THE RISK PROFESSOR SERIES

By Okechukwu Onwuka

Assessing and Controlling Project Risks

Starting a project can be a daunting task. Successful completion of any project requires the effective and efficient application of a broad set of project management tools. The concept, scope, cost and schedule are usually considered key aspects of major projects. Any situation, condition or set of events that can negatively impact on any of the listed items particularly cost and schedule to significant degrees are considered unacceptable risks by project sponsors or owners. The challenge for project managers is to find ways of identifying and managing associated risks in a cost effective way. Keeping costs and schedule under control is of prime importance. This is of even greater significance for projects where the funding is provided by lenders who charge interest on capital provided. PROJECT STAGES There are basic stages for typical projects which we ll highlight below! Concept Selection This is usually the stage where a number of options are identified and evaluated by the project owner, sponsor or team members. At this stage, well before spending begins, you have the opportunity to consider a number of options that can be used to implement the overall project objective. "ost estimates developed at this stage are at best rough estimates. #t is too early at this stage to conclude that available funds are adequate or inadequate. $sually, risk assessments are carried out for each of the options under consideration to help in developing a unified benchmark for comparing the options. Preliminary Design #t may be necessary to perform some preliminary design on a narrowed list of options %say one or two& to develop the concept further. This early design should define further project details to facilitate better cost estimates and planning. 'a(ard identification and risk assessments are also performed on the preliminary design to uncover risks which could result in significant negative project impacts if not eliminated or mitigated. Some risks e)posures may result in altering the implementation plan or aborting the project. #f such risks are not identified before huge funds have been spent, project costs might escalate well beyond the initial budget or capital allocation. Detailed Design The detailed design usually follows the conclusion and adoption of the preliminary design. The detailed design will produce detailed specifications for all materials, equipment, construction, commissioning and operations. The design team may include Architects, *ngineers %"ivil, +echanical, ,rocess, -acilities, *lectrical, #nstrumentation, Systems etc&, .uantity Surveyors/"ost *stimators, .A/." specialists, 'S* facilitators, #nterior designers, etc. 0etailed ha(ard identification and risk assessments are carried out prior to completion of the design to allow the design team to address the risk assessment findings and recommendations. ,rocurement datasheets are also developed. +ajor changes are usually difficult to implement at this stage of the project without significant cost impact on the project owner or sponsor. Some project owners shy away from conducting risk assessments at this stage for fear of finding difficult high risk issues that may not be cost effective to manage. Procurement ,rocurement will follow the development of a comprehensive procurement plan. A robust procurement plan will depend on the quality of the design. A wrong procurement strategy can result in bloated project costs, e)tensive delays and possibly inferior quality materials. 1

2009 The Risk Professor

2009 The Risk Professor

Construction $sing a wrong construction strategy could have severe impacts on schedule, completion quality and costs. Timely evaluation and assessment of construction risks is of prime importance. A number of e)amples e)ist where beautifully designed projects were derailed by poor understanding of associated construction risks. "onstruction risk assessments are advised to be carried out in three stages. The first is during the concept selection stage. The others are at the preliminary design and detailed design stages, well before commencement of construction. This allows cost effective modifications to be made on the design before it is finali(ed. 3hen materials have been bought, contractors selected and concepts fro(en, it is usually too late to make any meaningful adjustments to the construction process. Commissioning & Operations The operating philosophy should consider not only the capital cost of building the project but also the operating cost of the project on completion. 3hile the capital cost may be fi)ed, operating cost usually affects the operating profits. A high "apital cost and a low operating cost may be preferred to a low capital cost and high operating cost scenario. 4perating risk assessments result in value added risk insights for effectively managing potential deviations to smooth and reliable operations. *very project owner or sponsor should be able to provide firm answers to the following questions 1. #s there an adequate and dynamic process in place to identify e)isting and new risks to project implementation5 2. #s there an established risk acceptance criteria that is used to define standards for acceptable and unacceptable risk levels5 6. #s there a framework for selecting appropriate methods, tools and personnel for conducting risk assessments5 7. 0o risk assessments support the project owner s decision making process5 8. #s there an ownership and stewardship process for risk management5 4n 3ednesday, 9uly 1, 2::;, # ll be facilitating a seminar at the "onference "entre of ,A< A-=#"A< $<#>*=S#T?, %@agos Ausiness School& on Project & Business Start !p Ris" Assessment & Control. The first ten %1:& readers to send email %4r te)t message with email and phone number& requesting complimentary Admission "ards will qualify for a -=** Admission "ard. ?ou will also have to come with a copy of the Sunday >anguard together with your email confirmation to the venue at Km 22, @ekki *)pressway, @agos.

2009 The Risk Professor