Project Risk Management-Pankaj K Sinha

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  • OMDA Implementation Oversight Committee Meeting 05.01.07
  • Project Risk Management-Pankaj K Sinha

    1. 1. <ul><li>Pankaj K Sinha </li></ul><ul><li>CH2MHILL </li></ul>Risks Management in Major Projects
    2. 2. Risk- Definition <ul><ul><li>Risks are uncertain events that have a probability of occurrence, and, if these happen, there may be a positive or negative impact on </li></ul></ul><ul><ul><ul><li>Cost </li></ul></ul></ul><ul><ul><ul><li>Schedule </li></ul></ul></ul><ul><ul><ul><li>Quality </li></ul></ul></ul>
    3. 3. Risk Definition – Changing Perception ! “ Risk involves the possibility of suffering harm or loss. In the project context, it is concerned with opportunities (positive outcomes) and threats (negative outcomes).” Adapted from PMBOK Guide 1996 Edition “ Project risk is an uncertain event or condition that, if it occurs, has a positive or negative effect on a project objective.” Adapted from PMBOK Guide
    4. 4. Risk Management - Industry Standards AS/NZS ISO 31000:2009 - Risk Management Standard
    5. 5. Risk- Implicit acceptance <ul><li>Extreme impact: don’t think about it </li></ul><ul><li>Low impact: not a big deal </li></ul><ul><li>High likelihood: what can you do? </li></ul><ul><li>Low likelihood: will never happen </li></ul><ul><li>Low occurrence rate with low impact: not a big deal </li></ul>People have a subconscious tendency to ignore the risks (implicit acceptance)
    6. 6. Risk Analysis and Management Cycle
    7. 7. Risk Management Risk Management is the systematic process of identifying, analyzing, and responding to project risk. It includes maximizing the probability and consequences of positive events and minimizing the probability and consequences of adverse events to program objectives. Identify Analyze Mitigate Manage Risk Management
    8. 8. Risk Analysis Process – 4 Steps 1 Interpret Results 4 <ul><li>Identify Risks that can impact Program . </li></ul>2 3 Identify Risks Assess Impact of Risks Run Simulation <ul><li>Evaluate the impact of each Risk on Cost Items </li></ul><ul><li>Input the Impact of each risk in the Cost Risk Analysis Template </li></ul><ul><li>Use Monte Carlo Analysis to simulate nearly all possible scenarios of risk occurrences and the resulting impacts on Program Cost </li></ul><ul><li>Risk profile gives the probability distribution of costs for PWP due to the identified and evaluated risks </li></ul><ul><li>Tornado Diagram indicates the relative impact of identified risks </li></ul>
    9. 9. <ul><li>Force Majeure </li></ul><ul><li>Unforeseen Site Conditions </li></ul><ul><li>Contractor fails to perform </li></ul><ul><li>Design errors </li></ul><ul><li>Permitting delays </li></ul>Typical Risk Factors
    10. 10. Assessing Impacts of Risks <ul><li>For each risk factor (e.g. market condition), assess potential impact on costs </li></ul><ul><li>If the exact impact of a risk factor is not known, so a range of possibilities can be assigned (e.g. market condition may increase labor cost by up to 10% or decrease by up to 5%, but may increase material cost by up to 20% or decrease by up to 3%). </li></ul><ul><li>The probability distributions are subjective, unlike tossing a coin, where probability distribution is precisely known (50/50) </li></ul><ul><li>The individual impact assessment is subjective and hence prone to errors, but the sum of cost items (each of which are impacted by these imprecise assessments) has a much smaller error </li></ul><ul><li>Risk factors are project specific! </li></ul>
    11. 11. Risk Management - a Critical Component of Program Delivery (ATMA Concept ) <ul><ul><li>Avoidance – change the plan to avoid risk </li></ul></ul><ul><li>Transfer- Assign someone else the acceptance of the risk, usually through insurance </li></ul><ul><li>Mitigate- – Reduce probability/impact to acceptable level </li></ul><ul><ul><li>Acceptance – Deal via contingency Planning </li></ul></ul>
    12. 12. Risk Management Tools <ul><li>Program Control System (PCIS) </li></ul><ul><li>Decision Tree </li></ul><ul><li>Risk Analysis by PertMaster </li></ul>
    13. 13. Risk Register Interviews, workshops with Client, Contractors, and others Claims Risk Register Slums Tariffs Currency IE Claims Design OMDA
    14. 14. Program Control System (PCIS) Knowledge & Decisions IT Infrastructure Servers & Network Information
    15. 15. Decision Tree
    16. 16. PertMaster <ul><li>Over the period PertMaster has evolved as a very popular software for Risk Management. It supports qualitative as well as quantitative analysis and runs Simulation based on Monte Carlo/Latin Hypercube techniques. </li></ul><ul><li>Computer-aided numerical modeling which combines potential impact of all identified risks and opportunities to create a composite risk/opportunity profile. </li></ul><ul><li>Can perform > 50,000 “what-if” runs, with over 50,000 possible combinations of various impacts/reductions. </li></ul><ul><li>By repeatedly “sampling” values from the probability distributions for each risk (or opportunity factor), a statistically significant profile of total project costs vs. probability is provided. </li></ul><ul><li>The result of these > 50,000 calculated Project Costs give Two Deliverables: </li></ul><ul><ul><li>Probability Distribution of Costs </li></ul></ul><ul><ul><li>Relative Influence of Risk Factors (Tornado Diagram) </li></ul></ul>
    17. 17. Interpreting Results
    18. 18. Risk Manager <ul><li>For each risk treatment, Risk Manager shall be nominated to have responsibility for that treatment. The most appropriate person may be </li></ul><ul><li>the person who is responsible for the activity from which the risk arises; </li></ul><ul><li>the person who can best control the probability of the risk occurring; </li></ul><ul><li>the person best positioned to react to and recover from the occurrence of the risk or reduce its consequences; </li></ul><ul><li>the person with the appropriate level of authority to deal with the risk. </li></ul>
    19. 19. Manage the Risk
    20. 20. Program Risk for an Airport Expansion Program Program Budget approx. US$ 2 Billion Program Risks Contract Risks Project Risks OMDA LD Technical Claims Others
    21. 21. Airport Program– Timeline of major risk/opportunity ? Complete construction by Feb 15, 2010 OMDA Signed Conversion to Lump Sum by July 2008 Revised Master Plan submitted All design & Procurement Activities to be completed before conversion to lump sum 2010 Apr-2006 May-2007 2008 July 2008 2009 2007 August 2008 Substantial Construction activities during 2008-2009 Manpower resources Fund management for payment
    22. 22. Program Risk Categories Category 1: Known risk factor and known risk impact: We understand the potential outcomes and the probable impacts. (Issue of Concept Design for Terminal) Category 2: Known risk factor – Unknown risk impact: We understand the situation may affect the outcome but not sure the probability of occurrence (generally remote) or potential impact. (OMDA LDs, Change orders …) Category 3: Unknown risk factor – Unknown risk impact: Conditions we are not aware of and have no idea the potential impact. (war, global economic changes, etc…….)
    23. 23. Program Risk Analysis <ul><li>Step 1 – Risk/Opportunity Identification </li></ul><ul><li>Step 2 – Quantify Potential Risks and Opportunities </li></ul><ul><ul><li>For each risk, estimate probabilities of occurrence and potential cost increases/decreases </li></ul></ul><ul><ul><ul><li>Best Case </li></ul></ul></ul><ul><ul><ul><li>Base Case </li></ul></ul></ul><ul><ul><ul><li>Worst Case </li></ul></ul></ul><ul><li>Step 3- Statistical Assessment </li></ul><ul><ul><li>Use Monte Carlo/Latin Hypercube simulation to provide estimates of cost/schedule certainty </li></ul></ul>
    24. 24. Current Baseline Cost Used for Analysis <ul><li>CAPEX </li></ul><ul><li>Cost validation </li></ul><ul><li>EPC Contractor’s Estimate </li></ul>
    25. 25. Risk Quantification <ul><li>CAPEX </li></ul><ul><li>Potential cost impact estimated by the Program Manager’s Team </li></ul><ul><li>Probabilities for best case, base case and worst case </li></ul><ul><li>Inputs from….. </li></ul><ul><ul><li>Client’s P&D, Contracts & Procurement and Finance Teams </li></ul></ul><ul><ul><li>Program Management Team </li></ul></ul><ul><ul><li>In-House Data </li></ul></ul><ul><li>Based on two years of Program development experience and comprehensive understanding of risk factors </li></ul>
    26. 26. Risk Allocation – By Potential Impact
    27. 27. Program Risk Analysis Deliverable <ul><li>With current commitment funding, what Risk Analysis will predict certainty of finishing the Program at or below the Budget and on Schedule? </li></ul><ul><li>Identification of significant risks and opportunities. </li></ul>
    28. 28. Conclusion Risks are the Opportunities ! Let us manage those ... together

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