Project Risk Management: Essential Methods for Project Teams and Decision Makers

From the Foreword: "A practical 'recipe book' for the non-expert who is a decision maker or a project team member to understand how to conduct a robust risk management process while avoiding the many pitfalls." —Dr. Bill Gunter, Honorary Nobel Laureate, Alberta Innovates-Technology Futures Praise for Project Risk Management "The paramount importance of risk management for project success is rarely challenged. The preeminent significance of selection and implementation of the most efficient and practical risk methods is often overlooked though. Yuri shares his real-life mega-project risk experience to bridge this alarming gap. This is a fresh look at existing risk standards, practices, and tools from the angle of adequacy and practicality. Project practitioners who are interested in avoiding outdated, fancy, or impractical risk methods, as well as risk 'ritual dances' and other common pitfalls, should read this book." —Alfy Hanna, Senior VP, Mega-projects, SNC-Lavalin "Risk is that four-letter word that haunts those of us who strive year over year to create value from capital infrastructure investments. It is difficult to understand, tough to quantify in simple terms, and even more difficult to boil down into financial dollars, which is what we need to make decisions. But the risks are there, and we can or should do something about them. In his book, Yuri lays out fundamentals, practices, and tools that can take risk from a 'gut-feel reactive approach' to one where it is quantified, actionable, and result-focused. A recommended read for any decision maker or project manager responsible for capital projects where, at any time, labor, technology, people, financial markets, regulations, politics . . . will affect long-term value creation. Choose to be prepared." —Mark Mackay, PEng, VP, Engineering & Construction, TransAlta "Very early in the book, Yuri focuses on an essential enabler of any successful project risk management program—the Project Risk Management Plan. Quite often, this tactical road map is omitted by a project team, as focus is distracted by populating risk registers and implementing complex modeling programs. Yuri rightly provides core insight on both the purpose and content to enable any new or existing project team to develop a solid risk management plan that will serve to guide risk management activities throughout the project's life cycle." —Jason R. Kean, Principal, Project Solutions Inc. " Project Risk Management provides an excellent and highly accessible summary of the key aspects of risk management—this book should be of interest to those both familiar with and new to the field of project risk management." —Dr. Titus Fossgard-Moser, non-technical risk specialist

Foreword xv Preface xix Acknowledgments xxix PART I: FUNDAMENTAL UNCERTAINTY OF A PROJECT OUTCOME Chapter 1: Nature of Project Uncertainties 3 Phases of Project Development and Project Objectives 4 Quest for Predictability of Project Outcome 5 Sources and Types of Deviations from Project Objectives 7 Key Objects of Risk (or Uncertainty) Management: Do We Really Know What We Try to Manage? 15 Uncertainty Exposure Changers 24 Conclusion 26 Notes 26 Chapter 2: Main Components of a Risk Management System 29 Risk Management Plan 30 Organizational Framework 32 Risk Management Process 39 Risk Management Tools 52 Conclusion 59 Notes 60 Chapter 3: Adequacy of Methods to Assess Project Uncertainties 61 Review of Deterministic Qualitative (Scoring) Methods 62 Review of Deterministic Quantitative Methods 68 Review of Probabilistic Qualitative Methods 76 Review of Probabilistic Quantitative Methods 80 Conclusion 87 Notes 88 PART II: DETERMINISTIC METHODS Chapter 4: Uncertainty Identification 91 When Risk Management Becomes Boring 92 Three Dimensions of Risk Management and Uncertainty Identification 93 Risk Identification Workshops 95 Sources of Uncertainties and Risk Breakdown Structure 98 Bowtie Diagrams for Uncertainty Identification 101 Three–Part Uncertainty Naming 107 Role of Bias in Uncertainty Identification 110 Room for Unknown Unknowns 113 Conclusion 118 Notes 118 Chapter 5: Risk Assessment and Addressing 119 Developing a Risk Assessment Matrix 120 Using a Risk Assessment Matrix for Assessment As–Is 129 Five Addressing Strategies 136 Assessment after Addressing 141 Project Execution through Risk Addressing (PETRA) 145 Role of Bias in Uncertainty Assessment 147 Conclusion 149 Notes 150 Chapter 6: Response Implementation and Monitoring 151 Merging Risk Management with Team Work Plans 152 Monitor and Appraise 153 When Uncertainties Should Be Closed 154 When Should Residual Uncertainties Be Accepted? 155 Conclusion 155 Note 156 Chapter 7: Risk Management Governance and Organizational Context 157 Risk Management Deliverables for Decision Gates 158 Ownership of Uncertainties and Addressing Actions 160 Management of Supercritical Risks 162 Risk Reviews and Reporting 164 Bias and Organizational Context 168 Conclusion 175 Notes 175 Chapter 8: Risk Management Tools 177 Three Dimensions of Risk Management and Structure of the Uncertainty Repository 178 Risk Database Software Packages 181 Detailed Design of a Risk Register Template in MS Excel 184 Commercial Tools for Probabilistic Risk Analyses 185 Conclusion 191 Notes 192 Chapter 9: Risk–Based Selection of Engineering Design Options 193 Criteria for Engineering Design Option Selection 194 Scoring Risk Method for Engineering Design Option Selection 195 Decision Tree for Engineering Design Option Selection (Controlled Options) 199 Conclusion 202 Note 202 Chapter 10: Addressing Uncertainties through Procurement 203 Sources of Procurement Risks 204 Quantitative Bid Evaluation 207 Package Risk Management Post–Award 209 Conclusion 209 Notes 210 Chapter 11: Cost Escalation Modeling 211 Overview of the Cost Escalation Approach 211 Example of Cost Escalation Modeling 219 Selecting the Right Time to Purchase 223 Conclusion 224 Notes 224 PART III: PROBABILISTIC MONTE CARLO METHODS Chapter 12: Applications of Monte Carlo Methods in Project Risk Management 227 Features, Value, and Power of Monte Carlo Methods 228 Integration of Deterministic and Probabilistic Assessment Methods 230 Uncertainty Objects Influencing Outcome of Probabilistic Analyses 231 Origin and Nature of Uncertainties 233 Role of Correlations in Cost and Schedule Risk Analyses 240 Project Cost Reserve 242 Project Schedule Reserve 244 Anatomy of Input Distributions 246 Probabilistic Branching 250 Merge Bias as an Additional Reason Why Projects Are Often Late 251 Integrated Cost and Schedule Risk Analysis 253 Including Unknown–Unknown Allowance in Probabilistic Models 256 Conclusion 259 Notes 260 Chapter 13: Preparations for Probabilistic Analysis 261 Typical Workflows of Probabilistic Cost and Schedule Analyses 262 Planning Monte Carlo Analysis 264 Baselines and Development of Proxies 267 Why Using Proxies Is the Right Method 271 Mapping of Uncertain Events 272 Building and Running Monte Carlo Models 277 Conclusion 277 Notes 278 Chapter 14: Using Outputs of Monte Carlo Analyses in Decision Making 279 Anatomy of Output Distributions 280 Overall Project Uncertainty and Confidence Levels of Baselines 283 Project Reserve Criteria 287 Uncertainty of Cost Outcome and Classes of Base Estimates 291 Cost Reserve Drawdown 296 Sensitivity Analysis 298 Using What–if Scenarios for Advanced Sensitivity Analysis 304 Are We Ready for Construction, Logistics, or Turnaround Windows? 305 Validating Results and Closing Probabilistic Analysis 306 Conclusion 308 Notes 308 PART IV: RISK MANAGEMENT CASE STUDY: PROJECT CURIOSITY Chapter 15: Putting Together the Project Curiosity Case Study 311 Scope of the Case Study 312 Project Curiosity Baselines 313 Project Risk Management System Adopted by Project Curiosity 319 Overview of Project Uncertainty Exposure of Project Curiosity 326 Templates for Probabilistic Cost and Schedule Analyses 330 Building and Running Project Probabilistic Cost and Schedule Models 331 Three What–If Scenarios 333 Conclusion 334 Notes 335 Chapter 16: Decision Making 337 Key Points of the Probabilistic Analysis Report 338 Decision Gate Review Board Findings and Recommendations 350 Conclusion 352 Note 353 About the Author 355 Index 357

Dr. YURI RAYDUGIN is an experienced risk management professional who has developed and implemented successful risk systems for several major energy companies, including Royal Dutch Shell, SNC-Lavalin, and TransCanada Pipelines. He provides risk management coaching and training as well as risk assessment services and has published white papers and articles for a number of journals, including the International Journal of Risk and Contingency Management .