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APPEND TX F
Building Flexibility into Projects to
Manage Uncertainty
Many potentially critical factors can introduce uncertainty into the design,
construction, and management of DOE projects. These factors range from tech-
nical challenges inherent in research and development, to design and construc-
tion, challenges imposed by regulatory aspects and third party influence, and
challenges emanating from changing conditions over the lifetime of extended
projects. Managing this uncertainty calls for integrating flexibility into project
management. This flexibility is particularly needed when an uncertain condition
can generate an outcome that should be avoided (e.g., large costs) or captured
(e.g., improved performance). One way to achieve flexibility is through develop-
ing alternative options.
An option is a right to take action without an obligation to take specific
actions or to change strategies. Options add value by allowing managers to shift
risk or capture added value, depending on how one or more uncertain parameters
behave. For example, a contract clause permitting termination of a contract if a
critical technology is not developed provides an opportunity (but not an obligation)
to terminate. An options approach also inherently improves strategic thinking
and project planning by helping to recognize, design, and use flexible alternatives
to manage uncertainty.
Delaying commitment to a strategy until sufficient information becomes
available to resolve the uncertainty is an example of managerial flexibility. An
example could be a project manager recognizing that the cost and development of
a specialized component depends on the design expertise of a particular vendor.
The depletion of that vendor's capabilities could increase costs beyond the budget
limits, constrain development of the component, or both. Alternative options are
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109
needed that would ensure design performance or mitigate the effects when a
vendor's capabilities depleted. One option might be to guarantee the continued
employment of critical employees.
The use of an options approach is premised on specific rules for implemen-
tation that describe the conditions that would trigger a change in strategy. The
process includes continued monitoring of the uncertain parameters, evaluating
their status and impact, and changing strategies if alternative options are war-
ranted. This should be a proactive not a reactive process.
Options in procurement for the National Ignition Facility (NIF) have been
used to manage uncertainty. The following description illustrates how this has
been done. The current managers of the NIF project use options (although they
do not typically use that term) to manage many of the large uncertainties inherent
in the project. The LLNL project manager attributed the management team's
frequent use of flexibility (including options) to their focus on project objectives
instead of specific solutions. This allows managers to identify multiple potential
strategies to achieve success. These strategies or scenarios were used to design
options. Several principles for managing uncertainty guided procurement for
NIF. Examples were having two or more vendors for all major components to
reduce the risk of a sole supplier inflating prices and avoiding a manufacturing
role for LLNL to reduce the risks of uncertain project funding and schedules.
LLNL contributed its strength (scientific expertise and funding) and focused
vendor efforts on their strengths (technology development and manufacturing).
The laser glass production strategy for NIF illustrates the use of options to
address a common but important acquisition question: How many parallel devel-
opment efforts should be supported? More than $350 million will be spent to
produce more than 3,000 pieces of laser glass, weighing about 150 pounds each.
Laser glass begins as slabs of very high quality glass called "blanks." The large
volume of blanks and the project schedule and budget required a production rate
30 times faster and 5 times cheaper than had been demonstrated on prototype
lasers, necessitating the development of a new glass production technology and
manufacturing facilities. Because glass vendors could not justify funding the
development of glass production technology, the project itself invested in this
technology. The development of a high-volume, continuous-melting glass pro-
duction process included two critical uncertainties whether the technology could
make the glass and whether the quality of the glass would be acceptable. The
threat posed by these uncertainties was that if development efforts failed in either
way, the project could be delayed too long to meet its deadline and would incur
very high unbudgeted costs. Although LLNL had established relationships with
experienced laser glass vendors, none could guarantee successful development a
priori. Therefore, it became clear during laser glass procurement planning that
alternatives to a one-vendor strategy should be considered. LLNL considered
two types of procurement strategy for glass production technology development.
A base strategy was to invest in a single production development effort, helping
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APPENDIX F
the manufacturer where possible and hoping for a successful development. An
alternative strategy would simultaneously invest in two independent develop-
ment efforts by two glass producers, increasing the likelihood that at least one
effort would be successful. This strategy allowed LLNL to avoid the conse-
quences of having no successful glass production system if only one effort was
successful. The cost of the basic strategy is the cost of investing in one vendor
(approximately $12 million). Investing in multiple vendors would purchase
opportunities to proceed with successful vendors at two or more points in time,
when each uncertainty was resolved. The option costs are the funds required to
invest in a second vendor up to the uncertainty resolution times (approximately
$12 million each). The flexible strategy uses two options to abandon an unsuccess-
ful vendor when the technology feasibility and glass quality uncertainties are
resolved.
NIF managers considered the two-vendor strategy attractive for both eco-
nomic and noneconomic reasons. The following factors were considered. If a
single vendor was selected the development might succeed. But if the single
vendor failed, the costs to the project in time, money, and political consequences
would prevent the project from meeting its targets. In contrast, if two vendors
were selected, none, one, or two could succeed. The likelihood of two failures
was considered low. One success would allow NIF to exercise its option by
abandoning the unsuccessful vendor, and two successes would provide manufac-
turing and pricing flexibility in addition to meeting minimum needs. The avoided
costs of project failure if investments were made in two vendors were informally
estimated to greatly exceed the additional cost of investing in a second vendor
(0.5% of the project budget). Therefore, the option was considered more valu-
able than its cost. Based on this reasoning, DOE and LLNL contracted with two
vendors to support parallel development efforts.
The uncertainty about the technology's viability was resolved in early 1999,
when both vendors successfully produced pilot runs of glass using a continuous-
melting process. Largely because of the remaining uncertainty surrounding the
quality, NIF chose to not abandon either vendor. Uncertainty with regard to
quality was resolved near the end of 2000, when both vendors demonstrated the
ability to generate the required glass quality. Because both vendors succeeded,
NIF purchased valuable production and pricing flexibility that can help manage
other project uncertainties (e.g., schedule).
CONCLUSIONS
DOE has used flexible project management strategies to manage highly
uncertain projects. Successfully managing uncertain project conditions requires
a proactive approach that models multiple possible conditions, forecasts the out-
comes of potential actions, and guides managers as the project develops. A
proactive approach includes plans for specific actions that will be taken based on
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111
specific future conditions and does not merely react to conditions after uncer-
tainty has been resolved.
In 1997, the National Ignition Facility Risk Management Plan identified the
major cost and schedule risk at NIF to be the risk of "not getting congressional
required budget authorization and appropriation" (LLNL, 1997, p. 10~. In fact,
there were many greater risks at NIF having to do with technical and project
management issues, as events were to show. However, in a more recent example
at the Office of River Protection (ORP), Waste Treatment Plant (WTP), the major
project risk is identified as "unfunded estimated project cost (EPC) owner's
contingency: If Congress does not authorize an additional $435 million to cover
ORP contingency allowances (includes normal estimating variability and risk
allowances), then the WTP will not meet schedule and life-cycle ORP costs will
increase and schedule milestones will be missed." Risk assessments should deal
with risks, and not be vehicles for passing the buck and evading accountability
for managing risks.
REFERENCE
LLNL (Lawrence Livermore National Laboratory). 1997. National Ignition Facility Risk Manage-
ment Plan. Livermore, Calif.: Lawrence Livermore National Laboratory.
Representative terms from entire chapter:
laser glass
