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A simple approach to contingency drawdown, presented by Ben Fry, 10th Oct 2016, APM North West branch conference

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A simple approach to contingency drawdown
Presented by Ben Fry
Monday 10th October 2016
APM North West branch and Risk SIG conference
Alderley Park, Macclesfield

Published in: Business
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A simple approach to contingency drawdown, presented by Ben Fry, 10th Oct 2016, APM North West branch conference

  1. 1. making the difference A simple approach to contingency drawdown Ben Fry 10 October 2016
  2. 2. Turner & Townsend The presenter Ben Fry MEng MAPM ■ Worked in Project Controls for the past 13 years (specialising in risk). ■ Primarily operating in defence, having worked in; ■ Submarines ■ Maritime ■ Air ■ Land ■ Logistics domains ■ Currently working as a Risk Manager on the Hinkley Point C Project (£18bn). 2A simple approach to contingency drawdown
  3. 3. Turner & Townsend Turner & Townsend 3A simple approach to contingency drawdown 97 offices 130 countries Client Chester Zoo Project Islands project Services Cost management Value GBP 40m Client Heathrow Airport Limited Project Various Services Programme management Value GBP 1bn per year Client Transcend Project Crossrail Services Cost estimating Value GBP 15bn Client EDF Project Hinckley Point C Services Project controls Value GBP 16bn “Turner & Townsend is an independent professional services company specialising in programme management, project management, cost management and consulting across the property, infrastructure and natural resources sectors.”
  4. 4. Turner & Townsend What is contingency? “Resource set aside for responding to identified risks.” APM: Contingency “A sum of money held as an overall contingency to cover the cost impact of some unexpected event.” APM: Management Reserve “A provision for a possible event or circumstance.” Google: Contingency For the most of this presentation are using the Google definition above; ■ We are not distinguishing between Contingency and Management Reserve. ■ The principles underpinning the drawdown of MR and Contingency are broadly the same although the authority for the drawdown may be different. 4A simple approach to contingency drawdown
  5. 5. Turner & Townsend Forecast vs. Drawdown A simple approach to contingency drawdown 5 Forecast Updated regularly to determine current risk exposure. Reflects changes in circumstance and mitigation actions being completed. Changes to assessments. Doesn’t update the project baselines. Drawdown Happens when a risk has occurred and the baseline needs to be changed. Based on actual (rather than potential) events.
  6. 6. Turner & Townsend What is contingency drawdown? “The removal of funds from an agreed source resulting in a reduction of available funds.” APM: Drawdown “The transfer of provision from a contingency budget into the Baseline or, the realisation of a benefit to the sponsor” 6A simple approach to contingency drawdown Baseline Contingency Benefit Provision allocated to activities. Contingency Provision. Profit, reduced costs, early delivery or improved output performance. Transfer – Budget Release Transfer –Budget Transfer
  7. 7. Turner & Townsend Features of a good contingency drawdown approach ■ Allows the controlled and visible drawdown of contingency into the baseline (or into benefit). ■ Ensures accountability/authority for the drawdown of contingency. ■ Provides and audit trail for the drawdown of contingency. ■ Should be fully integrated into other project controls processes. ■ Should fully consider all impacts associated with the drawdown engaging all stakeholders as applicable. ■ Should be simple, clear and easy to follow, requiring minimal resources to implement. A simple approach to contingency drawdown 7 “Truth is ever to be found in simplicity, and not in the multiplicity and confusion of things. Isaac Newton
  8. 8. Turner & Townsend Types of contingency A simple approach to contingency drawdown 8 Cost Time Performance
  9. 9. Turner & Townsend Types of contingency A simple approach to contingency drawdown 9 Cost Time Performance
  10. 10. Turner & Townsend When would we drawdown cost contingency? Sources of drawdown ■ When a known risk has been realised; ■ When a reasonable, unforeseen event occurs; ■ When an additional funded mitigation has been approved; ■ When there is sufficient confidence that risk exposure has reduced. 10A simple approach to contingency drawdown
  11. 11. Turner & Townsend A cost contingency approach (process) 11A simple approach to contingency drawdown Control Account Budgets Contingency Budget Profit Risk Event Occurs Management Plan (Issue) Execute Change Process Update Budgets Control Account Budgets Contingency Budget Profit Should: • Prioritise the issue. • Seek to establish and agree the approach to be taken. • Might involve further development of fallback plan. Should: • Use the project’s standard change management process. • Consider all budgets that have been impacted by the risk. • Have clearly defined accountability for approving the change.
  12. 12. Turner & Townsend Pitfalls of cost contingency drawdown • Management may try to reduce the contingency budget to meet targets. • As contingency isn’t allocated to a specific task is can seem tempting to reduce. • Removing the budget doesn’t change the risk exposure. “I want a 10% reduction in project costs” • Often new/changed scope is required by the sponsor. • This is not a risk and was not considered when the contingency was agreed. • Scope changes should be provided with an associated budget. “The vehicle needs to go 10mph faster” A simple approach to contingency drawdown 12 Early profit realisation / cost saving New scope
  13. 13. Turner & Townsend Pitfalls of cost contingency drawdown • Control Accounts may be forecasting over-budget due to under performance. • A reasonable amount of uncertainty should be included in the CA budgets. • Underperformance doesn’t change the risk exposure. “Things have costed more than planned” A simple approach to contingency drawdown 13 Underperformance Most of these pitfalls are consistent with a normal Earned Value (EV) methodology. Establish early what constitutes an acceptable drawdown of the contingency budget.
  14. 14. Turner & Townsend Giving up contingency Linear Profile 14A simple approach to contingency drawdown Year 1 Year 2 Year 3 Year 4 Year 5 £1m £1m £1m £1m £1m • Very simple to calculate. • Sets the expectation for the contingency release on an annual basis. • Doesn’t relate to when the risk events will occur. • Can result in a lack of contingency (or holding onto contingency for too long). £3m Risk Occurs Budget has been released
  15. 15. Turner & Townsend Giving up contingency Impact Points Profile (Waterfall) 15A simple approach to contingency drawdown Time Risk A End of Exposure EMV = £1M Risk B End of Exposure EMV = £1M Risk C End of Exposure EMV = £1M Risk D End of Exposure EMV = £1MExposure (£M) Time 4 3 2 1
  16. 16. Turner & Townsend Giving up contingency Impact Points Profile (Waterfall) 16A simple approach to contingency drawdown • Fairly simple to calculate. • Relates to when in time a risk can occur. • Setting out a waterfall up front, doesn’t represent risks that are identified throughout the project. • Approach relies on being able to attribute an exposure value to a single risk event e.g. Expected Monetary Value (EMV). Exposure (£M) Time
  17. 17. Turner & Townsend Giving up contingency Cost Risk Analysis Review (Recommended) 17A simple approach to contingency drawdown Cost Confidence • More complex to calculate. • Requires commitment from the business to re-run cost risk analysis regularly and use this to determine release of contingency; • Key Milestones • Annually • Reflects any changes in the risks that occur between updates. Original Approval @ 50% - £1M 1 year later @ 50% - £800k 1 year later: Spent £50k on risks arising Release £150k to the business
  18. 18. Turner & Townsend Types of contingency A simple approach to contingency drawdown 18 Cost Time Performance
  19. 19. Turner & Townsend What is schedule contingency? 19A simple approach to contingency drawdown Activity A Activity B Activity C Milestone (Deterministic) Schedule Contingency Milestone (Contract/Reported)
  20. 20. Turner & Townsend A schedule contingency approach 20A simple approach to contingency drawdown Control Account Schedules Schedule Contingency Early Delivery Risk Event Occurs Management Plan (Issue) Execute Change Process Update Schedule Control Account Schedules Schedule Contingency Early Delivery Should: • Prioritise the issue. • Seek to establish and agree the approach to be taken. • Might involve further development of fallback plan. Should: • Use the project’s standard change management process. • Consider impact of schedule on costs. • Have clearly defined accountability for approving the change.
  21. 21. Turner & Townsend Pitfalls of schedule contingency A simple approach to contingency drawdown 21 Schedule Contingency Pitfalls Underperformance Scope Changes Pressures for Early Delivery
  22. 22. Turner & Townsend Types of contingency A simple approach to contingency drawdown 22 Cost Time Performance
  23. 23. Turner & Townsend What could performance contingency look like? A simple approach to contingency drawdown 23 Product Speed Noise Acceleration Comfort 70 mph Minimum 250 mph Desirable 100 mph Target 10.6s Minimum 4s Desirable 8.9s Target 2Hz Desirable 10Hz Target 15Hz Minimum 70Db Minimum 65Db Target 60Db Desirable
  24. 24. Turner & Townsend Key Requirement Features ■ Limit the number of critical requirements for your project. ■ Key requirements should be specific & measureable. ■ Often this information will be managed by engineering anyway (as engineering tolerances), but linking it to risk or contingency budgets is not always common practice. ■ The establishment of the key requirements (and therefore performance contingency) will depend on your contracting arrangement; ■ May be possible to agree these with the client. ■ You could take an internal view on what a client would be willing to agree as a concession. ■ You could specify requirements higher than your contract to establish a contingency in design or the supply chain. A simple approach to contingency drawdown 24
  25. 25. Turner & Townsend Performance Contingency A simple approach to contingency drawdown 25 Minimum Key Requirement Performance Contingency Planned Performance e.g. 100 mph Minimum Performance e.g. 70 mph Minimum Key Requirement Performance Contingency Risk Occurs Reduced Performance
  26. 26. Turner & Townsend Proposed approach to performance contingency A simple approach to contingency drawdown 26 Minimum Key Requirement Performance Contingency Risk Event Occurs Management Plan (Issue) Execute Change Process Update Margin Minimum Key Requirement Performance Contingency Should: • Prioritise the issue. • Seek to establish and agree the approach to be taken. • Might involve further development of fallback plan. Should: • Use the project’s standard change management process. • Consider impact of performance on schedule and costs. • Have clearly defined accountability for approving the change. Reduced Performance
  27. 27. Turner & Townsend Pitfalls of performance contingency A simple approach to contingency drawdown 27 Schedule Contingency Pitfalls Underperformance Scope Change Better Performance
  28. 28. Turner & Townsend Summary A simple approach to contingency drawdown 28 ■ Contingency budgets can be defined to cover schedule delay and performance margins as well as cost. ■ Consideration should be given monitoring/controlling all 3 “types” of contingency budget. ■ Make use of existing processes (specifically the change process); ■ This defines levels of authority for approving contingency drawdown. ■ Considers all aspects of the change integrating time, cost and performance. ■ Provides a joined up approach to contingency drawdown with minimal extra effort. ■ The pitfalls associated with contingency drawdown are the same irrespective of the type of contingency; ■ Scope change. ■ Under-performance. ■ Better performance.
  29. 29. Turner & Townsend Cost Management Limited One Castlepark Tower Hill Bristol BS2 0JA t: +44 (0) 117 922 7300 e: Ben.Fry@Turntown.co.uk www.turnerandtownsend.com 29 © Turner & Townsend Cost Management Limited. This content is for general information purposes only and does not purport to constitute professional advice. We do not make any representation or give any warranty, express or implied, and shall not be liable for any losses or damages whatsoever, arising from reliance on information contained in this document. It must not be made available or copied or otherwise quoted or referred to in whole or in part in any way, including orally, to any other party without our express written permission and we accept no liability of whatsoever nature for any use by any other party.
  30. 30. This presentation was delivered at an APM event To find out more about upcoming events please visit our website www.apm.org.uk/events

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