ASSIGNMENT         VALUE AND RISK          MANAGEMENTVALUE MANAGEMENT PROTOCOLS FOR TECHWATT CORPORATION AND AN ESSAY ON R...
INDEXPART 1Aim of the project                                 03Reason for the study                               03Key p...
AIM OF THE PROJECTTo provide an expert advice on how value management can be applied during the briefing stage and tohelp ...
Project briefingOnce the decision to build has been taken, the study team should state the strategic objectives of theproj...
5) Facilities managerThe role of the facilities manager would be to provide information related to the operational costs a...
 Source of funding                    The details about source and the                                                   ...
Financial issuesCapital costs such as lead cost, design and construction costs, equipment costs, fees and other charges,re...
Study agenda    Value management tools and technique that can be utilized in the studyFunction analysis system technique d...
Ideas which fulfilled the basic functions or the client’s needs are considered whereas the ideas whichwere of little signi...
REFERENCESCourse notes, Heriot Watt university, 2009Value management – John Kelly, Steven Male & Drummond GrahamValue mana...
PART 2 – RISK MANAGEMENT ESSAYThe following essay has been written by analyzing the risks associated from the construction...
   RESOURCE RISKRaw material, power, fuel, manpower etc are the resources used by a project. Shortage of raw materialsmay...
   EXCHANGE RATE RISKExchange rate risk, also called as ‘currency risk’ is the risk arising from currency fluctuations. V...
DECISION TREE ANALYSISDecision tree analysis is a graphical technique that can be used for analyzing the pros and cons ofa...
REFERENCESSchool of the built environment, Heriot Watt University, 2009, Value and Risk ManagementProject management profe...
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Value and risk assignment sample

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Value and risk assignment sample

  1. 1. ASSIGNMENT VALUE AND RISK MANAGEMENTVALUE MANAGEMENT PROTOCOLS FOR TECHWATT CORPORATION AND AN ESSAY ON RISK MANAGEMENT
  2. 2. INDEXPART 1Aim of the project 03Reason for the study 03Key points to be studied 03Required information 03Solution proposal 03Members requested to attend the workshop 04Required information for the workshop 05Main issues to be considered during the workshop 06Study agenda 08Value management tools and techniques to be used 08References 10PART 2Essay on risk management 11Kinds of risks 11Techniques of risk analysis 13References 15 2|Page
  3. 3. AIM OF THE PROJECTTo provide an expert advice on how value management can be applied during the briefing stage and tohelp develop the brief and confirm the decision to build. Reason for the studyTechwatt Corporation sees value management as a means of ensuring that the project is properlyscoped before proceeding any further. Key points to be studied 1) To verify the need of the construction project proposed by Techwatt corporation. 2) To compare the advantages and disadvantages of each option and evaluate them against business needs. 3) Finalize on the preferred options. 4) Improve communication and understanding between all parties to the project brief. 5) Develop the project brief. Required information 1) Preliminary list of the stakeholders. 2) Identification of similar facilities within the same geographical location. 3) Analysis of the main constraints of the project 4) Analysis of the resource pool of the project 5) Preparation of the action plan 6) Design requirements. Solution proposalA workshop is proposed to achieve a positive feedback on the study. The study shall be divided into twostages-  Strategic briefing  Project briefingStrategic briefingDuring this stage, the reason for investing in a new head quarters and its important parameters shall beconsidered. The next step is to consider and compare all the options that could meet the identifiedbusiness needs such as whether to construct a new building or lease/ rent an existing building orupgradation of an existing building and other similar options shall be brainstormed during the workshopsessions and finally evaluate these options and propose the best option to the client (TechwattCorporation). 3|Page
  4. 4. Project briefingOnce the decision to build has been taken, the study team should state the strategic objectives of theproject into construction terms such as site selection, specifications and budget estimation in order tohelp develop the project brief. Members requested to attend the workshop sessions and their roles in the study 1) The client/client representative ( project sponsor)The role of the client or the project sponsor would be to represent the Techwatt Corporation and tochair the committee of Techwatt representatives as well as report to the board of directors on allmatters associated with the study.The client / project sponsor would also need to provide the following information-  the intention of the project  concept design information  resources for the budget  constraints of the project  objective need and project requirements  performance specifications  future expansion plans 2) project manager The role of the project manager would be to develop realistic time and cost budgets against which future decisions with respect to the project shall be made and to establish the functional needs of the project. 3) Project advisorThe role of the project advisor will be to contribute his/her independent advises about differenttechnical issues related to the project. 4) Design teamThe role of the design team would be to provide conceptual as well as technical advice related to theproject through conceptual design sketches and to help develop the project brief. 4|Page
  5. 5. 5) Facilities managerThe role of the facilities manager would be to provide information related to the operational costs aswell as building performance and also to ensure that the project brief takes in consideration theorganizational and strategic needs of Techwatt Corporation. 6) FacilitatorThe role of the facilitator would be to encourage creative and lateral thinking, outlines the valuemanagement study, prepares the study reports and to develop an action plan Required information for the workshopThe accuracy and availability of information is very important to the success of the value managementstudy. The table below illustrates the necessary information to be gathered and its utility to workshops. Theme Related information Utility  TechWatt organizational The information is necessary for the structure verification of need to build and in the development of the strategic briefing.  Decision making structure The decision tree is important for the evaluation of legal and time issues. Organization  Business strategy of TechWatt  IT market trends  Project stakeholders  Corporate identity of TechWatt Important information at the stage of brief development. The integration of  Other social facilities for the corporate identity and the social Context employees: dining, nurseries, aspects of the facility are important to recreation facilities, etc. achieve a successful project  Proposed location(s) This information allows the study team to evaluate the options that could meet  Site characteristics the business need, and also to identify the estimated cost and the Location  Proposed site (s) specifications of the adequate site.  Property market trends 5|Page
  6. 6.  Source of funding The details about source and the allocation of funding are important to  Allocation of funding the project success and the evaluation Finance of high level financial risks to the  Budget estimation project.  Time constraints The study team will construct a strategic time line diagram which is Time  Possibility of phased project based on this information  Procurement strategy All legal issues that could have an impact on the project in term of time  Dispute resolution strategy and cost should be raised including the Legal and contractual proposed procurement strategy information  Insurance  Land acquisition procedure The objective of the second stage of  Environmental friendly design this study is to transform TechWatt requirements into technical assets;  Pollution control-noise therefore an accurate articulation of the required specifications is a  Lighting requirements significant factor in the brief quality.  Green material construction Specifications and  Sustainable development requirements  Landscape reservation  Accessibility  Appearance of the building  Security and safety requirements Main issues to be considered in the workshopDuring the value management study, the study team shall evaluate the following issues:Organizational issuesBy investigating the strategic business of the company and identifying the place of the project within thisstrategy. In addition, an evaluation of the impact of the decision making structure in the project must beconsidered. 6|Page
  7. 7. Financial issuesCapital costs such as lead cost, design and construction costs, equipment costs, fees and other charges,relocation cost, commissioning costs and allowances for contingencies shall be considered.Recurrent costs such as operating costs, maintainance costs, human resource and informationtechnology shall also be considered.Legal issuesAll legal issues related to the project must be considered especially if they have an impact on the costand project.Contextual issuesBy considering the different options of location and the characteristics of the preferred site. Here againan assessment of options should be carried out in order to identify the preferred location in terms offinancial, economical and political advantage.Time issuesAn evaluation of all time parameters shall be carried out including time constraints and relationshipsbetween deadlines and the commercial purpose of the project.Physical issuesVarious alternatives to the initial concept design scheme shall be considered and a final spatialrequirement keeping future expansions shall be decided.User issuesThe needs of the end users (employees, potential customers, visitors) such as interiors, comfort,lighting, and accessibility shall be considered.Operational issuesPost occupancy facilities management is an important requirement that is to be considered at the briefdevelopment phase. 7|Page
  8. 8. Study agenda Value management tools and technique that can be utilized in the studyFunction analysis system technique diagram (FAST)The FAST diagram is a technique for analyzing the functional structure of a technical system. It can serveas a useful tactic within any Systematic Design strategy.After brainstorming, a FAST diagram can be constructed and all the ideas that arouse out of thebrainstorming sessions are listed as below- 8|Page
  9. 9. Ideas which fulfilled the basic functions or the client’s needs are considered whereas the ideas whichwere of little significance were discarded.Those ideas which were finally selected by mutual agreement of all parties in terms of their prioritiescould then be placed in a diagram as stated below 9|Page
  10. 10. REFERENCESCourse notes, Heriot Watt university, 2009Value management – John Kelly, Steven Male & Drummond GrahamValue management in design and construction – John Kelly and Steven MaleReal project planning – developing a project delivery strategy – Dr. Trish Melton 10 | P a g e
  11. 11. PART 2 – RISK MANAGEMENT ESSAYThe following essay has been written by analyzing the risks associated from the construction managers/project managers’ point of view. Citing the possible risks associated while working on international orvaried geographical location. Risks are associated with almost all levels of the project life cycle and ismutually shared and mitigated by all parties employed within the construction industry. There are manyevidences to state that poor risk mitigation leads to poor performance and hence establish riskmanagement processes and practices are required to be adhered to in order to turn any project’soutcome into a success.The 2000 edition of the Guide to the Project Management Body of Knowledge (PMI,2000) states that aproject risk is :‘An uncertain event or condition that, if it occurs, has a positive or negative effect on a projectoutcome’.Risks can be broadly classified into 2 categories- speculative risk and pure risk. Speculative risks can beboth positive and negative whereas pure risks are mostly negative by nature.Risk can be defined as the ‘variability of return from an investment’ risk analysis play an important rolein any project. All projects are prone to some kind of risk or the other. All projects are appraised makingcertain assumptions and such assumptions are unavoidable since no 2 projects are unique in all respectsand hence a new project cannot be compared with an identical project that was executed in the past.Though there may be similarities in 2 projects, exactly identical projects do not exist.KINDS OF RISK IN A PROJECT (in the built environment)Projects face a host of risks such as,  PROJECT COMPLETION RISKCompletion of the project in time and within the estimated cost is itself a major achievement. A projectthat is delayed will result in time over run which will subsequently lead to a cost over-run. If the projectpromoters are not able to pump in additional funds required to meet the cost over-run, then the projectruns the risk of coming to a grinding halt. Also delayed implementation means an increase in interestcommitments on the borrowed funds. When the project promoters find it difficult to meet the interestcommitment during the implementation phase, the lenders may not be prepared to fund the projectadditionally to meet the cost over-run.There can also be technology failures, which may result in the non completion of the project. Forprojects with long gestation periods in the field of fast developing technology, there is a risk of projectnot being completed due to technological obsolesce during the course of project implementation. 11 | P a g e
  12. 12.  RESOURCE RISKRaw material, power, fuel, manpower etc are the resources used by a project. Shortage of raw materialsmay lead to a reduction in capacity utilization and higher cost of production which will make allprofitability estimates wrong. Similarly, shortage of power, fuel, and shortage of skilled manpower willalso jeopardize the project profitability, calculations and the project may run the risk of not earning theestimated returns.  PRICE RISKPrice fluctuations of both inputs and outputs (ie, raw material and finished products) affect the project.Unforeseen happenings such as government’s intervention in price fixation ability of competitors tooffer their product to customers at a comparatively cheaper price etc, are likely to have an adverseimpact.  TECHNOLOGY RISKTechnology risk may appear in two forms. A project that is based on unproven technology may havehidden defects which may make the project obsolete in technology due to evolution of latesttechnology.  POLITICAL RISKPolitical risk is a major risk as it cannot be predicted easily. The government intervenes in many formssuch as levying and regulating taxes, regulating monopolistic trade practices, imposing import duties,promoting inputs, price – control, ex-proration, nationalization etc.  INTEREST RATE RISKFluctuations in interest rate may bring in an adverse effect. For example, if a project is funded by way oflong term borrowings at a particular rate of interest, and if the interest rate falls down subsequently theproject that availed long term borrowings at a higher interest rate has service the loan only at a higherrate of interest, unless it makes alternative arrangements to mobilize funds at the prevailing interestrate and swap the old borrowings which is a difficult proposition. New entrants who set up similarprojects may have access to long term loans at the prevailing rate of interest which may be cheaper. Insuch a situation, projects that were implemented with high cost borrowings will find it difficult tocompete with the new entrants.On the other hand if the interest rate increases in the future, the interest on working capital finance(which normally carries a floating interest rate) increases which will result in lower profit margins thanestimated at the time of project appraisal. interest rate risks can be managed to some extent byentering into interest rate hedging agreements like ‘interest cap’, ‘interest swap’ etc. 12 | P a g e
  13. 13.  EXCHANGE RATE RISKExchange rate risk, also called as ‘currency risk’ is the risk arising from currency fluctuations. Volatileexchange rates can reduce cost and productivity advantages gained over years of hard work. Firmsexposed to international economy face this risk. When a firm has already committed to a foreigncurrency denominated transaction, the firm is exposed to a exchange rate risk. The firm will incur a lossif the exchange rate of the foreign currency has moved adversely and will earn profits if the exchangerate is moved favorably. Many exchange rate risk hedging tools such as forward cover, leads and lags,currency options, currency swaps etc are available which can be efficiently made use of to maneuverexchange rate risk. TECHNIQUES OF RISK ANALYSISBREAK EVEN ANALYSISThe financial viability of a project is estimated by making various assumptions like the cost of rawmaterial, cost of consumables, cost of labor, expected sales realization, expected capacity utilization ofthe plant etc. after implementation, the project starts earning profit or starts incurring loss dependingon the actual sales volume that it could achieve, the actual cost of inputs, the actual sales realization etcof these factors, the , the cost of the inputs and the cost of outputs are decided by the cost of marketforces. Of these factors, the only thing that is under the control of the project promoter is the level ofoutput (ie. Capacity utilization). Hence it is very essential to know the level of operation below which theproject will incur losses. Breakeven point (BEP) refers to the level of operation at which the projectneither incurs profit nor incurs loss. Calculation of BEP for the given cost and price levels indicates theminimum capacity utilization that the project should aim at in order to be in a no-profit, no-losssituation. BEP also helps in identifying the level of profit/loss for a specified level of operation and thelevel of operation required to attain a specified profit/to avoid a specified loss etc.Break even analysis starts with dividing the costs into two broad heads, viz, fixed costs and variable costsFixed costs: all projects incur certain costs that are fixed in nature. These costs remain constantirrespective of the changes in the volume of output.Variable costs: these are those costs that vary directly with the level of output. Raw material cost is avariable cost since it depends on the level of output.SENSITIVITY ANALYSISIt is a technique that measures the changes in the profitability of a project caused by changes in thefactors that affect the cash inflows of the project. If a small change in one factor leads to a major changein profitability of the proposed investment, the project is considered more sensitive to that factor, inother words the project is more risky. Sensitivity of a project is checked by observing the response ofany measure of profitability to changes in critical factors. 13 | P a g e
  14. 14. DECISION TREE ANALYSISDecision tree analysis is a graphical technique that can be used for analyzing the pros and cons ofalternative decisions and choosing the best possible course of action. A decision tree is a diagrammaticrepresentation of the logical relationship between the different parts of a complex situation and thepossible outcomes of different decisions. A decision tree is made up of nodes and branches where nodesare of two types, viz, decision node and chance node.MONTE CARLO SIMULATION‘Monte carlo’ is a code name given by Von Newmann and Ulam to the technique of solving problemsusing random numbers. Monte carlo technique can be used to solve a variety of problems involvingstochastic situations. It is a very popular technique and it uses random numbers to solve problemsrequiring decision making under uncertainty where a mathematical solution is highlycomplex/impossible.GAME THEORYIn real life situations, business firms compete with one another. Game theory deals with situations inwhich two intelligent opponents have conflicting interests. To achieve their goals, the two firms willform strategies. The strategy that one firm forms will depend on the strategy that the other firm hasalready formed / in the process of forming.The objective of the game theory is to develop a rational criterion for the selection of a strategy/strategies by each player since games are rooted in conflict of interest, the optimal solution selects oneor more strategies for each player in such a way that any change in the chosen strategies does notimprove the benefit to either player.SWOT ANALYSIS SWOT analysis is also known as the strength, weakness, opportunity and threat analysis. Swot analysisis done in many situations like mergers and acquisitions, take over and declining trends in profit etc.SWOT analysis can also be done in the absence of the above situations to improve upon the competitiveedge of an organization and also to avoid any pitfalls lying ahead that may hamper the growth of theorganization. Project appraisal is an area where Swot analysis is of immense help, particularly whenproject appraisal is done for expansion/ diversification activities. 14 | P a g e
  15. 15. REFERENCESSchool of the built environment, Heriot Watt University, 2009, Value and Risk ManagementProject management professional study guide, 1998Risk management and construction – Roger Flanagan & George NormanModern construction management (5th edition) - Harris and Mc Caffer. 15 | P a g e

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