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Practical project risk

assessment
Simon White

APM North West branch & APM Risk Management SIG


A world in which all projects succeed - but not without risk management
10th October 2016, Alderley Park Conference Centre
Agenda

• Introduction

• Project risk …
– Assessment
– Analysis
– Awareness

• Summary
Poll – your role and experience
• What is your role?
– Risk manager (specific “risk” role)
– Project team member (engineer, analyst, …)
– Project manager (project controls, PMO, support, …)
– Other

• Have you been in a risk workshop?


– Yes / No

• If yes, did you see any output from a QRA (e.g. a P90, or S-
curve)?
– Yes / No

• If yes, did you believe it?


– Yes / No
Key concepts
• probability
• expectation
• three-point estimate
• impact
• exposure
• contingency
• mitigation
• probability distribution
• P10, P50, P90
Poll – key concepts
• What do you mean by “mitigation”?
– Plans put in place in advance to make it better
– Avoiding it
– Dealing with it when (or if) it happens

• What do you mean by “contingency”?


– The cost if it happens
– The amount we set aside for risk
– The amount we spend to mitigate risk

• What do you mean by “fall-back”?


– Dealing with it when (or if) it happens
– The plan if the contingency fails
– Plans put in place in advance to make it better
Introduction
Risk …
• Assessment
– Beliefs: what do we believe about the risk?

• Analysis
– Effects: what does it mean to the overall project?

• Awareness
– Actions: what should we do about it?
Expressing risk
• Two popular ways of expressing risk:
1. Probability and impact (risk register)
2. Three-point estimate

Major
VH scope
change
“Three-point estimate”
DECC
H requires
Impact

recycle
Delay to
M lift vessel
arrival

SIMOPS
L
issues

L M H VH
Probability
Expressing risk

• Never been done before


X
• Challenging conditions
• Uncertain regulations
• Early phase
Base

• “Cheaper but
more risky”
P10 P90
P50

• Been done before


• Easy conditions
X • Established regulations
• Mid-execution
Base

• “More expensive,
less risky”
P10 P90
P50
Assessment
The risk workshop

• Valuable discussion: assumptions, inter-discipline issues, allows honesty


• Structured approach, best practice
• Engage project team, management and stakeholders
• Skilled facilitation, ensuring contribution from all team members, keeping focus

Probability Impact Score


Major scope change M VH 25
SIMOPS issues H L 17
• Identify, discuss and qualify risks DECC requires recycle L H 15
Delay to lift vessel arrival L M 9
– Cause, risk, effect … …
– Probability (H / M / L …)
– Impact on schedule, cost and safety, production, operations (H / M / L …)

• Capture mitigation options and fallback options


– Effect of mitigation
– Agree action owners and deadlines
– Make decisions – is it worth mitigating?
The risk workshop

Major
VH scope
• Risks can be ranked and summarised change
DECC
• Give focus on response / mitigation H requires

Impact
recycle
Establish agreement
Delay to
• Demonstrate robustness M lift vessel
• What are our top risks? arrival

SIMOPS
L
issues
• A useful live project document
L M H VH
• Track response actions Probability
• Keep risk visible throughout planning and execution

• But …
• Quantitative risk assessment adds more value …
The quantitative risk assessment

• Base cost estimate (CBS)


– Around 20-50 high-level cost elements
– Allowances / contingency identified

• Optionally: Base schedule (WBS)


– Around 50-300 activities
– Allowances / contingency identified
– “Forward-driven” logic
– Can use existing schedule, or create in a workshop

• Any risks already identified


The quantitative risk assessment
• Quantify significant risks
– Probability (%)
– Cost impact in £: P10, P50 and P90 (if it occurs) (optional)
– Schedule impact in days: P10, P50 and P90 (if it occurs)

• Associate the risks with the schedule activities (WBS)


– E.g. “Delay to lift vessel arrival” will impact installation activities

• Associate the risks with the cost elements (CBS)


– E.g. “Delay to lift vessel arrival” will impact topsides cost
The quantitative risk assessment
• May or may not happen (probability)
• Deviation from base, if it happens (impact)
“Probability”

“Probability”
“Impact” “Impact”
The quantitative risk assessment

• Further quantitative assessments


– Cost variance (-5% / +10% for jacket fabrication cost)
– Schedule variance (-10% / +30% for engineering activities)

– Variance accounts for: Base cost

• Estimating uncertainty “Three-point estimate”


• Risks not specifically modelled
• Deviation from base

– Correlation (all fabrication costs are uncertain because of common


causes)
The quantitative risk assessment
• Use the uniform or triangular distribution, or better

More knowledge /
Single value 1-point estimate
less uncertainty
Beta Pert
(larger shape parameter, 3-point estimate
default shape parameter of 4)

Triangle / Trigen 3-point estimate

Beta Pert
3-point estimate
(smaller shape parameter)

Less knowledge /
Uniform 2-point estimate
more uncertainty

Credit: from Centrica Energy’s QRA training manual


Analysis
Quantitative risk analysis
• The risk model shows the effect of the risk assessment,
on the overall project

“Probability distribution”
Base
estimate
(MM USD) The P90 is a
"reasonably likely"
Bulks 2.3
worst case.
Fabrication 5.7
Transportation 1.9
Heavy lift vessel 1.6 Contingency at P90 = 6.6
Hook-up and 4.3
commissioning “Exposure”
Project services 0.6
Total 16.4
Example project risk analysis
• Simple schedule
– Activities, durations, logic
– Costs (lump sums and day rates)
– Risks, variance, associated with activities and costs

• Risk analysis gives us


– Probabilistic finish date
– Probabilistic costs
– Much more
Other analysis outputs
• The total contingency can be shown (on average)
against the individual costs
Other analysis outputs
• The total contingency can be shown (on average)
phased over time
Awareness
Awareness

• Never been done before


X
• Challenging conditions
• Uncertain regulations
• Early phase
Base

• “Cheaper but
more risky”
P10 P90
P50

• Been done before


• Easy conditions
X • Established regulations
• Mid-execution
Base

• “More expensive,
less risky”
P10 P90
P50
Awareness

Base

Base Mitigate
(MM USD)
-% +%
Bulks 2.3
Fabrication 5.7
Transportation 1.9
Base
“Response
Heavy lift vessel 1.6 / mitigation”
Hook-up and 4.3
-% +%
commissioning
Base
Project services 0.6 Mitigate
Base X
(MM USD) X
Total 16.4
-% +%
Bulks 2.3
Fabrication 5.7 Base

Transportation 1.9
Base
Heavy lift vessel 1.6
Hook-up and 4.3
-% +%
commissioning
Project services 0.6

P10 P90
Total 16.4 P50
Awareness

• Given the risk as we have expressed it:

– How valuable is response x?

– How much overall contingency is likely needed?


– Where is it likely needed?
– And when?

– What’s our biggest risk at P50?


– At P90?

– What contractual incentivisations are appropriate?


Contingency

“Contingency”

Credit: from Centrica Energy’s PACE guidelines


Contingency

Credit: from Centrica Energy’s PACE guidelines


Contingency
Benefits of risk assessment

• A valuable process
– Challenge project teams and base estimates
– Express uncertainty in the team’s base assumptions
– Capture risks, assumptions, issues, and their consequences
– Encourage open discussion amongst integrated team

• Demonstrate awareness of risk


– Agree and communicate the team’s view of the risk
– Justify contingency and mitigation efforts
– Allow challenges, discussion and negotiation
– Set realistic stakeholder expectations

• The risk assessment and analysis represents the perceived risk, and its
logical consequences
Summary
Quantitative risk analysis
• The risk model shows the effect of the assumptions on
the overall project

Base
estimate
(MM USD) The P90 is a
"reasonably likely"
Bulks 2.3
worst case.
Fabrication 5.7
Transportation 1.9
Heavy lift vessel 1.6 Contingency at P90 = 6.6
Hook-up and 4.3
commissioning
Project services 0.6
Total 16.4
About Simon White
• Over 20 years’ experience in risk management and risk analysis
– Wide variety of industries and major projects
– Three years as UK Risk Analyst for ConocoPhillips
– Previously Senior Risk Management Consultant and trainer for Pertmaster,
Primavera and Oracle
– Risk analyst for current major oil / gas projects such as Cygnus, Clair Ridge and
Jasmine, and a major government infrastructure programme

• Recognised as one of the leading practitioners of integrated project schedule


and cost risk management and analysis
– Methods allow project risk models to be interrogated and understood by project
teams and senior management
– Designed and built commercial risk software: Predict!, Arrisca, and a contributing
architect to Primavera Risk Analysis (Pertmaster)
– Develops tools for more practical and valuable project and business risk
management.
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