Risk Assessment and Allocation for Effective Project Delivery and - PowerPoint PPT Presentation

Risk Assessment and Allocation for Effective Project Delivery and Management June 27, 2012 Informing and Supporting the Decision Making Process Dr. Khalid Bekka HDR Decision Economics

Agenda  Accounting for Uncertainty and the Use of Risk Management  HDR‘s Risk Management Process  Impediments and Procurement Traps  Risk Allocation and Project Delivery Method  Case Studies:  Texas DOT- North Tarrant Expressway  Washington State DOT – SR 520 Bridge Program  Utah DOT- Mountain View Corridor  Alaska DOT – Northern Rail Extension  NYC MTA – Signals Replacement Program  Open Discussion 2

My Background in Risk Management and P3  Over 20 years of experience in infrastructure economic, financial, and risk assessment;  Led financial risk assessment for more than 30 toll road projects for USDOT and bond insurers, including development of Public Sector Comparator Framework for agencies in Arizona and Florida  Conducted risk analysis for over 200 infrastructure investment in the US and Canada, including bridges, highways, rail, ports, airports, tunnels, water treatment facilities, and convention centers  Prepared reports for US FTA, FHWA, FRA, FAA, DOJ, and DHS that have been submitted to congressional committees, GAO and OMB  Developed and Conducted Risk Management for Mega Programs including Ground Zero in New York City, and Katrina Rebuild Program in New Orleans. 3

New Realities and the Need for Risk Assessment • Over 40% of all infrastructure projects, and over 80% of major infrastructure, exceed their budget or schedule;* • With the financial turmoil, funding constraints, volatile commodity prices, and policy/regulation changes, * Flyvbjerg et al. (2005) conventional planning methods are no $300 75% $280 longer sufficient; 60% $260 $240 • Credible, transparent, and 45% $220 $200 30% comprehensive processes become $180 $160 15% critical for effective infrastructure $140 $120 0% planning; and $100 $80 -15% Hot rolled bars, plates, $60 • Credibility means that decision-makers and structural shapes $40 -30% 12M Change $20 must know the nature and magnitude $0 -45% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 of risks to determine their risk tolerance so that they make effective decisions. 4

An Integral Part of Project Management Project Schedule Project Cost Scope Control Project Project Project Management Procurement QA-QC Plan Project Risk Project Staffing (HR) Management Communi- cations 5

HDR‘s Risk Management Process 6

Integrating Risk Analysis, Value Engineering, and Risk Response Principles Cost Risk Assessment VE / Risk Response  Investigate  Learn About Project  Functional analysis  Identify Risks  Speculate  Strategize  Qualify and Quantify  Evaluate  Develop  Develop Response  Improve  Anticipate Risk Performance Both use a consensus-based team approach 7

HDR‘s Risk Management Process * Project/Program Risk Step 1: Assessment Baseline Risk * Quantification of Cost and Assessment Schedule Risks Development of Alternative Step 2: Solutions and Risk Response Risk Response Strategies Step 3: Assessment of Threats and Risk Analysis on Opportunities Related to Response Strategies Response Strategies Step 4: Tracking, Monitoring, Continuous Risk Tracking, Monitoring, and Reporting and Control Risk Allocation/ Project Prioritization / Decision Support Delivery Method Financial Planning Alternatives 8

Comprehensive Identification of Risks  Construction schedule risks;  Third-Part Agreements;  Environmental Risks;  Utilities Risks;  Drainage Risks;  Traffic Management ;  Market Conditions Risks,  Procurement Risks;  Project Management Risks,  Right of Way Risks;  Performance Standards; and  Financial Risks. 9

Risk-Adjusted Cost Estimates 100% $281.5 Probability of Not Exceeding $255.1 90% $247.7 Baseline Baseline $242.0 Non-Escalated Escalated 80% $236.9 $150.3 $172.8 $232.7 70% $228.9 $226.1 60% BID PRICE $223.3 02/07 ($219 $220.5 M) 50% $217.5 40% $214.9 $212.0 30% $209.3 $206.2 20% $202.7 $199.6 10% $195.9 $192.3 0% $186.9 $170.9 $135 $155 $175 $195 $215 $235 $255 $275 $295 $315 Total Project Cost ($Millions) 10

Risk-Adjusted Schedule Projection 100% Baseline End Date Jun- 2018 Mar-2020 90% 80% Probability of Not Exceeding 70% 60% Jan-2019 50% 40% 30% 20% Feb-2018 10% Project Completion Date 0% 2017 2018 2019 2020 2021 2022 2023 2024 Project Timeline 11

Risks Prioritization Top Cost Impacts on Cost - Event Costs and Schedule Delay Costs Rw17: Utility relocation may not happen in time (22) $3,2 $3,2 Co6: Discovery of unknown utilities during construction (28) $0,6 $1,2 $1,8 Rw12: Other Delays in ROW Acquisition (1) $0,9 $0,9 Ma2b: Other construction projects in region limit supply of $0,9 $0,9 labor (28) Rw1b: ROW unable to certify before advertising (1) $0,6 $0,6 Rw7: Delays in ROW acquisition (1) $0,3 $0,3 Tr2b: Conflicting lane closures (28) $0,3 $0,3 Tr1b: False work placement and removal (28) $0,3 $0,3 Schedule Cost (Delay & Rw4: Objections to Right of Way appraisal (1) $0,2 $0,2 Escalation) Event Cost Co7b: Interference from other projects (28) $0,2 $0,2 $0,0 $0,5 $1,0 $1,5 $2,0 $2,5 $3,0 $3,5 Millones Expected Increase in Cost 12

Risk Response Categories • Avoidance is a change to the project scope to eliminate the impact of a risk. • Transference of a risk to another party who is more capable at handling the risk (such as the contractor or insurance company). • Mitigation is seeking to lessen the impact of a specific risk items, which may involve the consumption of additional time and/or money. • Acceptance is recognition by the project team of a specific risk and decision to not take action to deal with the risk. 13

Risk Analysis on Response Strategies Mitigation Value 14

Adequate and Continuous Reporting 15

Financial Planning Support • The framework integrates risk- adjusted cost estimation with cash flow modeling • The process allows for the assessment of various project prioritization on cash flow and risk exposure • Risk-Based budgeting thresholds determined on project by project basis, which depends on project size and level of risk • The projections can then be shown for the program as a whole or for individual or a set of projects 16

Impediments and Procurement Traps

Address/Resolve Regulatory Impediments • Interoperability • Conversion of Existing Roads/ Highways • Violation Processing • Eminent Domain/Condemnation • Negotiation after Selection 18

Selection Process is Critical • Specify Minimum Submission Requirements – Financial and Technical Qualifications – Financial Component – Demonstrate Technical Feasibility • Specify Evaluation Process • Balance Need for Confidentiality and Public Disclosure • Process for Ensuring Price Reasonableness in Negotiated Transaction if price is not ―locked in‖ at selection • Ensure Involvement of Local Stakeholders 19

Procurement “Traps” • Pre-quality Teams • Low Bid versus Best Value Evaluations • Design-Bid versus Design-Build and Design- Build-Operate-Maintain • Warranties, Maintenance, Long-Term Operational Arrangement • How Much Design should DOT Provide? • Land Acquisition: Advance, Donated, Shared with Private Partners • Utility Relocation 20

Competition is Critical • Alternate Technical Concepts • Innovative Design • Compensation for Ideas • Present Value Proposal Cost • One-on-One Meetings to Discuss Details Prior to Proposals • Realistic Time — Value of Money • Confidentiality 21

Risk Pricing and Allocation

Establishing Risk Allocation Policy Objective Benefit • Allocate individual risk • Understand which parties will manage each factors to the party risk best suited to manage • Improved understanding them of potential change • Develop contract orders language to effectively • Minimize cost premiums manage risks through for risks from contractors allocation for risk factors best handled by owner 23

Risk Allocation Methodology • Identify risks associated with project in baseline risk assessment • Identify mitigation strategies during risk response step • Assist in determining the ―ownership‖ of risks based on characteristics of the risk Goal: Optimal Risk Transfer that Maximizes Value for Money 24

Criteria For Risk Allocation Individual Risks should be allocated to: RISK ALLOCATION - The party best able to manage it: The party that is most capable ITEM Owner Contractor to predict and prevent the risk. Design - The least risk-bearing cost partner: The risk bearer must be ROW the party that can promptly deal Geotechnical with the risk via existing system and resources Environmental - The party with the most efficient and effective Utilities mechanism: The risk bearer Schedule must be the party that can deal with the risk with most Construction economical and effective method 25

Assigning the Risk Bearer Risk Key Risk Register Controlling Handling Influence Risk Procurement Ability Ability Ability Liability Cost ? Owner Agent 26