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60 7.1 Introduction This chapter presents guidance for risk management in the design phase, defined in terms of its relevance to cost estimat- ing and risk management. It then discusses each of the risk management steps in detail, including inputs, outputs, and tools for the risk management process. Tips for tool applica- tion and how project complexity impacts risk management tools and practices also are discussed for each step. 7.1.1 Design Phase Overview The design phase focuses on designing projects to meet the transportation needs defined in the planning phase. Design initiates project plan development and begins development once the project is incorporated into the STIP. At this point, the baseline cost estimate has been established for purposes of cost management. The goal of cost management through- out the design phase is to support the design of projects at or below the baseline cost estimate established in the program- ming phase. From the time a project enters the design phase to the beginning of construction letting can be as long as four years for complex projects and as short as a few months for non-complex projects. This time duration between the start of design and construction letting is a function of project complexity and project criticality. SHA policies and practices also influence this time duration. Once a project is included in the STIP, the Design Phase commences. Plan development focuses on detailed design and, if applicable, right-of-way plan development for prop- erty acquisition if it is required. The designer makes use of project programming information and data to prepare de- tailed right-of-way and construction plans. Right-of-way is typically purchased later in the design phase; most necessary outside agency permits are typically obtained during design. The design phase sometimes overlaps with the program- ming phase on small projects and/or in other special cases. In summary, activities that occur during the design phase include: â¢ Right-of-way development and acquisition; â¢ Final pavement and bridge design; and â¢ Final trafficcontrolplans,utilitydrawings,hydraulicsstudies/ drainage design, and updating cost estimates. Risk management and cost management are two primary focuses during the design phase. Risk management concerns the identification of new risks and monitoring and control of previously identified risks from the planning and program- ming phases. Cost management is concerned with the impact of changes due to additions or deletions to the project base- line definition or changes resulting from design development, site conditions, or realization of risks that could not be avoided or mitigated. Change is likely to occur as the project is fully defined through the design effort. Changes may be identified throughout the design process. Their potential cost impact is determined through either project estimate updates or an assessment of the impact of an individual change that is significant in terms of its potential dollar magnitude. Both risk management and cost management are focused on ac- tively managing and retiring the contingency that was estab- lished with the baseline estimate. The key output of the de- sign phase, in terms of cost estimating and cost management, is the engineerâs estimate. Ideally, this engineerâs estimate will be an amount equal to the baseline estimate. 7.1.2 Design Phase Risk Management Emphasis Design phase risk management practices focus on moni- toring and controlling risks and their associated cost contin- gency. However, all five steps in the risk management process must be actively addressed in this phase. Recalling from Chapters 2 and 3, the baseline cost estimate is comprised of C H A P T E R 7 Guide to the Design Phase
the base estimate and a contingency estimate. The goal of the design phase risk and cost management processes is to actively manage risk and changes in design so that, ideally, the con- tingency is retired at the time of letting and the engineerâs estimate is equal to the baseline estimate (see Figures 3.3 to 3.5 and associated text). As shown in Figure 7.1, all of the risk management steps are actively applied in the design phase. Risk identification will continue throughout design. While the majority of risk should be identified during planning, programming, and early in design, the project team should continuously identify risks throughout design. Risk assessment and analysis is also an ac- tive process. As design progresses, existing risk assessments will need to be updated and new risks will be analyzed. The risk management plan is the key document for planning and miti- gation and should be actively maintained. During the design phase, important risk allocation decisions will need to be made. If a risk cannot be mitigated or avoided during the design phase, the SHA will need to decide how to allocate the risk in the contract. The SHA will either accept the risk and maintain an appropriate contingency during construction or contractu- ally transfer the risk to a contractor and add cost to the engi- neerâs estimate to align with the contractorâs pricing of the risk. The final risk management step, monitoring and control, is ad- dressed in earnest during design. Through the risk manage- ment plan, all risks should be actively managed and controlled. The remainder of this chapter describes tools and manage- ment practices suggested for use during the Design Phase of project development. A discussion of how project complexity impacts risk management tools and practices is also provided. 7.2 Design Phase Risk Identification As stated in previous chapters, risk identification is para- mount to successful risk management and contingency esti- mation and this remains true at the Design Phase. The objec- tives of risk identification are to identify and categorize risks that could affect the project and to document these risks. The outcome of the risk identification is a list of risks that is, ide- ally, comprehensive and nonoverlapping. This list of risks can be the basis for estimating and managing project contin- gency. It is also the basis for the risk management plan that is used to monitor and control risks and manage contingency throughout design. Although risks will have been previously identified during the planning and programming phases, risk indemnification during the design phase should invite new risks as design de- velops. As engineering progresses, new information can lead to new risks. Changes in design can also lead to new risks. Risk identification should be a continuous process through- out design. The risk identification process should generally stop short of assessing or analyzing risks so as not to inhibit the identi- fication of âminorâ risks. This identification process should promote creative thinking and leverage team member expe- rience and knowledge. Perhaps the most challenging aspect of risk identification is in defining issues at an appropriate level of detail. Issues defined too vaguely or âlumpedâ into gross generalizations are hard to assess. Defining too many separate, detailed risks can lead to overlapping among issues or the omission of larger issues (i.e., âmissing the forest for the treesâ problem). To the extent pos- sible, define risks to be independent of each other, thereby elim- inating overlap among risks through their descriptions. Risk checklists and lists of risks from similar projects can be helpful, but use them only as a back check at the end of the risk identification process. Review these lists only at the end of the process as a means of ensuring that the list is not ex- cluding any common risks. Avoid beginning the process with the risk checklists or similar project analyses as the team may overlook unique project risks or include too many risks in the analysis, and this will make the process less useful. 7.2.1 Design Phase Risk Identification Inputs The project scope (generated during the programming phase) and the related base estimate package comprise the key inputs for risk identification at the start of the design phase. Each subsequent design milestone package will create a new set of inputs for the risk identification process. How- ever, waiting to identify new risks only at the time of a major design milestone submittal can cause a âcost blackoutâ as dis- cussed in Section 2.4.3 of this Guidebook. The project team must continuously evaluate changes (in scope, design, risks, and project site or market conditions) in relation to cost and time impacts against the project baseline scope, cost, and schedule. Any of these changes can trigger the identification of new risks. 61 Risk Management ProcessAllocate Monitor and Control Identify Assess/ Analyze Mitigate and Plan Figure 7.1. Risk management focus in the design.
The determination of project risk stems from a review of the design assumptions made by the design team and the es- timating assumptions made by the project estimator. The de- sign team must make initial conceptual design assumptions that they will refine as the design progresses. Likewise, the es- timator must make estimating assumptions in a design level estimate because complete design information is not yet available. Design and estimating assumptions serve as triggers for risk identification. The design phase risk identification process should begin with a review of any risks identified during the planning and programming phases. However, risks identified during the planning and programming phases likely will have changed substantially by the design phase. Changes to the risks from the earlier phases can include a change to the prob- ability or impact of the risk, a partial mitigation of the risk, or why the risk may have occurred. Risk identification at the design phase must be rigorous. It can be helpful to go through a new risk identification exercise at the beginning of the de- sign phase and then use the planning phase risk identifica- tion outputs as a check at the end of the process to ensure that no risks were overlooked. Throughout the design phase, it is important to continue to identify new risks and not rely solely on those risks which have been previously identified. 7.2.2 Design Phase Risk Identification Tools Risk identification tools that can be used in the design phase are listed in Table 7.1. Note that complex projects can use all risk identification tools. Refer to Appendix A for com- plete tool descriptions. 7.2.3 Design Phase Risk Identification Outputs The key risk identification output is a list of risks. On minor projects, the list of risks may take the form of a Red Flag Item list (I2.1). On some minor projects, and all moder- ately complex and major projects, the list of risks should form the basis of a Risk Management Plan (R3.1) and Risk Regis- ter (R3.12) for later risk management and control. Categorization of the risk list can be extremely helpful to en- sure that no risks have been missed. Categorization of risks can be accomplished through a review of Risk Checklists (I2.3). On major projects, categorization can be achieved through the application of Risk Breakdown Structure (R3.11). Ideally, the list of risks should be comprehensive and non- overlapping. This list of risks can be the basis for estimating project contingency and setting the baseline cost estimate. Comprehensive and nonoverlapping lists of risks are required for detailed risk and contingency modeling in the later steps. 7.2.4 Design Phase Risk Identification Relationship to Project Complexity On minor projects, the number of inputs to the risk identi- fication step can be small. An estimator or project manager may individually conduct the risk identification or with a small group. Information comes from preliminary estimates, preliminary schedules, the estimatorsâ judgment, scoping doc- uments, design assumptions, and other sources. Minor proj- ect risk identification tools may include only a Red Flag Items (I2.1) list. However, consultation with experts (Expert Inter- views, I2.5) can be a good idea if time and budget permits. The use of Risk Checklists (I2.3) is suggested at the end of the iden- tification process to ensure that no risks have escaped detection. Moderately complex projects will require risk identifica- tion from a greater number of sources. Expert Interviews (I2.5) will be a key input on moderately complex projects and they may be used on some minor projects if there is an area for which the project design lead or cost estimator does not have expertise. Formal Assumptions Analysis (I2.4) is typi- cally warranted on projects of all complexity. A Risk Register (R3.12) should always be employed and a Risk Management Plan (R3.1) can be warranted on moderately complex projects with a high level of uncertainty. Major projects require the highest level of risk identifi- cation. All risk identification tools are applicable to major projects. The Risk Workshops (R3.6) is the principal tool employed on major projects that is not typically applied to moderately complex or minor projects. Formal Risk Work- shops (R3.6) are typically facilitated by a professional risk analysis and, depending upon the specific project needs, can have upwards of 20 experts participating. The time to plan, 62 Table 7.1. Design phase risk identification tools. Tool M in or M od er at el y C om pl ex M ajo r I2.1 Red Flag Items I2.3 Risk Checklists I2.4 Assumption Analysis I2.5 Expert Interviews I2.6 Crawford Slip Method I2.7 SWOT Analysis R3.1 Risk Management Plan R3.6 Risk Workshops R3.11 Risk Breakdown Structure R3.12 Risk Register
conduct and document the workshop should not be under- estimated. The benefits of a workshop include a comprehen- sive list of risks and a firm basis for risk analysis and planning. 7.2.5 Design Phase Risk Identification Tips The use of appropriate risk identification techniques must be instituted during Design. â¢ Risk identification should be a creative brainstorming process. It should not attempt to analyze risks or discuss mitigation procedures, which will be completed in the sub- sequent steps. â¢ At a minimum, risk information should include assump- tions, estimate basis uncertainties, and project issues and concerns from the estimator, project team, and any partic- ipating specialty groups. â¢ To be most useful in later risk analyses, the resultant risk list should be comprehensive and non-overlapping. Com- bine like risks and separate overlapping risks. â¢ Only use risk checklists and experience from similar proj- ects to check for missing risks and to help categorize unique project risks. â¢ Upon completion of the risk list, categorize the risk into logical groupings. Use risk checklists and similar project risk analyses for possible categorizations. â¢ When updating the risk lists, identify new risks. Do not rely on previous identification exercise to detect all risks. â¢ Beware of cost blackouts. Conduct a risk identification ex- ercise whenever new information is discovered during the design process or whenever there is a significant change to the project scope. 7.3 Design Phase Risk Assessment and Analysis The level of effort needed for thorough risk assessment and analysis varies in the design phase, with the purpose of the risk analysis. If a thorough risk analysis is completed for the baseline estimate at the end of the programming phase as sug- gested in this guide, then risk assessment and analysis in- volves an updating process. If a thorough analysis is not con- ducted with the baseline estimate or if the project changes substantially during the design process, then a rigorous and comprehensive risk analysis will need to be conducted to properly quantify project risk and determine an appropriate contingency. As design progresses, risk assessment and analy- sis continues with the purpose of managing risk and retiring contingency. The primary objective of risk assessment is the systematic consideration of risk events focusing on their probability of oc- currence and the consequences of such occurrences. Risk as- sessment and analysis is the process of evaluating the risk events documented in the preceding identification step. Risk assessment and analysis has two aspects. The first determines the probability of a risk occurring (risk frequency); risks are classified along a continuum from very unlikely to very likely. The second aspect judges the impact of the risk should it occur (consequence severity). Typically, a projectâs qualitative risk assessment will recog- nize some risks whose occurrence is so likely or whose conse- quences are so serious that further quantitative risk analysis is warranted. A key purpose of quantitative risk analysis is to combine the effects of the various identified and assessed risk events into an overall project risk analysis. The overall risk analysis is used to determine cost and schedule contingency values and to quantify individual impacts of high risk events. Ultimately, however, the purpose of quantitative analysis is not only to compute numerical risk values but to provide a basis for controlling project costs through effective risk man- agement practices. 7.3.1 Design Phase Risk Assessment and Analysis Inputs The physical input to risk assessment and analysis is the list of risks from the identification step. Early in the design phase, this will likely be a long list that must be filtered through the assessment and analysis step to help focus the project team on a subset of the most critical risks. Later in the Design Phase, this will be a list of risks maintained in a risk register that must be updated with new risk assessments and analyses as the project design evolves. The risk identification step will have identified risks, but the identification step should stop short of assessment or analysis. In the risk assessment and analysis step, risk inputs will be elicited from project managers, functional experts, es- timators, and analysts to gain a clear picture of the risks. Man- agers and functional experts tend toward qualitative assess- ment of risks. They evaluate risks relative to their worst case effects and their relative likelihood of occurrence. Analysts and estimators tend toward quantitative assessment of risks. They evaluate risk impacts in terms of a range of tangible re- sults, and they evaluate risk of occurrence in terms of proba- bilities. The analystâs focus is on the combined tangible ef- fect of all the risks on project scope, cost, and schedule. A comprehensive risk strategy combines both a qualitative as- sessment and a quantitative analysis. Recalling from Chapter 3, the key inputs for risk assess- ment and analysis are the probability of a risk occurring (risk frequency) and the impact of the risk should it occur (conse- quence severity). Knowing the probability and impact, risks can be qualitatively ranked to help managers focus on the 63
most critical risks or quantitatively modeled to determine cost and schedule contingency estimates. 7.3.2 Design Phase Risk Assessment and Analysis Tools Risk assessment and analysis tools that can be used in the De- sign Phase are listed in Table 7.2. Note that project complexity has a significant impact on the use of risk assessment and analy- sis tools. Refer to Appendix A for complete tool descriptions. 7.3.3 Design Phase Risk Assessment and Analysis Outputs Risk assessment and analysis outputs will depend on the type of decision required, the detail in the input analysis, and the level of rigor in the selected tools for assessment or analysis. The use of qualitative expert input (I2.5 Expert Interviews) and the application of a Risk Priority Ranking (R3.7), Probability Ã Impact Matrix (P Ã I) (R3.8), or Risk Comparison Table (R3.9) tools will yield a ranked set of risks that can help focus management on managing the highest priority risks. The use of quantitative expert inputs and application of an Estimate RangesâMonte Carlo Analy- sis (R3.5) tool will yield a definitive contingency estimate and detailed sensitivity analysis of the risks that contribute to the contingency. All of these tools can produce updates to previous risk assessments or analyses throughout the de- sign process. Recalling from Chapter 3 (Section 18.104.22.168), the type of out- puts that a tool produces is a function of the analytical rigor, nature of assumptions, or amount of input data. Results from risk analyses may be divided into three groups according to their primary output: single parameter output measures; multiple parameter output measures; and complete distribu- tion output measures. Please refer to Sections 3.4.3 and 3.4.5 for a full description of risk assessment and analysis outputs. 7.3.4 Design Phase Risk Assessment and Analysis Relationship to Project Complexity Risk assessment and analysis are directly tied to project com- plexity. This can best be seen in the tie between risk analysis and contingency calculation. The research team has observed nu- merous methods for analyzing risks and developing contin- gency estimates. These methods fall into three categories (Type I, II, and III Risk Analysis), which directly relate to proj- ect complexity (minor, moderately complex, and major). Type I Risk Analysis â Risk Identification and Percentage Contingency A Type I risk analysis is the simplest form of risk analysis and applies only to minor projects. A Type I risk analysis in- volves the development Red Flag Items (I2.1) and the use of a ContingencyâPercentage (R3.2) tool to estimate the con- tingency. To estimate contingency, the estimator should ex- amine the list of risks and use judgment within percentage contingency range of acceptable standards set by the agency policies or estimating guidance. Type II â Qualitative Risk Analysis and Identified Contingency Items A Type II risk analysis applies to moderately complex projects and involves the use of more rigorous risk assess- ment and tools (e.g., P Ã I Matrix (R3.8), Risk Comparison Table (R3.9), etc.) and the estimate of specific contingency items using the Contingency â Identified (R3.3) tool that complements the percentage-based contingency in the Type I analysis. A qualitative ranking of the risks and expected val- ues estimates for contingency on the critical risks are key outputs of this method. When estimating an appropriate contingency in a Type II risk analysis, the range of contin- 64 Tool M in or M od er at el y C om pl ex M ajo r I2.1 Red Flag Items I2.5 Expert Interviews R3.2 Contingency â Percentage R3.3 Contingency â Identified R3.4 Estimate Ranges â Three Point Estimate R3.5 Estimate Ranges â Monte Carlo Analysis R3.6 Risk Workshop R3.7 Risk Priority Ranking R3.8 Probability x Impact Matrix (P x I) R3.9 Risk Comparison Table R3.10 Risk Map R3.13 Risk Management Information System R3.14 Self Modeling Worksheet R3.15 Influence Diagrams R3.16 Decision Trees Analysis Table 7.2. Design phase risk assessment and analysis tools.
gency from the ContingencyâPercentage (R3.2) tool is first consulted. The next step is to review approximately the top 20 percent of the prioritized risks to ensure that the contin- gency is adequate. An expected value estimate for estimating the top-ranked risks can be calculated by multiplying the product of the impact should the risk occur by the probabil- ity of the occurrence (e.g., $1,000,000 x 0.50 = $500,000). Contingency in addition to the predetermined percentage can be included if warranted by the expected value analysis. Type III â Quantitative Risk Analysis and Contingency Management A Type III risk analysis applies to major projects. This method is generally facilitated by risk analysts who are experts in the area of quantitative risk management practices. The process most often begins with a Risk Workshop (R3.6) and generates a stochastic estimate of cost and schedule through an Estimate Ranges â Monte Carlo Analysis (R3.5). The re- sulting risk-based range estimate is then updated throughout project development. In all cases, the list of risks should be related to the contin- gency amount. In a Type I analysis, the tie between the risks and contingency is loose, but the list of risks can justify the need for the contingency estimate to internal and external stakeholders. In the Type III analysis, the tie is direct as the list of risks forms the basis for the stochastic model that drives the contingency estimate. 7.3.5 Design Phase Risk Assessment and Analysis Tips There must be a clear understanding of risk significance and a description of what the contingency amount included in a cost estimate covers in terms of project risks. â¢ The goal of risk assessment is not to eliminate all risk from the project. Rather, the goal is to recognize the significant risk challenges to the project and to initiate an appropriate management response to their management and mitigation. â¢ All projects, regardless of project size and project complex- ity, will require some form of risk assessment and analysis. The framework of risk assessment and analysis remains the same, but the tools and level of effort vary with project complexity and the decisions that need to be made. â¢ A comparison of each riskâs probability and impact yields a relative ranking of the risks that can be used for risk man- agement or, if warranted by project complexity, a detailed quantitative risk analysis using probabilistic models to generate ranges of possible outcomes. â¢ Recalling from Chapter 3, there are five criteria that can be applied to help select risk assessment and analysis tools. The selected method or tool will involve a trade-off be- tween sophistication of the analysis and its ease of use. â The tool should help determine project cost and sched- ule contingency. â The tool should have the ability to include the explicit knowledge of the project team members concerning the site, the design, the political conditions, and the project approach. â The tool should allow quick response to changing mar- ket factors, price levels, and contractual risk allocation. â The tool should help foster clear communication among the project team members and between the team and higher management about project uncertainties and their impacts. â The tool, or at least their output, should be easy to use and understand. â¢ The risk analysis process can be complex due to the com- plexity of the modeling that is required and the subjective nature of the data available to conduct the analysis. How- ever, the complexity of the process is not overwhelming and the generated information is extremely valuable. â¢ The risk analysis process is continuous throughout the de- sign phase. Risk analysis at key milestones in the design phase will allow for active risk management and the reso- lution of contingency. 7.4 Design Phase Risk Mitigation and Planning Risk mitigation and planning efforts are active and contin- uous throughout the Design Phase. The objectives of risk mit- igation and planning are to explore risk response strategies for the high-risk items identified in the qualitative risk assess- ment or quantitative risk analysis. The process identifies and assigns parties to take responsibility for each risk response. It ensures that each risk requiring a response has an owner. The key output is the risk register or risk management plan. The design and estimating teams will revisit these plans at major design milestones or whenever a design change occurs. 7.4.1 Design Phase Risk Mitigation and Planning Inputs In the initial risk mitigation and planning efforts, the ranked list of risks from the first two risk management steps is the key input. As the project progresses, the risk register or risk management plan is the key input, along with any newly identified risks. Risk mitigation and planning begins by developing and documenting a risk management strat- egy focused on the key risks. Early efforts establish the pur- pose and objective; assign responsibilities for specific areas; 65
identify additional technical expertise needed; describe the assessment process and areas to consider; delineate proce- dures for consideration of mitigation and allocation op- tions; dictate the reporting and documentation needs; and establish report requirements and monitoring metrics. This planning should address evaluation of the capabilities of po- tential sources as well as early industry involvement. The list of risks (or risk register) is the basis for the solici- tation of mitigation and planning options from key managers and experts. The mitigation and planning options will require cost-benefit analyses (e.g., the cost of implementing a mitiga- tion effort versus the reduction in probability or impact to a risk) to assess the viability or impact of the options. Estima- tors and risk analysts will have key input into the mitigation and planning process. The project management staff will have the final input into the risk mitigation and planning efforts. They will determine who âownsâ the risk and is responsible for ensuring its effec- tive management. The risk management plan and/or risk reg- ister should clearly identify who is responsible for managing and resolving each individual risk. 7.4.2 Design Phase Risk Mitigation and Planning Tools Risk mitigation and planning tools that can be used in the Design Phase are listed in Table 7.3. Refer to Appendix A for complete tool descriptions. 7.4.3 Design Phase Risk Mitigation and Planning Outputs The outputs of the risk mitigation and planning steps are an organized, comprehensive, and interactive risk manage- ment strategy and plan for adequate resources. The Risk Management Plan (R3.1) tool in Appendix A provides a good example of this output. This example from Caltrans describes a clear approach to the assignment of responsibility. It also provides items that require resource investment and a method for calculating their costs. Risk mitigation and planning is iterative and includes de- scribing and scheduling the activities and processes to assess (identify and analyze), mitigate, monitor, and document the risk associated with a project. For minor or moderately com- plex projects, the result should be a Risk Register (R3.12). For major projects or moderately complex projects with a high degree of uncertainty, the result should be a formal Risk Management Plan (R3.1). Updates to the risk management plan and risk register should occur frequently during the design phase. The nature of each risk will change as the design evolves. Some mitigation efforts will be successful and others will fail. Other risks will change as project conditions change over time. The risk register should reflect the current status of each risk. Triggers for updating the risk register and/or risk management plan include: major de- sign milestones; a change to project scope; identification of a new risk(s); and/or change to an existing risk. 7.4.4 Design Phase Risk Mitigation and Planning Relationship to Project Complexity The risk mitigation and planning effort should be congru- ent with project complexity. Each risk plan should be docu- mented, but the degree of documentation will vary with proj- ect complexity. Not all projects will require a comprehensive and quantitative risk management process. The simplest minor projects may only require a Red Flag Items (I2.1) tool to man- age the most important risks. The list can be reviewed at proj- ect milestones to ensure that the key risks are being managed. The creation of a Risk Register (R3.12) is a more formal iden- tification of risks than the simple Red Flag Items (I2.1). A risk register is highly recommended for all projects. The risk regis- ter provides project managers with a listing of significant risks and includes information about the cost and schedule impacts of each risk. It supports the contingency resolution process by tracking changes as a result of actual cost and schedule risk impacts, as the project progresses through the development process and the risks are resolved. The level of detail in the reg- ister will vary with project complexity. Registers can be applied to minor projects and the effort to create and maintain them can be relatively minimal. All moderately complex projects should use a risk register. The risk register creates a concise tool to manage the risks and the individuals assigned to each risk. Major projects or moderately complex projects with high levels of uncertainty will benefit from having a detailed and for- mal Risk Management Plan (R3.1) that records all aspects of risk identification, risk assessment, risk analysis, risk planning, 66 Table 7.3. Design phase risk mitigation and planning tools. Tool M in or M od er at el y C om pl ex M ajo r I2.1 Red Flag Items R3.1 Risk Management Plan R3.5 Estimate Ranges â Monte Carlo Analysis R3.6 Risk Workshop R3.11 Risk Breakdown Structure R3.12 Risk Register R3.13 Risk Management Information System
risk allocation, and risk information systems, documentation, and reports. Major projects should use a risk register that is in- tegrated into the formal Risk Management Plan (R3.1). 7.4.5 Design Phase Risk Mitigation and Planning Tips Project cost is subject to many variables, but actions to mit- igate the impacts of risks can have a significant effect in con- trolling cost. â¢ Begin risk planning efforts early. Formal risk management plans can begin concurrently with risk identification and analysis steps. â¢ Clearly assign responsibility for risk ownership. Individu- als responsible for managing risks should be informed on the costs of mitigation efforts and in which the risks must be resolved. â¢ When planning for risk responses, keep in mind the com- mon strategies of avoidance, transference, mitigation, or acceptance. â¢ Risk mitigation and planning efforts may necessitate that agencies set policies, procedures, goals, and responsibility standards. â¢ Document the risk mitigation and planning efforts at a level of detail that is appropriate for the project complex- ity and resources available to management. â¢ Actively update risk management plans and risk registers. Update these documents whenever there is a major design milestone, a change to project scope, identification of a new risk(s), and/or change to an existing risk. 7.5 Design Phase Risk Allocation The goal of risk allocation is to minimize the total cost of risk on a project and not necessarily the costs to each party sepa- rately. Risk allocation begins in the programming phase with the project delivery decision and contract packaging decisions. It then continues in the design phase with careful considera- tion of those contract provisions impacted by the identified risks. The identified project risks should align with the selected project delivery method, contract packaging, and individual contract provisions to provide an optimal allocation of risk to minimize the total cost and meet other project objectives. The traditional design-bid-build delivery method is most commonly used by SHAs and its risk allocation tenets are well understood in the industry. However, alternatives to the tra- ditional delivery method exist. Designâbuild, construction management at risk, and publicâprivate partnerships are among the alternative project delivery options that can bene- fit from innovative risk allocation opportunities. In all of these project delivery decisions, consideration must be given to the scope and size of the contract packages. For example, design- build projects are most frequently used on large and complex projects, but they have been successful on moderately com- plex projects of a size for which the design-builders can inno- vate to offset the additional risk of taking on design liability. Project managers and designers should examine each con- tract provision closely. They should not treat standard con- tract language as a âone size fits all.â For example, the appli- cation of unit price contracts has traditionally allocated risks equitably for items in which field quantities can vary (e.g., earthwork quantities). However, the application of lump sum payment provisions can allocate risk equitably when design- build delivery is being used or when schedule is a primary project goal. Similarly, the risk for undiscovered site condi- tions has typically been borne by the agency, but some agen- cies have found success in sharing this risk with the contrac- tor (see Section 22.214.171.124 for examples). The determination of project time is a risk that agencies are commonly allocating to contractors through A + B (cost + time) procurement. In essence, A + B procurement passes the risk for accurately set- ting the fastest construction completion date from the agency to the contractor. All of these examples show a thoughtful ap- proach to allocating risks that have been identified through a thorough and structured risk management process. 7.5.1 Design Phase Risk Allocation Inputs Risk allocation inputs at the design phase include the out- puts from the first three steps in the risk management process plus an examination of the detailed contract provisions for the project. Designers who are developing the plans, specifi- cations, and contract decisions must have a clear understand- ing of the project risks. They must also have a clear under- standing of project goals as inputs to their decisions. Take for example the risk of unusually severe weather. If achieving the lowest project cost is a primary goal, a contract provision for unusually severe weather can be written to share the risk for delays while not providing for additional compensation costs. However, this provision may lead to longer project du- ration. If shortening project duration is a primary project goal, then the highway agency may wish to allocate the risk for unusually severe weather to the contractor to develop in- novative methods avoiding the risk. However, this provision will undoubtedly lead to higher bid costs from the contrac- tor. Risk allocation decisions require clear inputs of the proj- ect goals, the identified risks, and understanding of the con- tract provisions. 7.5.2 Design Phase Risk Allocation Tools Table 7.4 lists Design Phase tools discussed in this Guide- book for risk allocation. The Delivery Decision Support (D1.2) tool includes descriptions of numerous alternative project delivery methods. 67
7.5.3 Design Phase Risk Allocation Outputs The final project delivery decision and contract packaging strategy should be known from decisions made in the pro- gramming phase. If they are not, the project delivery and con- tract packaging will need to be determined as a first order of business in the design phase. At the end of the design phase, detailed risk allocation decisions regarding the individual contract provisions will be made. 7.5.4 Design Phase Risk Allocation Relationship to Project Complexity Minor projects tend toward the use of traditional risk allo- cation strategies. Typically, risk allocation in minor projects requires only a cursory review of the risks to ensure that they are allocated properly in the contracts. Moderately complex and major projects require careful consideration of all con- tract provisions affected by risks that could not be avoided or mitigated. Alternative delivery methods and contract provi- sions should be explored on moderately complex projects and are becoming common for major projects. 7.5.5 Design Phase Risk Allocation Tips Risk allocation affects the amount of contingency that must be included in a project estimate. â¢ Explore alternatives to traditional risk allocation tech- niques in both delivery and contract packaging strategies. â¢ Gain industry input concerning risk allocation whenever possible. â¢ For each risk that cannot be avoided or fully mitigated, ex- amine the affected contract provisions closely. Risks allo- cated to the contractor will result in higher bid costs. â¢ Follow the four fundamental tenets of sound risk allocation: â Allocate risks to the party best able manage them. â Allocate the risk in alignment with project goals. â Share risk when appropriate to accomplish project goals. â Ultimately seek to allocate risks to promote team align- ment with customer-oriented performance goals. 7.6 Design Phase Risk Monitoring and Control The objectives of risk monitoring and control are to sys- tematically track the identified risks; identify any new risks; effectively manage the contingency reserve; and capture les- sons learned for future risk assessment and allocation efforts. The strategy for risk monitoring and control is developed in the programming phase and implemented in earnest in the design phase. 7.6.1 Risk Monitoring and Control Inputs The key inputs to risk monitoring and control are the Risk Management Plan (R3.1) and Risk Register (R3.12). These tools provide a framework for managing risks through a formalized monitoring and control process. On moderately complex and major projects with a high degree of uncer- tainty, an agency may invest in a Risk Management Informa- tion System (R3.13) to better monitor and control impacts. During the design phase, it is imperative that the risk management plans and risk registers are kept current. Peri- odic project risk reviews repeat the tasks of identification, as- sessment, analysis, mitigation, planning, and allocation and update the risk register for monitoring and control. Regu- larly scheduled project risk reviews can be used to ensure that project risk is an agenda item at all project development and construction management meetings. If unanticipated risks emerge, or a riskâs impact is greater than expected, the planned response or risk allocation may not be adequate. At this point, the project team must perform additional re- sponse planning to control the risk. Active risk monitoring and control ensures that the response is timely and adequate (refer to Section 126.96.36.199 for more information on reporting methods). The other primary goal of risk monitor and control is to ensure an accurate resolution of the contingency that was de- veloped for the baseline estimate. As the design phase pro- gresses, the contingency should be resolved as risk are miti- gated, avoided, or allocated to the contractor. If a risk is accepted by the agency, contingency must remain to help control project costs if the risk is in fact realized. As the proj- ect progresses through the design phase, the contingency is lowered and the base estimate increases. 7.6.2 Design Phase Risk Monitoring and Control Tools Table 7.5 lists the risk monitoring and control tools sug- gested for the design phase. More information on the tools can be found in Appendix A. 68 Table 7.4. Design phase risk allocation tools. Tool M in or M od er at el y C om pl ex M ajo r D1.1 Contract Packaging D1.2 Delivery Decision Support
7.6.3 Design Phase Risk Monitoring and Control Outputs The key output for risk monitoring and control early in the design phase is a formal strategy or plan that will support monitoring and control. The monitoring and control strategy is typically described in the risk management plan. The mon- itoring and control strategy should define how the risk man- agement process will be supported by: â¢ Providing consistent and comprehensive reporting pro- cedures; â¢ Developing a set of key milestones for risk resolution; â¢ Monitoring changes to risk probabilities or impacts; â¢ Supporting active contingency resolution procedures; and â¢ Providing feedback of analysis and mitigation for future risk assessment and allocation. The list of key milestones for when risks will be resolved is an imperative output from early in design. This information can be used to create a ârisk resolution scheduleâ to assist in the monitoring and control process. Key milestones will in- clude dates when more information will be known about a given risk or dates when a risk must be resolved or allocated into the contract. Documentation of the ongoing risk management process is another key output of the monitor and control process dur- ing the Design Phase. Formal documentation provides the basis for project assessment and updates. It ensures more comprehensive risk assessment and risk planning. It provides a basis for monitoring mitigation and allocation actions and verifying results. A comprehensive Risk Register (R3.12) will typically form the basis of documentation for risk monitor- ing and updating, but project complexity can drive the choice of other tools. 7.6.4 Design Phase Risk Monitoring and Control Relationship to Project Complexity Only the simplest minor projects will use a Red Flag Item (I2.1) list for risk monitoring and control. A Risk Register (R3.12) is suggested for all projects. Risk registers can be tailored to project size and complexity so that they do not require undue effort for monitoring and control. Risk Man- agement Plans (R3.1) and Risk Management Information Systems (R3.13) can assist in monitoring and control of mod- erately complex and major projects with a large amount of uncertainty. 7.6.5 Design Phase Risk Monitoring and Control Tips Risk monitoring and control should be a continuous and repetitive activity during all phases of project development. â¢ For each project, develop a unique risk monitoring and control process that is appropriate for the size and com- plexity of the project. â¢ Document risk management during the design phase will be a key to success. However, do not create monitoring and control processes that are burdensome or create undue paperwork. â¢ Develop a successful risk monitoring and updating process that will systematically track risks, support the identification of new risks, and effectively manage the contingency reserve. â¢ Develop key milestones for risk resolution will help to en- sure active risk management. â¢ Actively monitor project contingency. Develop a contin- gency resolution schedule early in the Design Phase and monitor the contingency in relation to the project risks. 7.7 Conclusions This chapter discussed guidance for risk management in the Design Phase. The Design Phase engages all of the steps in the risk management process. A comprehensive and non- overlapping set of risks is developed early in the Design Phase and new risks are identified as the design progresses. Risks as- sessments are periodically updated, and risk analyses are used to monitor and control the contingency throughout design. Risk planning and mitigation efforts attempt to minimize the effects of risks on the project goals. Risks that cannot be avoided or fully mitigated are thoughtfully allocated to the contractors through the choice of the project delivery system and through the language in the contract provisions. 69 Table 7.5. Design phase risk monitoring and control tools. Tool M in or M od er at el y C om pl ex M ajo r I2.1 Red Flag Items R3.1 Risk Management Plan R3.12 Risk Register R3.13 Risk Management Information System