Project Risk and Opportunity Management

The Owner's Perspective

Agnar Johansen, Nils O. E. Olsson, George Jergeas, Asbjørn Rolstadås, Nils Olsson

• Publisher: Routledge
• Year: 2019
• Print ISBN: 9781138365810
• eBook ISBN: 9780429773402
• Edition: 1
• Topic: Commerce
• Subtopic: Gestion de projet

Effective risk and opportunity management is key to the successful delivery of any major engineering and construction project. This book looks at how all those involved can manage risk and capitalise on the opportunities that uncertainty present. The authors of this book highlight that uncertainties should be managed rather than avoided. This book will look at simple projects with a small team, to megaprojects where some hundreds of people are involved, and the consequences of delays or unforeseen costs. However, while the obvious risks can be planned for, the authors argue that it is often the opportunities in these situations that can have unexploited potential.

This book is about opportunity management seen from the owner's perspective. It will be an invaluable resource for those studying Engineering both undergraduate and postgraduate and set out ways in which projects should be managed from planning to completion. This book is also a great tool for those working in project management and the construction industry. While there are many books that demonstrate effective construction management, this book is the first of its kind to emphasise that there is opportunity in uncertainty, and possibility in the unexpected.

Part I

Why chase opportunities?

1 Project business

Each project is unique and uncertain, making it impossible to predict the ­outcome of every activity. Various stakeholders and factors (such as markets and nature, community and government) contribute to this uncertainty.

All major projects perform risk analysis, including risk identification and potential mitigation actions, but many projects do not manage all aspects of uncertainty that a project should address. Uncertainty can involve both an upside and a downside; the downside is usually well-known and managed, but the upside (opportunities) still has unexploited potential.

1.1 The lost opportunities

When the media presents news about projects, it is typically about cost overruns or delays. Such stories appear frequently—so frequently that the public are led to believe that this is the normal situation for projects. However, even if some projects are completed on time and within budget, are they successful? The answer to that is, of course, dependent on who is asking.

Let us consider an example. A multinational company has decided to build a factory for one of their products in a sparsely populated area. They have done studies indicating this will improve their competitiveness in nearby markets, and that they will benefit from access to an inexpensive and stable labour force. A consultant has developed plans for this factory including location, factory layout, production lines, management and operations. This is used to design the facilities and provide a first schedule and cost estimate for the building of the factory.

A local consultant is hired as an engineering/management contractor for the project. Extensive risk analysis is run, and the project starts on time. All possibilities for avoiding delays and cost overruns are considered whenever deviations occur. The project finishes on time and within budget. Production starts as planned and the owner should be satisfied.

However, the expected competitive advantage is not obtained. The competitors have developed their production technology, which appears superior to the one of the newly established factory.

Let us then go back to the question of whether the project is successful. Success is always measured against goals. There are three sets of goals:

• project goals

• business goals

• societal goals.

Project goals describe the project’s final delivery. The project manager has delivered the project on time and within budget, and within specifications. In this respect, the project is successful. Business goals describe the outcomes sought for users of the project’s results. The planned competitive advantage was not achieved. Consequently, the project has failed to succeed according to the owner’s expectations. Societal goals describe the benefit or value the project should contribute to society in the longer term. The factory was built at a location with large unemployment where the youth were moving out to more urban surroundings. The factory provided work for the local construction industry during the building period, as well as secure employment for many people in the operation and maintenance of the facilities. Obviously, the project has proved successful in this respect.

A project where neither the project goals nor the business goals are met is an obvious project failure. Figure 1.1 shows the degree of success dependent on whether or not the project and business goals are met. An unsuccessful project must be stopped to prevent financial loss. In the case where the project goals are obtained, but the project fails to achieve the business goals, the investment is a waste. We have managed the wrong project well. If the project fails to meet the project goals but meets the business goals, the result is a reduced return on the investment. Several mega projects have experienced this. The best example is probably the Sydney Opera House.

Figure 1.1 Project success matrix

The next obvious question in our example is: how could the project have also reached the business goals? Why have the competitors been able to improve their technology whilst this was not detected for the factory under construction? Is there any explanation to be found in the interplay between the owner and the main contractor, or in the way the project manager managed the project?

The project team ran extensive risk analysis up front and used this to keep the project on track. In doing so, many decisions were made early (freezing technical solutions at an early stage, for example). In this way, opportunities that could have made this a better project were lost.

This is a situation experienced in many projects. The owner and project management team can improve the situation by running a constant hunt for opportunities. They must not only focus on risks, they must actively look for and hunt the opportunities.

This book is about opportunity management as seen from the owner’s perspective. It will discuss various facets of opportunity management based on the authors’ own research findings and give suggestions for tools and methods to exercise opportunity management in practice. As it is important to chase opportunities, it should be realized that seizing an opportunity also involves taking a new risk. Although there are tools to assist the decision-making process, in the end it is a gamble.

1.2 Current industry practice

Major projects face unique challenges/uncertainties (due to geography, climate, labour market characteristics, investment and other factors both internal and external to the industry) resulting in cost overruns and schedule delays. These large projects require managing numerous, concurrent, and complex activities while maintaining tough schedules and tight budgets. In addition, large projects have several distinctive characteristics—including project size, technical complexity, complex procurement/contracting, schedule constraints, human, community, political, economic and environmental impacts, uncertainty (risks and opportunities) and scope changes—and ultimately experience cost overruns and delays.

As a project progresses from inception to completion, project professionals continually apply a management framework that incorporates the best practices available to balance uncertainties regarding business, technical and social issues (Hartman, 2000). This framework divides a project into a number of manageable pieces or segments, called phases, for improved management control and better decision-making. Although the number of phases in a project life cycle can typically vary from four to ten, all organizations have a similar objective of managing these projects as efficiently and effectively as possible (Kerzner, 2013). Each phase represents a group of activities that form a module in the process of developing and executing a project. A decision point or gate is located at the end of each phase to allow the organization to decide if the project should proceed to the next phase, if changes should be made before proceeding to the next phase, or if the project should be terminated at that point.

Although most projects are delivered by this framework of phases, the delivery is not always orderly and sequential. Project teams are under pressure from several decision-makers within their organization to complete projects as quickly as possible. Decision-makers exist in four areas: commercial, financial, technical and execution (Rolstadås, et al., 2011). For commercial reasons, for example, an organization must complete a facility that will allow them to meet a delivery contract with a fixed timeline. For financial reasons, a fast completion would secure a timely revenue stream. On the other hand, complex technical and execution requirements often require a slower schedule. Project teams attempt to balance these project priorities by fast-tracking, a technique where many actions are done in parallel. An ideal project delivery would see engineering design completed prior to the procurement of material and equipment, followed by construction of the facility.

However, the delivery of major projects is influenced by the owner’s requirement for faster completion time, to maximize profit by getting products delivered to market sooner. To shorten the schedule, project teams perform activities simultaneously, resulting in procurement and construction beginning before the engineering design is complete. This fast-tracking approach is referred to as concurrent engineering. It introduces many uncertainties for the project teams, such as less time for optimizing the design, for procurement planning and to develop the most optimal solutions for project ex...

Table of contents

• Cover
• Half-Title
• Title
• Copyright
• Contents
• List of figures
• List of tables
• Preface
• Abbreviations
• PART I Why chase opportunities?
• PART II How to chase opportunities
• PART III Changed mindset
• References
• Index