Quantifying
Cost and Schedule Risks
for
Major Energy Projects
PRMIA Luncheon Presentation
4 November 2010
CSC Project Management Services
200-321 19 Street NW. Calgary, Alberta. T2N 2J2
(403) 233-7994 cscmain@cscproject.com
CSC
Excellence in Risk Management
1
4 November 2010
Major Project Blues
Over the last two decades, almost every major energy project
has suffered significant cost overruns, significant
schedule delays, and/or poor quality work.
Exceptions are rare and most projects that tout being “On
Time and Under Budget” have re-cast schedules,
significantly modified scope or revised base estimates.
The problem isn’t new. In the late 1980’s the Rand
Corporation published a study showing that 80% of all
major projects had significant cost and schedule
overruns.
The problem is not restricted to the Alberta Environment, the
oil industry, or to Canada. It is a global problem.
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Excellence in Risk Management
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4 November 2010
Major Project Blues - the Issues
Major energy projects are truly colossal in scope. Capital
costs are routinely in excess of $1 Billion, equipment is
sourced world-wide, labour pools are stretched.
The boom in oil prices that drives new projects results in
competing project impacts on everything from bulk
materials to major equipment, from camp beds to hotel
rooms and from field labour to construction management.
After many years of industry retrenchment, project
management and construction supervision experience has
been scarce. Owner groups are not resourced to deal with
the issues driven by massive capital projects.
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Excellence in Risk Management
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4 November 2010
Major Project Blues - the Solution
These major projects are being driven by economics. In
order to capture the project value, a fully functioning
(nameplate) project must be completed on schedule and
within the capital budget.
The Project Team must identify and understand the wide
range of risks facing them, and put in place an action
plan that mitigates these risks. Failure to assess and
identify risk issues will almost certainly doom a project.
The Project Team must bring resources to bear on the risk
issues throughout the project execution life. As a project
proceeds the risks change, and the risk management plan
should reflect this changing reality.
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Excellence in Risk Management
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4 November 2010
Risk Management Life Cycle
Strategic
Planning
Project
Definition
Project
Financing
Project
Execution
Project
Execution Team
MidConstruction
Project
Start Up
Year 1
Full
Operations
Internal Review
Corporate
Planning
Risk Contractor
Involvement
Operations Team
Corporate Review
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Excellence in Risk Management
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4 November 2010
Risk Management:
• The most important risks and their impacts are identified and
communicated to the project management and stakeholders.
• All sources of risk and opportunity are identified including “soft”
items such as “organization performance” and “competing project
environment”.
• Expert judgments about the likelihood of uncertain events are
documented, and their impacts quantified.
• Budgets and performance targets are set at
appropriate confidence levels, and areas for
mitigation are identified and explored.
• Project strategies are tested in a
“best case/worst case” scenario to analyze
mitigation plans and alternatives.
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Excellence in Risk Management
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4 November 2010
Risk Analysis is the centerpiece of a Risk Management Process
Base Design
& Operating Plans
Uncertain
Environment
Risk Analysis
Scheduled, Formal Reviews
Updated Model Results
(Probabilities, Tornados, Steps)
Management Risk Reporting
Risk
Monitoring
System
Probability
Distributions
Project Targets
Tornado
Step
Interview
Diagrams
Diagrams
Issues
Immediate Risk
Control Measures
Model and Test Options
Contingency Plans
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Excellence in Risk Management
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4 November 2010
The general Risk Analysis Process proceeds in a systematic
sequence
Recycle to Focus on
Most Important Risks
Frame
The
Problem
1
Review
Alternative
Strategies.
Identify all
Important
Sources of
Uncertainty.
Develop
Analysis
Basis
Model how
underlying
uncertainties
interact to
influence
outcomes
on the Project.
2
Evaluate
The
Risks
3
Identify the
Experts in each
of the uncertain
variables.
Assess the
impact and the
probability of
occurrence for
each uncertain
variable.
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Excellence in Risk Management
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Interpret
The
Results
4
Calculate the
uncertainty in
the key result
measures.
Quantify the
risk & return
for each scenario.
Analyze and
document the
results.
Risk
Management
5
Identify
preemptive
actions.
Develop
contingency
plans.
Recommend
actions.
4 November 2010
Framing the problem is often the most difficult but
most valuable step in the process
• Project scope, basic assumptions, and cost & schedule milestones
are identified.
• Strategic alternatives and logical development paths are identified, and
decision criteria are defined.
• All project decisions (both made and not made), and the logical
links between decisions, are identified.
• All risk issues and their potential impact areas for the project are
identified.
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Excellence in Risk Management
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4 November 2010
The Influence Diagram shows how the risks influence each other and their impact
on the project. Correlations between variables must be properly captured.
Operating
Costs
Operating
Revenue
Scope
Changes
Organizational
Performance
Capital
Cost
Contractor
Rates
Competing
Projects
Material
Rates
NPV
Contractor
Default
Productivity
Rates
Schedule
Labour
Availability
Regulatory
Delays
Regulatory
Environment
Conditioning
Variables
Weather
Delays
Impact
Variables
Results
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Excellence in Risk Management
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4 November 2010
Conditioning Variables
Organization Performance
•
•
•
•
•
•
•
Organization, Distribution of Authority
Continuity of Design, Coordination of Engineering
Information Gathering and Communication Tools
Baseline and Performance Measuring Tools
Contracting Strategies
Construction Productivity
Owner Involvement and Commitment
Competing Project Environment
•
•
•
•
•
Labour Resources
Engineering Resources
Contractor Availability
Material / Vendor Shop Availability
Construction Equipment Availability
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Excellence in Risk Management
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4 November 2010
Risk Variable Assessments
Risk Discussion
•
•
•
•
•
Discuss the Assumptions in the Base Cost / Schedule, including
Manpower and Equipment levels
Identify Risk and Opportunity factors influencing the range of
uncertainty
Discuss what factors are included and excluded from the risk
range for the item
Collect the risk range information (Assessment is a value and
the probability of that value occurring)
Identify what is driving the high and low values
Cost Variables
•
Probability of a Cost Variance, a Specific Cost, or an increase /
decrease from the Base Cost
Schedule Variables
•
Probability of a Duration, a Specific Date, or a Delay /
Advancement to the Base Schedule
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Excellence in Risk Management
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4 November 2010
The risk analysis calculates the probability distribution of
potential cost outcomes. This distribution can be used to :
1. Determine the contingency required for any confidence level (probability).
2. Compare the estimate uncertainty (slope) with traditional estimate class
definitions.
Base = 1600 $MM
100%
P90 =2220 $MM
+11%
90%
80%
Slope of
Class V Estimate
Probability
70%
400 $MM
Contingency
Required for
P50 Confidence
60%
50%
Slope of
Class 2 Estimate
40%
P50 = 2000 $MM
30%
20%
P10 =1780 $MM
-9%
10%
0%
1200
CSC
1600
2000
CAPEX ($MM)
Excellence in Risk Management
13
2400
2800
4 November 2010
The tornado diagram identifies and ranks the key
project risks and is a tool that helps the project team to
focus on the most important drivers.
Start Date
-60
3
Road Preparation Duration
Labour Productivity Delays
Plant Pad Preparation Duration
Labour Unrest Delays
Execution Organization Performance
Regulatory Duration
Competing Project Environment
Start-up & Commissioning Duration (Early Steam)
Terms of Reference - Duration
Regulatory Environment
Terms of Reference - Application Date
Labour Availability Delays
OTSG Manufacture & Delivery Duration
Weather Delays
Long Lead Equipment Delays
-40
Days
0
-20
20
40
60
6
-1.25
1.75
3
6
0
2.3
Best
Worst
11.3
16.5
Low
Heated
1.5
2.4
3
4
Relaxed
Stringent
1-Aug-02
1-Oct-02
0
12
0
1.4
16
0.5
-1
2
EV = 20-Dec-07
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Excellence in Risk Management
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4 November 2010
Modern Day Application of Risk Management
• Risk management is fundamental for accountability on corporate
governance and on maximizing shareholder value.
It begins with strategic definition and continues in a consistent manner
throughout the project life cycle.
• Range Estimating is not Risk Analysis.
Risk analysis must consider the specific uncertainties of a project, and
incorporate these underlying risks into the project value. Processes that
provide single-point outcomes or risk distributions based on the probability
of fixed outcomes (decision trees, KT, range estimating) do not meet the
definition of risk analysis.
• Risk Management ensures that there are no surprises.
Documentation of assumptions and all risks. Communication of the risk
management plan (avoid, accept, manage) focusing on the underlying project
risks.
“Ignoring risks to a project is not an option; important decisions will be
made anyway, shouldn’t they be made with the best information
available?”
(Project Manager Today, October 2000)
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Excellence in Risk Management
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4 November 2010
CSC
Excellence In Risk Management
Specifics:
• Supports Owner Organizations in major project development.
• Group formed in 1982, over 250 project assignments worldwide.
• Extensive and varied background in Project Planning and Management.
Specialties:
• Risk & Decision Analysis for a wide range of capital Projects.
• Strategic & Mitigation Planning for projects using risk models.
• Facilitation of Project Management, Business Planning, Environmental &
Safety Planning & Management and Team Building.
• Project Management Education Workshops.
• Development of Contract Claims and disputes and litigation support.
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Excellence in Risk Management
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4 November 2010