Risk Assessment and Allocation Management

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Risk Assessment and Allocation Management
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Risk Assessment

• What can go wrong?
• Risk identification
• What is the likelihood?
• What are the consequences?

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Risk Management

• What can be done and what options are available
• What are the tradeoffs in terms of all costs,
  benefits, and risks among the available options
• What are the impacts of current decisions on
  future options.

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Chapter 1. Introduction

• Procedures for PSE (plans, specifications, and
  estimates) are standard
• Across DOTs
• Treatment of Risks are not standard
• Or uniform

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Risk Management

• Identification
• Assessment
• Analysis
• Mitigation
• Allocation
• Monitoring
• Updating

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Typical Risk Issue
Project Phase
Status
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Expected Outcomes
Objectives for Risk Assessment
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Terms

• Technical Risk
• Performance
• Programmatic Risk
• Cost
• Schedule
• Contingency
• Amount of money or time needed above the estimate
  to reduce the risk of overruns ..to a level
  acceptable to the organization

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Neat contingency
Neat Estimate
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Qualifications of RM Team

• Early
• Environmental planning, funding, operations
• Later
• Scheduling, cost estimating

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But

• Output needs to be clear (and simple)
• Easily understood by decision-makers
• And partners, public, team

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Chapter 2. Risk Identification

• Objectives of Risk Identification
• Identify Risks
• Categorize Risks
• Identify minor risks
• Brainstorming
• Later will analyze these and determine if minor
• Simple project, red flag list may be sufficient

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Cute

• Knows
• Know-unknowns
• Unknown-unknowns
• Also, Triggers

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Risks

• Events that team members determine would
  adversely affect the project
• Examine
• Project Description
• WBS
• Cost Estimate
• Schedule
• Procurement plan
• Checklists

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Organize

• Classify, groups of like risks
• Right of Way issues
• Levels
• Right of Way
• South Park
• East Park
• Businesses
• Parkland reserve
• Golf course

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http//creatingminds.org/tools/crawford.htm
http//creatingminds.org/tools/ngt.htm
http//creatingminds.org/tools/delphi.htm
http//en.wikipedia.org/wiki/Scenario_planning
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Chapter 3, Risk Assessment

• (Chapter 3, qualitative 4, quantitative)
• Qualitatively evaluate risks from Risk
  Identification.
• Systematic consideration of risk events, their
  likelihood of occurrence, and their consequences.

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Nature of Effects

• Direct, Organization
• Increase cost or schedule
• Direct, public
• Affect the public, public perception,
  environmental, health
• Indirect
• Increased oversight
• Planning
• Reviews

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Managers v. Annalists

• Managers tend toward qualitative evaluation
• Worst case and likelihood
• Avoid risks
• Reduce negative impacts
• Annalists tend toward quantitative
• Range of results
• Probabilities
• Tend to combine

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From Pennock and Haimes

• Four barriers to transfer of risk knowledge
• Horizontal
• Between subdivisions or specialties, stovepipes
• Vertical
• Between layers of management, upper, middle and
  operational
• External
• Between organizations
• Geographic
• Distance
• Principles and Guidelines for Project Risk
  Management, M.J. Pennock and Y.Y.Haimes, Systems
  Engineering, Vol.5, No. 2, 2002

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• Qualitative best for
• Screening and prioritizing risks
• Developing appropriate risk mitigation and
  allocation strategies
• Quantitative best for
• Estimating the numerical and statistically nature
  of the risk exposure

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Risk to whom?

• Often several project participants share the
  risk.
• Might maintain the risk or shift it to another
  party via contract
• But owner needs to understand the risks
• Consider change order risk

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Definitions

• Internal risks
• Can be referenced to a project documents
• Cost estimate, schedule
• External risk
• Imposed on projects from outside
• Citizens groups
• Funding restrictions

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• Incremental Risk
• Small, over the life of project
• Most internal risks are incremental
• Costs will occur and be different from the
  estimate
• Discrete
• Often External
• Will occur or not

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Model Risks and Data Risks

• Aleatory (Data) Risks
• Uncertainty associated with the data
• Future cost of a material
• Epistemic (Model) Risk
• Inability to calculate risk
• Number of passes required to compact
• Despite knowing soils data.

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Organize Data and Decide

• Ordinal Risk Matrix
• Decision tool

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Ordinal Risk Matrix
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Chapter 4 Risk Analysis

• Take qualitative risks
• Surely high
• Probably moderate
• Do a quantitative analysis
• Often, cost and schedule

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Many methods

• Should include explicit knowledge of team
• Allow quick response to changing markets and
  conditions
• Determine project cost and schedule contingency
• Help foster clear communications among team and
  higher about uncertainties
• Should be easy to understand

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Technical Risk s

• Reliability
• FMEA
• Failure modes and effects analysis
• Fault tree analysis
• (Here we will spend most time on cost and
  schedule)

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Input Parameters

• Probability distributions
• Continuous
• Discrete
• Point

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Output

• Depends on use
• Simple mean (w or w/o SD)
• Of many projects in next years budget
• Distribution
• Useful for assigning contingency

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Sensitivity Analysis

• Test how sensitive result is to change in
  variables

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Estimate Factors

• Increase estimate for certain items
• Low percent for items that do not vary much in
  cost
• High percent for items that usually vary
• Problems
• Not project specific
• Dont think
• Does not identify risk drivers
• Mitigation

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Analytical Methods

• Last week
• Beta distribution

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Monte Carlo

• With Crystal Ball is easy
• Needs definite input parameters
• Better mousetrap

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Others

• Decision Trees
• Useful
• Model conditional probabilities among project
  variables
• Examples

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Schedule

• CPM
• Critical path can change
• Can work in MS Project with Beta
• Or set up in Excel/Crystal Ball

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Chapter 5, Risk Mitigation and Planning

• Follows qualitative and quantitative risk
  analysis
• Identifies and assigns parties to take
  responsibility
• For each risk response
• Ensures each risk requiring a response has an
  owner

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Risk Response Options

• Unrecognized, unmanaged, or ignored
• Recognized but no action
• Absorbed as a matter of policy
• Avoided by taking appropriate steps
• Reduced with alternative approach
• Transfer via contract or insurance
• Retained and absorbed by prudent allowances
• Combination of above

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Risk Planning

• Appropriate risk response strategies
• Iterative through the job
• Large projects with high degree of uncertainty
  need formal risk management plan.

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• Assign responsibilities for specific areas
• Identify additional technical expertise needed
• Describe assessment process and areas to consider
• Delineate procedures for consideration of
  mitigation and allocation options
• Dictate reporting and documentation needs
• Establish report requirements and monitoring
  metrics

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• But will vary with size, complexity, and
  uncertainty of project.
• See CalTrans Excel files.

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Red Flag List

• See several, Caltrans for example
• Identify items
• Focus attention on critical items that can affect
  cost and schedule
• Need to update

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Risk Charter

• Gives managers list of risks and possible cost
  and schedule impacts
• It is a management tool to identify, communicate,
  monitor, and control risks
• Helps set contingencies

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List for each risk

• Description
• Status
• Project phase
• Functional assignment
• Risk Trigger
• Probability
• Impact ( or time)
• Response actions
• Responsibility (task manager)

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Formal Risk Management Plan

• Large, complex, uncertain projects
• Often with management contractor

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Chapter 6 Risk Allocation

• Goals
• Allocate risks to party best able to manage them
• Allocate risks in alignment with project goals
• Share risk when appropriate
• Allocate risks to promote team alignment with
  customer-orientated performance goals

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1. Party best able to manage

• Contractor
• Labor force, equipment breakdown, construction
  technique
• Owner
• Project funding, site availability
• Differing Site Conditions
• Owner
• Inappropriate risk shifting can result in
  misaligned incentive, mistrust, and increased
  disputes.

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Alignment with Project Objectives

• Public needs project completed on short schedule
• Increase LD?
• Understand objectives early and refer to them at
  all important project decisions.
• Examples of objectives

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Risk Sharing

• Risk is not really shared
• It is split among the parties
• Adverse weather
• Excusable not compensable delay
• Delay by owner
• Cost by contractor

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Example

• Claims on drilling of shafts for bridge piers due
  to small boulders. But sufficient equipment
  could handle
• Owner could
• Specify equipment
• Which has its risks too
• Pass risk to contactor
• No DSC for small boulders
• Non-traditional risk sharing should be explained
  to contractors

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Alignment with Customer-Orientated Performance
Goals

• Customer goals
• Satisfaction with product
• Satisfaction with service
• Predictability of time
• Predictability of cost, safety
• Other goals
• Mine
• Agencies'

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Innovations

• AB procurement
• Lane Rental
• Warranties
• Examples

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Novel Shared Contingency

• Set 500,000 aside for boulders
• Contractor can use up at his unit rates
• Owner and contractor spilt remaining 50-50
• This is more profitable than the profit in his
  unit rates
• ??

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• Contractor and supply chain are more likely to
  contribute to the effective and efficient
  management of risks if they have fair and
  reasonable incentives
• Risk of fuel price escalation

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Chapter 7 Risk Monitoring and Updating

• Objectives
• Systematically track the identified risks
• Identify any new risks
• Manage the contingency reserve
• Capture lessons-learned

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• Tasks
• Develop consistent and comprehensive reporting
  procedures
• Monitor risk and contingency resolution
• Provide feedback of analysis and mitigation for
  future risk assessment and allocation.

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Reporting

• Formal?
• Tends to ensure more comprehensive assessments
• Distinguish from Project Control
• Cost
• Schedule
• Production
• These focus on what has happened relative to plan

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• Part of other reports monthly
• See Fig 22, page 39

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Contingency Funds

• Track and Manage
• Contingency should be matched to underlying risks
• Which changes over time
• La La Land?
• Manager will try to hold on to contingency
• May not be able to transfer between projects

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Estimates, Risk, Public Trust

• Public perception
• Projects grossly over budget
• Waste or incompetence?
• Dishonesty
• Low-ball estimates?
• Explain project risks?
• http//www.tfhrc.gov/pubrds/04jul/03.htm