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36 contingency for competing the San Francisco Oakland Bay documenting improvement. This section briefly describes Bridge Project and the Toll Bridge Seismic Retrofit Program. policies and performance measures found in the research. WSDOT developed an exceptional top-level risk status re- port, as seen in Figure 3.14 (Washington 2006). The "What's 3.5.1 Policies Changed" also acts as a high-level monitoring report. The sta- tus report uses a one-page format to communicate important Policies statements on the application of risk and cost man- cost and risk issues to both the DOT personnel and external agement will help to encourage better cost control. These poli- stakeholders. It communicates key project information, proj- cies are perhaps as important as the steps of the risk manage- ect benefits, and project risks. It reports cost and schedule in ment process in the successful integration of risk management a range rather than a single point. It also communicates the procedures within the organization. The process of imple- project design status. In some high-profile projects, the report mentation begins with the development of a policy statement. is completed annually and updates information from the pre- Figures 3.15 and 3.16 illustrate portions of policy state- vious report. While the example shown is for a large corridor- ments on risk management. The example in Figure 3.15 from level program, this format can be successfully implemented Minnesota Department of Transportation (Mn/DOT) was on smaller projects as well. developed as part of the agency's Cost Estimating Process Improvement and Organizational Integration initiative. It is one of five policies relating to cost estimating and cost man- 3.4.6.3 Contingency Resolution agement. The policy statement makes clear the use of contin- Any party assuming a risk must be prepared for the finan- gency estimates on all early estimates. cial burden associated with that risk. Figures 3.3 through 3.5 The U.S. DOE policy statement highlighted in Figure 3.16 is in this chapter graphically depicted how contingency is re- an example of risk management policy that captures the essen- tired. Prudent contractors and agencies use the quantitative tial elements of safety and cost in analyzing risks as well as the risk assessment techniques to estimate the contingency nec- benefits of a rigorous, systematic analysis. The policy acknowl- essary to complete a project. Proper risk allocation will allow edges that risk management is part of sound project manage- for the minimization of this contingency for both parties. ment and is designed to enable and enhance the procedures As the project matures from programming through final stated in DOE Order 413.3A. design, the contingency is lowered and the base estimate in- creases. The percentage of the contingency to the base estimate 3.5.2 Performance Measures is a function of the project complexity and the level of project definition. Procedures and tools for estimating an appropri- Performance measures help keep projects and programs on ate contingency amount are provided throughout the remain- track by ensuring that the risk management process is meeting der of this guidebook and the Appendix A. its goals. Performance measures such as cost, schedule, and safety measurements can be taken at predetermined times, or at significant milestones to evaluate the accuracy and effective- 3.4.6.4 Conclusions on Risk Monitoring and Control ness of risk management and project management procedures. A successful risk monitoring and updating process will sys- The development of risk management performance met- tematically track risks, support the identification of new risks, rics is essential to risk monitoring success. The establishment and effectively manage the contingency reserve. The system of a management indicator system that provides accurate, will help to ensure successful completion of the project objec- timely, and relevant risk information in a clear, easily under- tives. If documented properly, the monitoring and updating stood manner is key to risk monitoring. Early in the planning process will capture lessons learned and feed risk identifica- phase of the process, the team should identify specific indica- tion, assessment, and quantification efforts on future projects. tors to be monitored and information to be collected, com- piled, and reported. Specific procedures and details for risk reporting should be included in the risk management plans 3.5 Risk Management Policies prepared by the agency and the contractor. and Performance Measures Caltrans has proposed performance measures for its risk A survey conducted as part of this research found that less management program. They are considering 1) percent of than 10 percent of the SHA have policies regarding risk man- projects with risk management plans during the project initi- agement for cost control (Molenaar et al. 2009). Policies and ation document (PID) phase (is it happening), and 2) percent performance measures will help to ensure consistent applica- of project change requests (PCRs) due to unidentified risks tion of risk management processes and provide a means for (builds into the quality of the PCRs). These measures will be

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37 Figure 3.14. Washington State DOT cost and risk status report.

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38 Mn/DOT Uncertainty, Risk, and Contingency Policy The Total Project Cost Estimate for each of the project development phases will include an analysis of uncertainty and risk, and associated contingency estimates. Draft Policy Guidelines: a. Uncertainty, risk and associated contingencies will be acknowledged early for all projects in the project development process, starting with the planning phase, and updated in subsequent phases. b. With the exception of the Letting Phase cost estimate, where project contingency is zeroed out, contingency will not be incorporated in individual line item costs; instead, contingency will be maintained in a separate category. As more is known about the project, the amount of estimated contingency and the Base Estimate would change (contingency resolution). c. A contingency estimate based on a risk analysis will be developed for all projects. The level of risk analysis, including the possible use of a specialized risk-estimation unit or review panel, will be determined by each unique project's complexity, local impacts, or political interest. Figure 3.15. Excerpt from MnDOT policy statement on uncertainty, risk, and contingency. tracked and reported by division headquarters of project man- successfully mitigated. The project risk performance measures agement (for the measure relating to PCRs) and planning (for also can resemble traditional construction management per- the measure regarding PIDs). formance measures such as cost variance, schedule variance, Performance measures can be project specific rather than estimate at completion, design schedule performance, man- programwide. These project risk performance measures can agement reserve, estimate to complete, or similar measures. deal with the number or magnitude of risks that have been Some examples of performance measures proposed for a state DOE RISK MANAGEMENT POLICY STATEMENT 1) PURPOSE AND SCOPE. The EM Risk management Policy strengthens accountability in project management decision-making processes and is designed to enhance and build upon DOE Order 413.3A by providing the platform to establish a formal, organized process to plan, perform, assess, and continually enhance risk management performance. 2) POLICY. It is the policy and practice of EM to conduct its operations in a manner that promotes overall risk planning including the assessment (identification and analysis of), implementation (or mitigation actions), monitoring, and documentation of risk. The objective of this policy is to safeguard the interests of the public, the environment, the worker, and the government during the conduct of operations in meeting the EM mission objectives. It is also the objective of this policy to provide an accurate reflection of the bounding cost and schedule contingency requirements of the EM field operations. To accomplish this objective EM has established these implementing policy goals: a. Risk management policy, procedure, and processes apply to all work done by EM, its field offices, contractors, and subcontractors. b. The risk planning process is to be applied and documented in a step-wise process. All documentation is to be incorporated into the appropriate project management documentation for the specific work to be done at the specific work site and is to be updated semi-annually and reviewed at least monthly depending upon specific regulatory or other site specific changes or risk factor changes. c. The first strategy to be taken in the handling of any identified risk is to take actions to prevent or mitigate risk factors if it can be accomplished within reasonable cost/benefit analysis within the approved funding profile. d. All risks identified by the field office or contractors must be monitored for change by the designated risk owner to protect the worker, the public, and the environment. Figure 3.16. Excerpt from DOE risk management policy.