Project Risk Analysis

Techniques for Forecasting Funding Requirements, Costs and Timescales

Derek Salkeld

• Editorial: Routledge
• Año: 2016
• ISBN:
  9781317074915
• Edición: 1
• Categoría: Negocios y empresa
• Categoría: Seguros

Projects overspend and overrun. Business cases perform less well than expected. Managers tighten their grip and initiate more procedure. But little changes and the scenario repeats, and it has done so for decades. Losing other peoples' money and goodwill is almost an innate characteristic of projects. This may be a norm but it need not be the natural state of affairs. In Project Risk Analysis, Derek Salkeld shows how easily assimilated techniques developed out of formal risk analysis methods can be used to increase the chances of projects being delivered to the oft quoted objective of on time and to budget, to quality and to popular acceptance. These techniques need to be understood by managers so that they can foresee the benefits of directing their teams to carry them out, and so they can inform their clients about the potential consequences of the investments they wish to make and how the project team plan to assure these. The three parts of the book explain how you can: ¢ calculate the funding required for a simple, short project using risk based methods to generate answers that are more accurate than traditional estimating ¢ apply the techniques to inform an investment decision for a major project, taking into account whole of life costs, operations and revenues ¢ design and implement specific management controls that will assure the outcomes of the investment decisions. Risk and opportunity are inherent in projects and yet, whilst many organizations invest heavily in project management methodologies and processes, few project sponsors, project board members or managers understand the effect these might have. The approach taken in the book is to understand how the risk and opportunity in a project will affect its funding requirements and its business case outcomes, and to use this understanding to devise management controls that will benefit both the investor and the project manager. This is essential reading for anyone concerned with adding value to projects, programmes and the organizations for which they are delivering them.

CHAPTER 1 The Case for Risk Analysis

Why is so Little Known about Project Costs and Timescales?

In 2008, the British economy turned over just under £1,450 billion.1 The measure of this, the gross domestic product (GDP), comes in three forms,2 one of which is the value of the goods and services its people produce (Figure 1.1).

All of our efforts to keep the wolf from the door are in there somewhere, but when I ask people in which part of this spectrum they work, it quickly becomes apparent that there are quite a few people for whom the answer is a ‘kind of neither, probably both’ portmanteau expression that German speakers would have little problem expressing in a single word. They do not work in manufacturing, but similarly they do provide relief to those in need. They are neither producers nor providers of service. Instead, they say they produce a good, or perhaps just a small number of them, a specific product to a specific client. They say they work in teams that deliver motorways, bridges, computer systems, production lines, power grids, buildings and so on. They work in what I suggest is a hitherto unsung sector of the economy called ‘Projects’ (Figure 1.2). How big this sector of the economy is I do not know, but I would not be surprised to learn that it is both large, and that a small number (tens of percent) of the UK workforce consider themselves to be part of it.

Since working on projects is economically productive, there must be a band in this spectrum equal to the value of the projects completed annually. Where it sits, towards the goods or services end of the GDP spectrum, is not clear, but it has to be in there somewhere.

It almost goes without saying that the value of the goods the UK produces has declined in recent years. However, since the GDP has grown, it is reasonable to assume that the value of UK services must have increased

Among the goods we can no longer buy are Raleigh bicycles (started in 1887 and closed in 2003), Rover cars (1885 to 1967, when the company became part of British Leyland), and Norton motorbikes (1898 to 1975). Among the services that have replaced them are English-language entertainments (BBC TV, the West End), tourism (easyJet) and finance (providers’ interests, first pensions, money invested in money, bets placed against the economy, private equity purchases of successful companies, etc.). Indeed, we may have been too successful at the last. Though the profits made by these companies may have generated taxes for the Exchequer to expend (or invest of course), being privately owned means those profits have not been accessible to the masses due to the equity no longer being publically traded on the stock exchange. I digress, but perhaps even for a capitalist like me, life is a progression from the political left to the political right and then slightly back again.

Figure 1.1 The UK gross domestic product spectrum I

Figure 1.2 The UK gross domestic product spectrum II

Somewhere in the spectrum of goods and services lies the projects sector. Projects have provided most of the objects and products around us that we would consider evidence of a modern, civilised society. Many of these such as roads, railways and airports are clear, apparent to the masses, while others such as broadband, air traffic control and customer information databases are less so.

Projects are distinguishable from goods in that generally each project produces only one good before it is closed, and even though some projects are commissioned to set up facilities to produce goods, once the products start to roll out of a new production facility, the project is finished. A subsequent requirement for a further good is usually the cause for a further project.

Projects are also distinguishable from services. The idea behind a services-based business model is to reduce costs and improve quality through economies of scale and repetition. If I can work out a way of doing something you do but for which you have neither the time nor the inclination, and if I can persuade you it would be better value, then I ought to be able sell that service repeatedly to you (and to others). I would make my profit from multiple sales, probably accumulating it bit by bit as the business year rolls by.

If what you need however is a project, then you are probably only going to commission one from me. I need to make my annual profit, or rather, earn your contribution to it, from a single sale, normally taking it at the end of our business deal when the project is finished. Moreover, when it comes to building the next thing you want – power distribution network, ship, or satellite – I will probably have to persuade you to use me all over again, usually through some form of competitive tender. It would be very unwise of me to base my business plan on a presumption of a number of multiple sales to you previously.

Of course there are many companies that deliver major projects throughout their business year, receiving repeat business (without competition) from satisfied clients. Goods and services are generally typified by lots of smaller projects and sales.

I may have given an impression that projects is the harder business sector to be a part of, but this is not entirely the case. There are some compensatory aspects that are extremely attractive. First, projects is arguably a much less risky business than goods or services because project costs, staff, facilities, materials and such like, are often reimbursed by the project funder within a few weeks of them being incurred by the project delivery company. Secondly, if project-delivered goods do not work as intended, remedying the situation can possibly be paid for by commissioning a further project. This sounds slightly scandalous, but my perception is that projects sometimes deliver things that are markedly different from the original designs, and that possibly the newer items may have attracted additional funding. You must also contrast this with the moneyback guarantees and refunds – necessary nowadays to secure sales in the goods sector. Finally, if the project good does not provide the benefit foreseen, say perhaps the number of drivers across the toll bridge is fewer than forecast, then that is not the fault of the project-delivery company, nor is it a loss-making scenario. The project delivery company only does what it is commissioned to do and doesn’t generally take responsibility for the level of use of the good.

So somewhere in the GDP spectrum of goods and services is a ‘neither one nor the other’ band, a group of projects that spend other peoples’ money and accrues its profit on single trades, usually some time after the work has been commissioned. There is evidence that this band exists everywhere we look: telecommunications systems, water supplies, power generation and distribution, transportation, information systems. But there is no sight of it as a sector in our economic statistics (though there is evidence in the services end of the spectrum of its use). Perhaps this economic data is available to economists. It would let them quantify the parameters of the sector, and though I am not suggesting for one moment that there is a conspiracy on the part of those involved in projects not to publish this data, I can see an economic rationale for its absence. I will illustrate this using four case histories from projects that have made the front pages and the prime time broadcasts in their own countries. They are:

• The Australian Federated Health Care Records (IT system)

• RAPID, The European Heavy Logistics Aircraft (Defence)

• The Buenos Aires Urban Light Rail Transport System

• The Sino-Canadian Polar Air Traffic Control System

I spoke at a university conference recently and asked the audience of academics and students to speculate why these projects were in the news headlines. I suspect the students took their lead from their professors but regardless, they all agreed it must be because the projects were over budget and late. No one suggested that they just opened then closed. No one suggested they were white elephants, or even posited that they were associated with infamous accidents.

My presentation was entitled ‘What we know and what we don’t about projects’, and I think that I was successful in convincing my audience that what all of us know about projects, even those who are not involved with them, is that they cost more and finish late.

I have carried out this unscientific vox populi experiment a number of times over the last ten years, enough for me to be confident of the outcome. With one exception I have never had any response other than that the projects must be over budget and late. The one exception was right though: none of the projects exist. I made them up and so they are not famous at all, but in the minds of the audience projects must be newsworthy because of their flaws. It is what we have come to expect.

If I had presented the names of four fake goods in my lecture and asked the audience why they thought those might be newsworthy, I suspect I would not find a consensus in the answers. I also suspect the same would apply to four fake services. If there was a consensus among my audience then it would probably be a deduction made on the basis that, since all successful goods and services attain such a strongly branded recognition in our shopping society, these ones must be the flops. It would be the reason they’re newsworthy. Fuzzier, more nuanced business-speak might be that the goods were poorly positioned in the market, there was a lack of quality control of the service, the underlying business model was inflexible, there was a failure to adapt to emerging markets. In reality, ‘over budget’ and ‘late’ would be suitable responses. If there is an ingrained perception of failure, both financially and in relation to time, what does one do if they are working in the projects sector of the economy in order to thrive?

This is not, metaphorically speaking, a theological debate about what people believe to be the truth. Though it may not be supported by evidence, there are justifications for this public perception. In the 1997 edition of his book The Management of Projects,3 Professor Peter Morris explains how he could find the final out-turn costs for only 1449 projects in the public domain and that of these, only 12 had been delivered on or below budget. I could see that number from numerous office windows in any big city. Professor Morris also describes a later analysis of 3000 projects that found a similar result.

How then do companies that deliver projects survive when there is evidence the sector fails to deliver on time and to budget? Sorry to sound cynical, but ‘on time, on budget, on occasion’ is not going to be a business-winning pitch for a company, no matter how bravely honest it may be. Perhaps it would be wiser, all things considered, to keep quiet about overspends and overruns in case admission of their existence may be seen as evidence of lack of grip and drive (essential prerequisites for employment as a project manager). It is vital that prospective clients are assured that past performance is not a guide to the future.

It is also prudent for those that deliver the project not to let their performance (delivering on time and to budget) be subject to analysis by economists. Those researchers would need to identify their sources if their work were to have credibility when peer reviewed for publication. This is obviously not the case with goods and services, both of which offer researchers rich seams of data on supply, demand and pricing to mine for econometric understanding and insight.

I suspect the reason people and companies involved in the projects business survive overspends and overruns is the same as the reason why projects does not feature in the GDP spectrum of goods and services – information regarding the frequency and extent of failures to deliver on time and budget is never released. Though not completely true, published data about the actual timescales and eventual costs of projects are scarce.4 The projects sector keeps quiet and gives out nothing by which it may be delineated and measured. One is therefore led to conclude that it is not in the economic interests of any one whose livelihood is earned in the projects sector to publish information about their performance. There is no commercial advantage to be gained from doing so, and I suggest this is why the sector is not recognised in the GDP spectrum.

The Case for a Better Understanding of the Projects Sector of the Economy

Delivering projects as a business venture, in which someone provides a good to someone else for a fee, has probably been around since public works began. A Eurocentric view would choose the forums of the Mediterranean city states or the pyramids of Egypt as early example. This led to the introduction of grids of one form or another: roads, canals, rail, mass housing and so on, upon which our current daily lives have very much come to depend for their relative ease and comfort.

I estimate that approximately 250 years’ worth of projects have been designed and built by project delivery businesses. Inevitably, a Web search of project management companies finds thousands, so I started to draw up a list of companies I know of that are currently practicing in the sector and looked up when they started: 1920s, 1880s, 1944, 1978, 1848, 1901, 1885. Clearly this is a large and a persistent business sector. The questions that then arose were:

• If these the companies have all been around for a long time, how could they have avoided overspending and overrunning?

• If they have all been trading for longer time frames than any of the projects they have worked on, then in spite of probably enduring their share of overspends and overruns, they must have been able to continue efficiently trading to attract further business.

My suggestion in relation to the first point is that they keep quiet about it. To the second – that like railroading in the nineteenth-century United States – dominant positions for the design and delivery of certain kinds of projects may be capable of being established through company size, experience, expertise, connections to political power and an ability to provide the funding required. One can see that access to these would mak...