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  1. 1. Megaproject Risk Management: Lessons from the Big Dig Presented by Virginia A. Greiman NASA PM CHALLENGE 2011 February 9-10, 2011 Long Beach, CA © 2010Used with permission
  2. 2. Topics Overview of Risk Management Structure and Costs of Mega Project in Comparison to Risk Catastrophic Loss Role of Risk Management in a large Mega Project The Big Dig – Key Facts – Benefits of an Owner Controlled Insurance Wrap-up Program – Risk Mitigation – Allocation of Known and Unknown Risk – Success Factors Virginia A. Greiman © 2010 2
  3. 3. What Is Risk Management?Risk Management is an Organization’s strategy to prevent andreduce exposures to losses and accidents by: Identification Assessment AllocationTypical costs associated with an Organization’s risk managementfunctions include net insurance premiums for: retained losses risk control loss prevention expenses administrative costsEmerging Trends – The rise of Enterprise Risk Management (ERM). – A comprehensive program for managing the risks of the entire organization including: Business environment, compliance, governance, operations, audit, information, financial and transactional risks. Virginia A. Greiman © 2010 3
  4. 4. Major Elements of a Risk AnalysisA Three-Step Process Risk Identification Risk Risk Allocation Assessment Virginia A. Greiman © 2010 4
  5. 5. Risk Management Process Risk Policy Legislation StrategyRisk Control Risk Management Risk AssessmentEvaluation Objectives and Goals IdentificationMonitoring Risk Information PerceptionReporting Risk Communication Qualitative v. Quantitative Analysis Risk Allocation Avoidance Prevention Reduction Separation Duplication Transfer Virginia A. Greiman © 2010 5
  6. 6. Risk of Catastrophic LossImpact of World Trade Center (WTC) Virginia A. Greiman © 2010 6
  7. 7. Classification of Catastrophic Losses Natural Perils – Cave-in, Earthquake, Fire, Flood, Ice – Landslide, Sea and Tidal Waves, Settlement,Water, Wind Human Perils – Human Error – Terrorism – Embezzlement – Pollution – Explosion/Chemical Leakage – Utility Disruption Economic Perils and Political Risk – Funding – Depression/Recession/Inflation – Political Risk (Regulatory Risk) Technological AdvancesSource: Insurance Institute of America Virginia A. Greiman © 2010 7
  8. 8. Major Catastrophic Losses Element Estimated Loss ($,MM) World Trade Center (2001) $30-40B Earthquake in Chile (2010) $30B ($8B insured) Hurricane Andrew (1992) $18B California Earthquake (1994) $12.5B Hurricane Hugo (1989) $ 4.2B Japan Typhoon Murielle (1991) $ 6.4B Hurricane Georges (1998) $ 2.9B Hurricane Floyd (1999) $ 2.0B Oakland, CA fire (1991) $ 1.7B Missouri Hail Storm (2001) $ 1.2B IRA Bombing, London (1993) $ 1.0BSources: Insurance Services Office Inc.,Virginia A. Re, Lloyds2010 Munich Greiman © of London 8and Global Reinsurance
  9. 9. Central Artery Project Virginia A. Greiman © 2010 9
  10. 10. Central Artery/Tunnel Project FactsExcavation and Tunneling – Construction of: 161 lane miles of highway in a 7.5 mile corridor, about half in tunnels. Four major highway interchanges – Excavation and transport of 13 cubic yards of dirt and soil mix construction – Placement of 3.8 million cubic yards of concrete. – Installation of more than 26,000 linear feet of steel-reinforced concrete slurry walls – Demolition of 7 miles of existing elevated arteryTed Williams Tunnel – Construction of: Concrete Immersed Tunnel Tubes and Jacked Vehicle Tunnels Seven building ventilation system – Connection between water-based and land-based approachLeonard Zakim Bunker Hill Bridge – Design and Construction of the widest cable-stayed bride in the worldParks and Open Space – Creation of more than 150 acres of new parks and open space Virginia A. Greiman © 2010 10
  11. 11. Jacked TunnelProcess•Jacking Pit Constructed•Freeze Pipes Placed•Ground Frozen over 3-4 mo.•Tunnel Segments built•Tunnels Jacked 3 ft/day
  12. 12. CA/T’s Risk Management MissionTo protect the Commonwealth of Massachusetts, CA/T contractors,consultants, workers and the general public againstcatastrophic loss by: Operating a world-class Risk Management Program for: – Engineering and construction – Loss control – Safety program Insuring all identified loss exposures through and beyond Project completion – Past – Current – Future. Virginia A. Greiman © 2010 14
  13. 13. Project Structure and Cost Element Current Estimate ($MM) Construction $ 9,496 Design $ 1,034 Project Management $ 1,977 Force Accounts $ 608 ROW Settlements $ 576 Insurance Premiums $ 609 Contingency $ 498 TOTAL $14,798Source: CA/T Project Finance Plan 2007 Virginia A. Greiman © 2010 15
  14. 14. Conventional Costs of Risk Management Premiums Expected Losses Broker Compensation Safety and Health Administration Consultants Audit ExpendituresSource: Essentials of Risk Financing, Insurance Institute of America, 1996 Virginia A. Greiman © 2010 16
  15. 15. Why did the CA/T Project Choose an OCIP? 1 Key Programmatic Factors Uniform Coverage for All Contractors – Without OCIP, adequate coverage may be unavailable to small contractors Coordinated Claims Handling/Management Centralized Loss Control and Prevention – OCIP provides a more effective means for Project-wide safety implementation and favorable loss experience results. Eliminates Cross Contractor Litigation – One coordinated insurance program used by all contractors. 1 Owner-Controlled Insurance Program, also known as “Wrap-up Insurance” Virginia A. Greiman © 2010 17
  16. 16. A Review of Wrap-Up InsuranceIn 1998, wrap-up insurance covered about 300 construction projectsnationwide Advantages Large Cost Savings from Buying in Bulk – Project owners can save up to 50 Percent on the cost of traditional insurance. Avoiding Duplication and Gaps in Coverage More Efficient Claims Processing and Less Litigation Centralized Safety Programs Disadvantages More Time and Resources needed in administration Costs to hire additional personnel or pay to contract out the management Larger premiums at the beginning of the Project Reduces a contractor’s profits from insurance rebates. Conclusions Advantages usually outweigh disadvantages Source: United States General Accounting Office, GAO/RCED-99-155, June 1999 Virginia A. Greiman © 2010 18
  17. 17. Major Public Project Wrap-Up Programs Channel Tunnel (U.K./France) Sydney Harbor Tunnel (Australia) Great Belt Link (Denmark) U. S. Nuclear Power Plants The Central Artery/Tunnel Project Oregon Tri-Met Westside Light Rail Line New Jersey Transit Corporation Hudson-Bergen Rail Line Chicago Transit Authority Green Line Rehabilitation Project Utah Department of Transportation Interstate 15 New York City Transportation AuthoritySources: Great Projects, James Tobin, 2001, United States General Accounting Office,GAO/RCED-99-155, 1999, Bechtel Corporation, San Francisco, CA Virginia A. Greiman © 2010 19
  18. 18. CA/T Project Insurance Wrap-up Coverage’s($M) (2006 CA/T Project Finance Report) Administrative Costs and 60 Safety Mitigation Railroad Protective Liability 5 Airport Contractors’ Liability 8 Professional Liability 11 48 Builders’ Risk 215 General Liability/Excess Liability 262 Workers Compensation 0 100 200 300 Virginia A. Greiman © 2010 20
  19. 19. Insurance Plus Indemnification Insurance Defense Indemnification Hold Harmless Virginia A. Greiman © 2010 21
  20. 20. Selected Project Risk Control Techniques Preconstruction Planning and Videos Catastrophic Analysis and Prevention Integrated Risk Management Building Monitors Soil Tests Quality Assurance Mitigation Program Risk Control Training Virginia A. Greiman © 2010 22
  21. 21. CA/T Safety Performance RecordableSource: CA/T Project Management Monthly Report Virginia A. Greiman © 2010 23
  22. 22. CA/T Safety Performance Lost TimeSource: CA/T Project Management Monthly Report Virginia A. Greiman © 2010 24
  23. 23. Six Steps to Profitability Enforce the Contract Train, Monitor, Test and Retrain Zero-Accident Philosophy Negotiate Insurance from Experience Assess and Mitigate Risk Exposures Allocate Risks Contractually Virginia A. Greiman © 2010 25
  24. 24. Mega Project Risk Success FactorsRecognition that Risk Management is Central to Project Success orFailureMitigation of Political and Regulatory Risk from the Inception of theProjectIntegration of Stakeholders in all aspects of Risk ManagementBack to Back Allocation of Risk to all Project ParticipantsWrap-up Insurance Program v. Contractor Controlled InsuranceSafety Incentive Program that Spans the Life of the Project Virginia A. Greiman © 2010 26
  25. 25. QuestionsVirginia A. GreimanAssistant Professor Boston University Virginia A. Greiman © 2010 27