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16 CHAPTER 3 Risk Management Overview 3.1 Introduction The risk management process is shown in Figure 3.1 and forms the framework for this Guidebook. Of particular note This chapter defines risk management in terms of cost esti- is that the overall risk management process is repetitive and mating and cost management and provides formal definitions cyclical. As the project evolves, some risks will be resolved for risk management and cost estimating terms for application or diminished, while others may surface and thus be added. throughout the Guidebook. The chapter focuses on the risk The five fundamental risk management steps can be applied management process and presents each of the five risk manage- throughout the project life cycle. The extent of application of ment steps in detail with illustrative examples. The chapter each step varies as the methods and tools used to support concludes with a discussion of risk management policies and these steps depend on the project development phase and performance measures. project complexity. A cost estimate that directly addresses uncertainty and risk Brief descriptions for each of the five steps follows with is at the core of a comprehensive risk management program. complete descriptions and examples provided in Section 3.3 However, risk management must be viewed as a comprehen- of this chapter. sive management process, not as simply a tool or set of tools for cost estimating. The output of a risk-based cost estimate 1. Risk identification is the process of determining which risks supports identification of critical cost containment issues and might affect the project and documenting their character- helps to effectively inform the design team about risks as proj- istics using such tools as brainstorming and checklists. ects move through the development phases. 2. Risk assessment/analysis involves the quantitative or quali- "Risk management" is the term used to describe a sequence tative analysis that assesses impact and probability of a risk. of analysis and management activities focused on creating a Risk assessment assists in deriving contingency estimates. project-specific response to the inherent risks of developing a Quantitative and qualitative risk analysis procedures are new capital facility. Various organizations and mission agen- applied to determine the probability and impact of risks. cies such as the Project Management Institute, the AACEI, or 3. Risk mitigation and planning involves analyzing risk re- the Department of Energy use very similar steps, but slightly sponse options (acceptance, avoidance, mitigation, or trans- different terms, to describe their risk management approach ference) and deciding how to approach and plan risk man- (PMI 2004; AACEI 2000; DOE 2003). The process step terms agement activities for a project. that this Guidebook will use are: 1) risk identification; 2) risk 4. Risk allocation involves placing responsibility for a risk to assessment/analysis; 3) risk mitigation and planning; 4) risk a party typically through a contract. The fundamental allocation; and 5) risk monitoring and control. tenants of risk allocation include allocating risks to the The Guidebook provides risk analysis tools and manage- party that is best able to manage them, allocating risks in ment practices to help control transportation project costs. alignment with project goals, and allocating risks to pro- Proper risk management will facilitate agency efforts to avoid, mote team alignment with customer-oriented perfor- mitigate or better plan for costs that result from identifiable mance goals. risks during the project development process. Table 3.1 pro- 5. Risk monitoring and control is the capture, analysis, and re- vides examples of typical risks and expected outcomes of porting of project performance, usually as compared to applying risk management tools to the project development the risk management plan. Risk monitoring and control process. assists in contingency tracking and resolution.