Introduction to Risk Management in

Power Plant Investment Projects

Murat Kandaz, PMP
May 2013
Presenter
Murat Kandaz, MScME, PMP
B.Sc. 2003, M.Sc. 2006 Department of Mechanical Engineering, METU
Have held various positions regarding engineering, construction and
project management in;
Baku-Tbilisi-Ceyhan Crude Oil Pipeline Project
Ashgabat Power Plant Project
Damlapnar, Kepezkaya, and Kumky Hydro Power Plant Projects
Demircili and Sarpnck Wind Power Plant Projects
Have held various positions in business development and proposal
departments
Works as the PM of Wind Power Plant Projects of alk Energy
Project Management (PM)
Presentation Series
1. Introduction to Implementation of Project Management
Book of Knowledge (PMBOK) Guide in Power Plant
Investment Projects
2. Introduction to Risk Management in Power Plant
Investment Projects
3. Project Management in Multi-Cultural Teams
4. Project Feasibility and Development within Project
Management Offices (PMOs)
5. Project Management at Construction J obsites
Outline
Introduction
Risk Management Activities
Risk Management in Wind Power Plant
Projects
Conclusions
Discussion Panel / Future Work
Before We Start
What do you think would be the most important work of
a PM regarding handling problems?
Dealing with the problems effectively and efficiently
as they occur?
Preventing them, or having a plan to deal with
thembeforehand?
Against Possible Problems
What if we can say: No problem. We
anticipated this, and we have a plan in
place that will resolve it*
Savings in money and time that would
have been spent addressing the
problem
Efforts focused on being proactive
rather than solving problems
Less stress
Reduced uncertainties and estimates
* PMP ExamPrep, Rita Mulcahy, 7th Edition, 2011, RMC Publications
Importance of Risk Management
Risk is an uncertain event or condition that, if it
occurs, has an effect (+ve / -ve) on at least on
project objective, i.e. scope, schedule, cost,
quality!*
Among many examples, consider the interaction
between cost and risk management, just during
planning!
* PMBOK Guide, 4th Edition, 2008, PMI
Cost Budget & Risk Planning

Activity
estimates:
Work package estimates:



Control account estimates:
Project estimate:



Contingency reserves
(for known unknowns)
Management reserves
Cost
Baseline:
Cost
Budget:
(for unknown unknowns)
Risk Management Processes
per PMBoK
Sequential and recurring processes:
1. Plan Risk Management
2. Identify Risks
3. PerformQualitative Risk Analysis
4. PerformQuantitative Risk Analysis
5. Plan Risk Responses
6. Monitor and Control Risks
Process Interactions
0
2
4
6
8
10
12
14
16
18
20
1 4 9 14 19 24
Initiating Planning Executing Monitoring & Controlling Closing
I
n
t
e
r
a
c
t
i
o
n
Time
1. Plan Risk Management
2. Identify Risks
3. Qualitative Analysis
4. Quantitative Analysis
5. Plan Risk Responses
6. Monitor &
Control
Risks
Always Keep In Mind
The processes overlap
and interact in many ways
during a project or a phase!
Hence the PM should be proactively
and consistently performrisk management
with continuous updating!
Risk Management Processes:
1. Plan Risk Management
What is the best approach in power plant investment
projects, to come up with a plan that is fit for purpose,
trackable, and comprehensive?
What must this plan include?
Who among the company
should be included?
Output: Risk Management Plan
Methodology
Roles &
responsibilities
Budgeting
Timing
Risk categories
Definitions of risk probability and impact
Stakeholder
tolerances
Reporting and tracking
procedures
Risk Management Processes:
2. Identify Risks
Technical
e.g. New technology or
materials, test failures
Environmental
e.g. Weather conditions,
traffic restrictions
Operational
e.g. New
systems/procedures,
need for training
Cultural
e.g. Established customs
and beliefs, holidays
Financial
e.g. Bankruptcy, currency
fluctiation
Legal
e.g. Local laws, lack of
clarity of contract
Commercial
e.g. Changes in market
conditions or customers
Resource
e.g. Shortage of staff, operatives, materials
Economic
e.g. Slow-down,
change in prices
Political
e.g. Change in
government/policies
Security
e.g. Theft, safety
Risk Identification Methods
Documentation reviews
Information gathering techniques
Brainstorming
Delphi
Interviewing
Root-cause analysis
Checklist analysis
Assumptions analysis
Diagramming techniques (C&E, PFD, etc)
SWOT analysis
Expert judgement
Output: Risk Register
Main document on which the risks are
documented, updated, analyzed, planned. It is
the major document on which most of the risk
information is kept.
At this point (2. Identify Risks without any
updating and further proceeding), what does risk
register include?
Risk Register (Initial)
List of risks
List of potential responses
It is not always logical to seperate risk
management works!
Hence, some potential responses may be
added as risks are identified.
Root causes of risks
Risk categories
Risk Management Processes:
3. PerformQualitative Risk Analysis
We should create a shortlist of risks depending upon:
Are we supposed to do something about all the
risks that we have identified?
Probability: Probability of each risk occuring
Impact: Amount at stake (+ve/-ve)
To performa subjective evaluation of risks
Tools for Qualitative Risk Analysis
Probability and Impact Matrix: Standard rating
system
Risk Data QualityAssessment: Howaccurate
and well understood is the risk information?
Risk Categorization: What will we find when
we categorize the risks by categories? By
work packages? By any other category?
Risk UrgencyAssessment: Order by urgency
Probability & Impact Matrix - 1
P
r
o
b
a
b
i
l
i
t
y
10
9
8
7
6
5
4
3
2
1
0 1 2 3 4 5 6 7 8 9 10
Impact
Probability & Impact Matrix - 2
P
r
o
b
a
b
i
l
i
t
y
Severe
Medium
Low
None Low Medium High
Impact
Risk Register (updated after
QualitativeAnalysis)
List of prioritized risks and their P & I rating
Risks grouped by categories
Risks needing near-termresponses/analyses
Risks needing further responses/analyses (to be
further proceeded with or not?)
Watchlist
Trends
For portfolio management: Risk ranking of project
Risk Management Processes:
4. PerformQuantitative Risk
Analysis
Expected monetary value (EMV) = P x I
Similar techniques as in risk identification
and qualitative analysis
Leads to detailed risk analysis such as
Monte Carlo simulations andTornado
diagrams, showing which activites are
quantified how
Combined Frequency/Time
Histogram
An Example to Quantitative Risk
Analysis
To performmodel test / prototyping or not?
Prototype
Setup Cost = 100.000
Do Not Prototype
Setup Cost = 0
Failure = 10% and
20.000 impact
Pass = No impact
Failure = 10% and
2.000.000 impact
Pass = No impact
Qualitative vs Quantitative
Risk Analysis
Qualitative
Quantitative
~Subjective ~Objective
Risks may be defined by
numbers
Risks defined by EMV
Performed for each
project / phase
Determine the
quantified probability
of meeting project
objectives
Risk Management Processes:
5. Plan Risk Responses
What are we going to do about each top /
major / prioritized risk?
Do something before the risk happens
Do something to make sure the opportunity happens
Decrease the P and/or I of threats, increase those of
opportunities
For the remaining (residual) threats that can not be
eliminated:
o Do something if the risk happens contingency plan
o Do something if the contingency plan do not work
fallback plan
Risk Response Strategies
Avoid
e.g. Remove a risky
activity / work
package / resource
Mitigate
e. g. Provide training to a
non-experienced
resource
Transfer
e.g. Purchase
insurance,
outsource work
Exploit
e.g. Move a work
package per an
experienced
resources availability
Enhance
e.g. Begin negotiation
earlier than planned
so as to secure a
lower price
Share
e.g. Outsource a
work package to
form a
partnership via an
opportunity
Accept
e.g. Notify management that the
risk is accepted
Risk Management Processes:
6. Monitor and Control Risks
Risk reassessments regularly sheduled
Risk audits regularly scheduled
Variance and trend analyses analyses of
deviations from baseline plan
Reserve analyses adequacy of
remaining contingencies
Status meetings the more the merrier
Sample Risk Register
Key:
Hhigh;
Mmedium;
Llow
Project:
Preparedby:
Reference:
Date:
Typeof
risk
Description
ofrisk
Probability Impact
Risk
reduction
strategy
Contingency
plans
Risk
owner
H M L Perf Cost Time
SomeActions
Look for occurance of risk triggers
Monitor residual risks
Indentify newrisks and then
analyze and plan for them
Look for occurance of risk triggers
Evaluate the effectiveness of the
risk management plan are the
RM processes working?
Develop newrisk responses
That plan no longer seems
applicable, lets plan a different
response
Collect and communicate risk status
Check initial assumptions
Reevaluate risk identification if the
project misses the baseline
Update risk management plan,
response plans, and so on
Create a database of risk
management tools and documents
for lessons learned
Performvariance and trend
analyses on project performance
Look for any unexpected effects or
consequences of risk events
PMBOK Ed. 4th 5th
Plan risk management: improved set of
tools and techniques (expert judgement of
stake holders)
Risk related contract decisions taken out
of outputs included in PMPlan in
procurement management
Control risks
Risk Management in
Wind Power Plant Projects
Risk management plan prepared
200+ risks identified
via information gathering, diagramming,
and expert judgement techniques
Qualified
via expert judgement using other tools
Quantification in progress
via 3-point estimates by expert judgement
Sample Risks 1/3
# Risk Item Risk Category
Probability
Qualification
(0-none; 1-low;
2-med; 3-high)
Impact
Qualification
(0-none; 1-low;
2-med; 3-high)
PxI
24
Radar interference - need for additional radar
software / hardware
Technical 1 3 3
165
Change in anticipated currency rate - more
than 10%
Financial 1 3 3
45
Violation of environmental Laws by
subcontractors
Legal 2 2 4
91
Increase in land costs that are to be obtained
by Owner
Administrative 3 2 6
21
Incompatibility of Materials and Works with
technical exhibits of the Contract - noticed at
testing and installation
Technical 1 3 3
142
Carbon certification deemed to be impossible
because of non-Owner related and non-force-
majeure events
Legal 1 1 1
88
Decrease in feed-in tariff for the WPP
commercial operation period
Financial 0 3 0
Sample Risks 2/3
# Risk Item
Probability for
Expected Monetary
Value Analysis
(Quantification -
only for PxI >= 3)
Impact for Expected
Monetary Value
Analysis
(Quantification - only
for PxI > 3)
EMV
24
Radar interference - need for additional radar
software / hardware
2% 100.000 2.000
165
Change in anticipated currency rate - more
than 10%
4% 1.750.000 70.000
45
Violation of environmental Laws by
subcontractors
38% 133.333 50.667
91
Increase in land costs that are to be obtained
by Owner
80% 200.000 160.000
21
Incompatibility of Materials and Works with
technical exhibits of the Contract - noticed at
testing and installation
10% 250.000 25.000
142
Carbon certification deemed to be impossible
because of non-Owner related and non-
force-majeure events
N/A N/A -
88
Decrease in feed-in tariff for the WPP
commercial operation period
N/A N/A -
Sample Risks 3/3
# Risk Item
List of
Potential
Precuations
List of
Potential
Responses
Risk
Mitigation
Strategy
Response
Trigger
Event
Secondary
Risk?
Res.
Risk?
24
Radar interference - need for
additional radar software / hardware
165
Change in anticipated currency rate -
more than 10%
45
Violation of environmental Laws by
subcontractors
91
Increase in land costs that are to be
obtained by Owner
21
Incompatibility of Materials and
Works with technical exhibits of the
Contract - noticed at testing and
installation
142
Carbon certification deemed to be
impossible because of non-Owner
related and non-force-majeure
events
88
Decrease in feed-in tariff for the
WPP commercial operation period
Conclusions
Risk assessment decreases costs (sometimes
saves projects!)
PMs best strategy to be proactive and to
perform actual PM work
PMBOK risk management ~best way for
investors in power plant projects (given HSE,
CAPEX, OPEX concerns)
Importance of contingency and management
reserves (known/unknown unknowns)
References
PMBOK Guide, 4
th
Edition, 2008, PMI
PMBOK Guide, 5
th
Edition, 2012, PMI
PMP ExamPrep, Rita Mulcahy, 7th Edition, 2011, RMC
Publications
Project Management, Planning and Control, 5th Edition,
2007, Butterworth-Heinemann Publications
www.projectmanager.com
Discussion Panel / Future Work
Any more problems / issues you could
think of, and any recommendation, if any?
Could you kindly write the risks in
investment projects, so that we can
compare with the ones in wind power
projects?
Finally..
Thank you for your attention and hope to see
you in the next presentation of PM Series
Q & A..