Project Risk Management

Essential Methods for Project Teams and Decision Makers

Yuri Raydugin

• Publisher: Wiley
• Year: 2013
• ISBN:
  9781118746134
• Edition: 1
• Topic: Business
• Subtopic: Project Management
• Index: Business

An easy to implement, practical, and proven risk management methodology for project managers and decision makers

Drawing from the author's work with several major and mega capital projects for Royal Dutch Shell, TransCanada Pipelines, TransAlta, Access Pipeline, MEG Energy, and SNC-Lavalin, Project Risk Management: Essential Methods for Project Teams and Decision Makers reveals how to implement a consistent application of risk methods, including probabilistic methods. It is based on proven training materials, models, and tools developed by the author to make risk management plans accessible and easily implemented.

• Written by an experienced risk management professional
• Reveals essential risk management methods for project teams and decision makers
• Packed with training materials, models, and tools for project management professionals

Risk Management has been identified as one of the nine content areas for Project Management Professional (PMP®) certification. Yet, it remains an area that can get bogged down in the real world of project management. Practical and clearly written, Project Risk Management: Essential Methods for Project Teams and Decision Makers equips project managers and decision makers with a practical understanding of the basics of risk management as they apply to project management.

(PMP and Project Management Professional are registered marks of the Project Management Institute, Inc.)

PART ONE
Fundamental Uncertainty of a Project Outcome

IN WORDS ATTRIBUTED TO Abraham Lincoln, Peter Drucker, Steve Jobs, and several other prominent individuals, the best way to predict the future is to create it. Project development could be understood as an activity to predict future project outcome through creating it. The role of risk management is to ensure a certain level of confidence in what is supposed to get created as a result.

CHAPTER ONE
Nature of Project Uncertainties

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Questions Addressed in Chapter 1

• What could be expected as a project outcome?
• What factors are behind deviations from the expected project outcome?
• Do we really know what we try to manage?
• What degrees of freedom do uncertainties have?
• What are major uncertainty objects and their changers?
• When is a decision really a decision and when it is an opportunity?
• Is it really risk management? Or is it actually uncertainty management?
  

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MULTIPLE FACTORS INFLUENCE OVERALL project outcome. Their nature and influence depend on how a project is developed and executed, what are project objectives and expectations of stakeholders, and so on. It is not possible to manage factors influencing project outcome without properly understanding their definition. Only when all relevant uncertainty elements are pinned down and all factors leading to uncertainty changes are clearly understood can a minimal set of adequate methods be selected to manage all of them effectively.

Those multiple uncertainty elements are called uncertainty objects in this book. Systematic definitions are proposed for all of them from first principles based on the intrinsic nature of project uncertainties along with main factors that change the objects (uncertainty changers). The purpose of these definitions is not to come up with linguistically flawless descriptions of the objects, but to reflect on their intrinsic nature. The degrees of freedom are used to classify various realizations of uncertainties. This formalized systematic consideration, which resembles symmetry analysis of physical systems, is converted to specific and recognizable types of uncertainties and changers that pertain to any capital project.

PHASES OF PROJECT DEVELOPMENT AND PROJECT OBJECTIVES

Phases of project development used in industries vary as do their definitions. They are also different in the same industry, for instance, in the case of project owners and contractors. We will use a simplified set of project phases that is common in the oil and gas industry in the owner environment (see Table 1.1).

The first three phases are often combined to front-end loading (FEL). They precede final investment decision (FID), which is supposed to be made by the end of Define, which is a crucial point for any project (no FID, no project’s future). All project objectives and baselines are supposed to be well developed prior to FID to be reviewed and (hopefully) sanctioned.

TABLE 1.1 Project Development Phases

Project Phase	Description
Identify	Commercial and technical concept is pinned down; its feasibility is considered proven by the end of Identify.
Select	Several conceptual options are outlined; one is selected for further development by the end of Select.
Define	Selected option is developed, including all baselines; it is sanctioned by the end of Define [final investment decision (FID)].
Execute	Approved project is being implemented and completed by the end of Execute.
Operate	After commissioning and startup, project is in operations during its lifetime and decommissioned by the end of Operate.

The main focus of this book is on phases preceding FID (i.e., on FEL). For this reason two main project lifecycle periods could be introduced conditionally and told apart: “Now” (FEL) and “Future.” Operate certainly belongs to Future, which could include dozens of years of project lifetime before decommissioning. Execute seems to hide in a gray area since it’s the beginning of Future. It starts at FID and doesn’t end until the project is complete. One could imagine the high spirits of a project team, decision makers, and project stakeholders when a project FID is made and announced. The boost in energy, enthusiasm, and excitement following the positive FID is certainly an attribute of a “Now-to-Future quantum leap.”

After positive FID a project is likely to have future. So, decision makers, team members, and stakeholders are interested in knowing what sort of actual future characteristics it might get upon completion. If we regard project objectives and baselines as a sketchbook put together for FID, how close would the original (i.e., project completed in Future) resemble sketches done Now?

The answer to this question becomes clear in the course of project execution. By the end of Execute there will be a pretty clear picture. The original could appear even more beautiful and attractive than the sketches of the past. This is a sign of the project’s success. But the original could also get ugly, with sketches being quite irrelevant to reality.

To continue the artistic analogy, the sketches may be done using various styles and techniques. The variety of styles could resemble anything from cubism, expressionism, and pop art, to impressionism, to realism. (Guess what these styles could mean in project management!) A “project development style” adopted by a project in FEL depends on many factors: from maturity of the company project development and governance processes and biases of team members and decision makers, to previous project development experience, to stakeholders’ expectations and activism. But what is even more important is the “project execution style.” Its abrupt change right after FID could make pre-FID sketches completely irrelevant (see Figure 1.1).

QUEST FOR PREDICTABILITY OF PROJECT OUTCOME

Figure 1.1 represents a concept of a value associated with project definition and execution. The term definition means here all activities related to FEL, and not only to the Define phase, whereas the term value could be perceived as an amalgamation of project objectives, baselines, and stakeholders’ expectations compared with the completed project. (In a simplified interpretation it could relate to either project cost or duration.) According to Figure 1.1, a project value may be characterized by a broad spectrum of outcomes, from unconditional success to complete failure. According to benchmarking data and the definition of project failure by the IPA Institute, a staggering 56% of major projects fail due to

FIGURE 1.1 Project Definition, Execution, Value, and Outcome

• Budget overspending for more than 25%, and/or
• Schedule slipping for more than 25%, and/or
• Severe and continuing operational problems holding for at least one year.¹

Imagine what the failure numbers would be if we used 15 or 20% thresholds instead.

Project definition and execution is a battle against multiple factors of uncertainty of the project outcome. Multiple uncertainties and deviations from project objectives should be understood as inputs to project definition and execution that drive overall uncertainty of outcome. Depending on features of project development and execution, this could be either an uphill or downhill battle. Accumulated deviations from multiple project objectives and baselines upon project completion could be both favorable and unfavorable to various degrees. Decision makers, project team members, and stakeholders have a vested interest in the final outcome of a project. Was this delivered within scope and quality, according to the sanctioned budget and by the approved completion date, or was the discrepancy between baselines and reality appalling? Were changes done during project development and execution? Were they properly taken into account? What was the safety record or environmental impact in the course of project delivery? Has the owner’s reputation suffered?

All these questions emphasize multiple dimensions of project goals and uncertainty of project outcome. All project disciplines—engineering, procurement, construction, quality, project services, safety, environment, stakeholder management, and so on—take part in shaping corresponding baselines and managing multiple uncertainties at the work packa...