine the number of iterations required for an error of less than 2%. A gross estimation of the random variable is the average of the maximum value and the minimum value. An absolute error of 2% is this average divided by 50: ε = AVERAGE(H2:H3)/50 = 1,475 Therefore the number of iterations to obtain a result with an error of less than 2% is: The Model is ran by propagating line 4 a total of 362 times. The expected value of the random variable is the average of the Total column: Expected project cost = AVERAGE(H4:H547) = 73,428 Given that the variable is normally distributed, the median should be very close to the mean MEDIAN(H4:H547) = 73,304. A difference of only 0.2% The standard deviation is calculated over the entire population: STDEVP(H4:H547) = 3,604 We can now review the true error of the estimate This is an error of only 0.8%. Other useful information is the Kurtosis and the Skewness of the distribution. The Kurtosis is a relative measure of the shape compared with the shape of a normal distribution. The normal distribution has a Kurtosis of 0. = KURT(H4:H547) = This indicates that the distribution is somewhat flatter than a normal distribution. Skewness is a measure of asymmetry. The normal distribution has a skewness of 0. = SKEW(H4:H547) = This indicates that the tail of the distribution extends towards the right. The results can be easily plotted to produce the following chart: Figure 3: Frequency/Cumulative Chart 13

14 ii. Modeling Technique - Sensitivity Analysis The purpose of a sensitivity analysis is to establish the risk events which have the greatest impact or value. Those events are later weighed against the objectives of the project. The higher the level of uncertainty a specific risk has, the more sensitive it is concerning the objectives. In other words, the risk events which are the most critical to the project are the most sensitive and appropriate action needs to be taken. The result from the analysis can be presented in a spider diagram, Figure 4, that shows the areas in the project which are the most critical and sensitive. Moreover, one disadvantage with this analysis is that the variables are considered separately, which means that there is no connection between them. Figure 4: How Sensitivity Analysis Look Like (Smith et al., 2006) The method requires a model of project in order to be analyzed with computer software. The project will benefit if the method is carried out in the project s initial phases in order to focus on critical areas during the project. iii. Diagramming technique Decision tree analyses are commonly used when certain risks have an exceptionally high impact on the two main project objectives: time and cost. There are two types of decisions trees; called Fault tree analysis (FTA) and Event tree analysis (ETA). The FTA method of analysis is used to determine the probability of the risk and is used to identify risks that can contribute or cause a failure of one event. The purpose is to find the underlying causes to this event. It is usually drawn up as a sketch of a tree. The branches are the causes to the problem, and the starting point of the tree is the problem itself. Each branch has its own sequence of events and possible outcomes. The problem could depend on some causes that are interrelated with each other, or simply random causes. By having many branches, the tree provides an opportunity to choose which branch to follow and base decisions on, see Figure 5. 14

15 Figure 5: An example of a Decision Tree Fault tree analysis (FTA) and a similar analysis called event tree analysis (ETA), are simple methods which can be used as a structured model to identify causes and effects of a single event, but present different approaches. As explained, ETA is very similar to the FTA, but what differentiates the methods is the outcome. ETA is also drawn as a tree but in an opposite approach than the FTA. Failure generally does not have its roots in a single cause. It is rather described as a chain of causes and consequences in a sequence which can end up in major damage for the project. The tree consists of branches which represent the consequences that can be followed by that main event that this method is analyzing. Every branch has its own focus on a specific type of causes, which is why the importance is so great to create a risk assessment. In both FTA and ETA, cause-effect skills are required including the possibility to understand how failure could occur and see which failure modes can arise from the situation respectively. Therefore it is preferable to have an analyst within the field of risk management in the project team. An example on how to deal with cost overruns There are financial models for hedging against interest and exchange rate risk. This entails: Forward rate agreements which are usually traded with the futures exchange while this will form a separate paper in future it can be applied to project cost overruns whereby there will be a strike price. This is an example of a risk that can be transferred to third party. Interestingly, featured below is an article from The Sun Newspaper dated 13th June 2017 where Lafarge a multinational in Nigeria decided to hedge against exchange risk. Forex: Lafarge hedges $300m with CBN for futures contract 13th June 2017 ( PLANNING & CONTROLLING RISK RESPONSES It is important that planned responses are appropriate to the significance of the risk, cost effective in meeting the challenge, realistic within the project context, agreed upon by all parties involved, and owned by a responsible person. The individual owner of each risk will need to communicate with the appropriate stakeholders who may be impacted by it s occurrence as part of managing the risk. The risk plan defines the level of risk which is seen as acceptable, how risks will be managed, who will be responsible for carrying out risk related activities, the time and cost of each risk activity and how the communication of risk is to occur. You will need to use this along with the risk register to plan your responses. 15

16 Figure 6: Strategies Risk Responses There are four possible strategies for dealing with threats or risks that may have negative impacts on the project. 1. Avoid: this involves taking action to either reduce the probability of the risk and/or its impact to zero. In either case this response enables the risk to be circumvented entirely. For example, using a certain supplier might carry the risk of them going out of business during the course of the project. This risk could be avoided by using a supplier who was bigger, better established and more financially secure. 2. Transfer: this involves transferring the risk to a third party so that they are responsible for its management and impact. It does not eliminate the risk it simply transfers the liability to someone else who should be a specialist in that field. This can be done by: Taking out insurance (the insurance company is now liable) or Having the work done under a fixed price contract (the contractor is now liable). Risk transference nearly always involves payment of a risk premium to the party taking on the risk and may introduce new risks. For example, an insurance company may contest the claim or a contractor might dispute the terms and conditions of the contract if they are having problems delivering. Figure 7: Strategies Plan for Negative Risks or Threats 3. Mitigate: taking early action to reduce the probability and/or impact of a risk occurring is often more effective than trying to repair the damage after it has occurred. Adopting less complex processes, conducting more tests, or choosing a more stable supplier are examples of mitigation actions. 4. Accept: the most common acceptance strategy is to establish a contingency reserve, including amounts of time, money, or resources to handle the risks. It is usually chosen either because: the risk is low in terms of impact or probability, or the cost and effort of taking a different action is out of proportion to the risk itself. There are four possible strategies for dealing with opportunities. Figure 8: Strategies Plan for Positive Risks or Opportunities 16

17 a. Exploit: examples of directly exploiting responses include assigning an organization s most talented resources to the project to reduce the time to completion or to provide lower cost than originally planned. b. Share: sharing a positive risk involves allocating some or all of the ownership of the opportunity to a third party who is best able to capture the opportunity for the benefit of the project. Examples of sharing actions include forming risk-sharing: Partnerships, Teams, Special Purpose Companies, or Joint ventures (JVs). These can be established with the express purpose of taking advantage of the opportunity so that all parties gain from their actions. c. Enhance: examples of enhancing opportunities include adding more resources to an activity to finish early. d. Accept: accepting an opportunity is being willing to take advantage of it if it comes along, but not actively pursuing it. This is the process of implementing risk response plans, tracking identified risks, monitoring residual risks, identifying new risks, and evaluating risk process effectiveness throughout the project. Planned risk responses that are included in the project plan are executed during the life cycle of the project, but the project work should be continuously monitored for new, changing, and outdated risks. There are several techniques that can be used to control risks Figure 9: Risk Assessment Risk Monitoring Project risk monitorng should be regularly scheduled to keep the risk register updated. The amount and detail of repetition that is appropriate depends on how the project progresses relative to its objectives, as well as, which risks (if any) actually manifest themselves. The objectives of risk monitoring and updating are to: (1) Systematically track the identified risks, (2) Identify any new risks, (3) Effectively manage the contingency reserve, and (4) Capture lessons learned for future risk assessment and allocation efforts. Audits These should be scheduled in the risk plan and examine the effectiveness of risk responses in dealing with identified risks and their root causes. The objectives should be clearly defined in advance and the audit may form part of the routine project review meetings, or may be run separately, each producing its own project audit report. 17

18 Trend Analysis Earned value analysis and other methods of project variance and trend analysis may be used for monitoring overall project performance. Outcomes from these analyses may forecast potential deviation of the project at completion from cost and schedule targets. Deviation from the baseline plan may indicate the potential impact of threats or opportunities. Figure 10: Trend Analysis Performance Measurement This is designed to indicate the degree of technical risk faced by the project. Where deliverables can be measured against the plans in a quantitative way e.g.: Response times, Number of defects, etc. This can predict the degree of success in achieving the technical aims of the project. Reserve Analysis This compares the contingency reserves remaining to the amount of risk remaining at any time in the project in order to determine if the remaining reserve is adequate. Implementing contingency plans or workarounds sometimes results in a change request. i. Recommended preventive actions are documented directions to perform on activity that can reduce the probability of negative consequences associated with project risks. ii. Recommended corrective actions include contingency plans and workarounds. The latter are responses that were not initially planned, but are required to deal with emerging risks that were previously unidentified or accepted passively. If the approved change requests have an effect on the process of managing risk, the corresponding component documents of the project plan are revised and reissued to reflect the approved changes. What next 1. Let there be a policy on project risk management to incorporate specialist and risk managers in all project handled both by the public and the private sectors. 2. Let practitioners in project management come up with a case write up on their experiences in risk and how they were managed. This will form a good database for risk management. We strongly believe that the QS Academy have a role to play in this aspect. 3. More research work will be require on coming up with a project risk management approach. Thank you!. 18

19 REFERENCES American Consulting Engineers Council and Associated General Contractors of America (1992). Owner s Guide to Saving Money by Risk Allocation, Report to the American Consulting Engineers Council and Associated General Contractors of America. Authored by Robert J. Smith, Wickwire Gavin, P.C., American Consulting Engineers Council, Washington, DC. American Society of Civil Engineers (1990). Construction Risks and Liability Sharing, Volume II. American Society of Civil Engineers, Washington, DC. Association for the Advancement of Cost Engineering International (1998). Professional Practice Guide #2: Risk. Michael W. Curran, Editor, AACE International, Morgantown, WV. Cooper, J.A. (2002). Decision Analysis for Transportation Risk Management. Cambridge University Press Risk Decision and Policy, 7(1). Construction Industry Institute (1993). Allocation of Insurance-Related Risks and Costs on Construction Projects. Construction Industry Institute, Austin, TX. Highways Agency (2001). Highways Agency Framework for Business Risk Management. Report of the Highways Agency, London, England, Project Management Institute (2004). A Guide to Project Management Body of Knowledge (PMBOK Guide). Project Management Institute, Newton Square, PA. Smith, R.J. (1995). Risk Identification and Allocation: Saving Money by Improving Contracting and Contracting Practices. The International Construction Law Review, Washington State Department of Transportation (2006). Cost Estimate Validation Process (CEVP) and Cost Risk Assessment (CRA). Washington State Department of Transportation, Olympia, WA, projects/projectmgmt/riskassessment. Wideman, R.M. (1992). Project and Program Risk Management: A Guide to Managing Project Risks and Opportunities. Project Management Institute, Newton Square, PA. 19