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OCR for page 77
77 9.3 The Risk Management Risk assessment/analysis involves the quantitative or quali- Framework tative analysis that assesses impact and probability of a risk. Risk assessment assists in deriving contingency estimates. The risk management framework described in this Guide- Quantitative and qualitative risk analysis procedures are book is based on best practices in the design and construction. applied to determine the probability and impact of risks. In the Guidebook, those practices are adapted to the unique Risk mitigation and planning involves analyzing risk response needs of highway project development. The overall frame- options (acceptance, avoidance, mitigation, or transference) work of the Guidebook includes three main elements: and deciding how to approach and plan risk management activities for a project. Risk Management Process: risk identification; assessment; Risk allocation involves placing responsibility for a risk to a analysis; planning and mitigation; allocation; and monitor- party, typically through a contract. The fundamental tenants ing and control; of risk allocation include allocating risks to the party that is Project Development Phases: planning, programming, and best able to manage them, allocating risks in alignment with design; and project goals, and allocating risks to promote team align- Project Complexity: project type, technical complexity, and ment with customer-oriented performance goals. management complexity. Risk monitoring and control is the capture, analysis, and reporting of project performance, usually as compared to The interaction of the risk management process with the the risk management plan. Risk monitoring and control project development process and with project complexity is assists in contingency tracking and resolution. shown schematically in Figure 9.1. Of particular note in Figure 9.1 is the fact that the overall risk management process is cyclical. As the project evolves, some risks will be resolved or diminished, while others may 9.4 Challenges and Keys to Success surface and thus be added into the process. The five funda- The challenges of implementing risk management processes mental risk management steps can be applied throughout the to control project costs are similar to those identified by the project life cycle. The extent of application of each step varies research team for implementing new cost estimating and man- as the methods and tools used to support these steps are influ- agement practices in NCHRP Report 574. State highway agen- enced by the project development phase and project com- cies must consider several challenges when deploying this plexity. The process is scalable from small and noncomplex Guidebook: projects to large and complex projects. There are five imper- ative steps to managing project risk. Challenging the status quo and creating a cultural change requires leadership and mentoring to ensure that all steps Risk identification is the process of determining which risks in the cost estimation management and cost estimation might affect the project and documenting their character- processes are performed. istics using such tools as brainstorming and checklists. Developing a systems perspective requires organizational perspective and vision to integrate cost estimation manage- ment and cost estimation practice throughout the project Monitor development process. and Identify Dedicating sufficient time to changing agency attitudes Control toward estimation and incorporating the strategies, meth- ods, and tools from this Guidebook into current state high- Risk way agency practices is difficult when resources are scarce. Management Dedicating sufficient human resources to cost estima- Allocate Process Assess/ tion practice and cost estimation management beyond the Analyze resources that have previously been allocated to estima- tion processes. Mitigate and Plan Meeting these challenges will ultimately require a commit- Figure 9.1. Risk management ment by the agency's senior management to direct and support process framework (varies by change. The benefit of this commitment will be manifested in project development phase projects that are consistently within budget and on schedule and complexity). and that fulfill their purpose as defined by their scope. This

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78 benefit also will improve program management by allowing 2. Document estimate basis, assumptions, and back-up cal- for better allocation of funds to projects to meet the needs of culations thoroughly. the ultimate customer, the public. 3. Identify project risks and uncertainties early, and use NCHRP Report 574 provided 10 key principles to success- these explicitly identified risks to establish appropriate ful cost estimation management and cost estimation practices. contingencies. The 10 keys to success are repeated in this Guidebook on risk 4. Anticipate external cost influences and incorporate them analysis tools to control project cost. into the estimate. Cost estimation management: 5. Perform estimate reviews to confirm that the estimate is accurate and fully reflects project scope. 1. Make estimation a priority by allocating time and staff resources. Of particular note is Cost Estimating Practice #3, which 2. Set a project baseline cost estimate during programming or deals directly with identifying risks and uncertainties. Lessons early in preliminary design, and manage to this estimate learned from the development of this Guidebook can be sum- throughout project development. marized in five additional keys to success for risk analysis 3. Create cost containment mechanisms for timely decision tools to control project cost. making that indicate when projects deviate from the baseline. 6. Employ all steps in the risk management process. 4. Create estimate transparency with disciplined communica- 7. Communicate cost uncertainty in project estimates tion of the uncertainty and importance of an estimate. through the use of ranges and/or explicit contingency 5. Protect estimators from internal and external pressures to amounts. provide low cost estimates. 8. Tie risks to cost ranges and contingencies as a means of explaining cost uncertainty to all stakeholders. Cost estimation practice: 9. Develop risk management plans and assign responsibil- ity for resolving each risk. 1. Complete every step in the estimation process during all 10. Monitor project threats and opportunities as a means of phases of project development. resolving project contingency.