National Academies Press: OpenBook

Guide for the Process of Managing Risk on Rapid Renewal Projects (2012)

Chapter: 8 RISK MANAGEMENT PLANNING

« Previous: 7 RISK ANALYSIS
Page 92
Suggested Citation:"8 RISK MANAGEMENT PLANNING." National Academies of Sciences, Engineering, and Medicine. 2012. Guide for the Process of Managing Risk on Rapid Renewal Projects. Washington, DC: The National Academies Press. doi: 10.17226/22665.
×
Page 92
Page 93
Suggested Citation:"8 RISK MANAGEMENT PLANNING." National Academies of Sciences, Engineering, and Medicine. 2012. Guide for the Process of Managing Risk on Rapid Renewal Projects. Washington, DC: The National Academies Press. doi: 10.17226/22665.
×
Page 93
Page 94
Suggested Citation:"8 RISK MANAGEMENT PLANNING." National Academies of Sciences, Engineering, and Medicine. 2012. Guide for the Process of Managing Risk on Rapid Renewal Projects. Washington, DC: The National Academies Press. doi: 10.17226/22665.
×
Page 94
Page 95
Suggested Citation:"8 RISK MANAGEMENT PLANNING." National Academies of Sciences, Engineering, and Medicine. 2012. Guide for the Process of Managing Risk on Rapid Renewal Projects. Washington, DC: The National Academies Press. doi: 10.17226/22665.
×
Page 95
Page 96
Suggested Citation:"8 RISK MANAGEMENT PLANNING." National Academies of Sciences, Engineering, and Medicine. 2012. Guide for the Process of Managing Risk on Rapid Renewal Projects. Washington, DC: The National Academies Press. doi: 10.17226/22665.
×
Page 96
Page 97
Suggested Citation:"8 RISK MANAGEMENT PLANNING." National Academies of Sciences, Engineering, and Medicine. 2012. Guide for the Process of Managing Risk on Rapid Renewal Projects. Washington, DC: The National Academies Press. doi: 10.17226/22665.
×
Page 97
Page 98
Suggested Citation:"8 RISK MANAGEMENT PLANNING." National Academies of Sciences, Engineering, and Medicine. 2012. Guide for the Process of Managing Risk on Rapid Renewal Projects. Washington, DC: The National Academies Press. doi: 10.17226/22665.
×
Page 98
Page 99
Suggested Citation:"8 RISK MANAGEMENT PLANNING." National Academies of Sciences, Engineering, and Medicine. 2012. Guide for the Process of Managing Risk on Rapid Renewal Projects. Washington, DC: The National Academies Press. doi: 10.17226/22665.
×
Page 99
Page 100
Suggested Citation:"8 RISK MANAGEMENT PLANNING." National Academies of Sciences, Engineering, and Medicine. 2012. Guide for the Process of Managing Risk on Rapid Renewal Projects. Washington, DC: The National Academies Press. doi: 10.17226/22665.
×
Page 100
Page 101
Suggested Citation:"8 RISK MANAGEMENT PLANNING." National Academies of Sciences, Engineering, and Medicine. 2012. Guide for the Process of Managing Risk on Rapid Renewal Projects. Washington, DC: The National Academies Press. doi: 10.17226/22665.
×
Page 101
Page 102
Suggested Citation:"8 RISK MANAGEMENT PLANNING." National Academies of Sciences, Engineering, and Medicine. 2012. Guide for the Process of Managing Risk on Rapid Renewal Projects. Washington, DC: The National Academies Press. doi: 10.17226/22665.
×
Page 102
Page 103
Suggested Citation:"8 RISK MANAGEMENT PLANNING." National Academies of Sciences, Engineering, and Medicine. 2012. Guide for the Process of Managing Risk on Rapid Renewal Projects. Washington, DC: The National Academies Press. doi: 10.17226/22665.
×
Page 103
Page 104
Suggested Citation:"8 RISK MANAGEMENT PLANNING." National Academies of Sciences, Engineering, and Medicine. 2012. Guide for the Process of Managing Risk on Rapid Renewal Projects. Washington, DC: The National Academies Press. doi: 10.17226/22665.
×
Page 104

Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

90 INTRODUCTION Objectives The primary objective of risk management planning is to optimize future project per- formance, specifically with respect to risks. Value engineering has a similar objective of optimizing project performance, but generally focuses on improving the base rather than reducing risks (e.g., through changing project design, project delivery strategy, and construction means or methods). Risks and opportunities from the risk identi- fication process, with risk-factor assessments from the risk assessment or risk analy- sis, and the base factors from structuring, are necessary input for risk management planning. The risk management planning process develops specific actions and assigns responsibilities to cost-effectively deal with individual risks and capitalize on opportunities, and to then deal with the remaining risks collectively through contingency (both reserve and recovery plans). The risk management plan (RMP) is the output of that process. The RMP documents specific actionable items to deal with risks and opportunities. These actionable items require resources. The RMP provides a consistent format for assigning and documenting these resources. It answers the essential questions about risk management: Who will manage the risk? What will be done? When will it be done? How will they do it? What resources are likely to be required? What are the likely benefits? The RMP should be accurate and defensible, as well as cost-effective. Following a rigorous process (of risk identification, assessment, and possibly analysis before risk management planning) will help to ensure accuracy and defensibility. Documentation 8 RISK MANAGEMENT PLANNING Develop and commit to implementing an ad- equate but efficient Risk Management Plan to address project risks, both proactively and in- dividually, and then reactively and collectively, to optimize project performance.

91 GUIDE FOR THE PROCESS OF MANAGING RISK ON RAPID RENEWAL PROJECTS of each step in the process is essential for effective planning efforts. Decisions on the investment of resources in risk management alternatives should ultimately be made through a cost–benefit analysis. Following the steps of the risk management process will allow the team to use prior risk assessment outputs and weigh the benefits of risk management alternatives against the costs of implementation. Ultimately, the RMP should fit within the context and culture of the DOT. Risk management (i.e., anticipating and addressing potential problems and improvements) is an essential element of project management, and should integrate into the project team’s approach to cost, schedule, scope, and quality management, and into the DOT’s goals for program delivery. Philosophy and Concepts At any point in time, future project performance is uncertain because of many factors, as previously discussed. However, this uncertainty generally decreases with time as the project develops, and various issues are resolved, although it cannot be predicted whether the mean value (or even the high or low ends of the range) will increase or de- crease. Project teams can affect some aspects of future performance through pro active individual risk reduction. Ultimately, however, a risk eventually either happens or it does not. Effective risk management planning establishes budgets and schedule mile- stones with contingencies (both reserves and recovery plans) for risks to adequately cover the uncertainty that remains—even after the best planning efforts. A project team would ideally avoid all risks and capitalize on all opportunities through an investment of minimal resources, but this is not realistic in practice. Risk reduction—the proactive reduction of risk probabilities and impacts—is the next option when risk avoidance is not viable. The mean impact value of a risk is the prob- ability of its occurrence multiplied by the impact if it does occur. Comparing the reduc- tion in the severity of the risks with the cost of individual mitigation actions, or a suite of actions, helps the project team to decide if the mitigation effort is cost-effective. Ultimately, however, the effectiveness of risk mitigation is only realized at implementa- tion. Therefore, the assignment of a risk owner with adequate resources is necessary to ensure that the process is complete (see Chapter 9). For example, one particular risk (of many) on a project consists of a 50% chance of an extra $1M (unescalated) and a 1-month delay, both during construction. However, one action for addressing this risk, which would cost $100K, would reduce the chance of that risk happening by half (to 25% chance). The combined impact of the risk if it happened (considering the effect on the critical path, escalation of the cost impact and increased escalation of remaining costs, and the value of project completion delays) is $2M (equivalent YOE). Hence, the reduction in the probability of occurrence (from 50% to 25%) is worth $500K (equivalent YOE). Since this risk reduction exceeds its cost of implementation by $400K or 4:1, the action is cost-effective and should be adopted.

92 GUIDE FOR THE PROCESS OF MANAGING RISK ON RAPID RENEWAL PROJECTS Residual risks are those future risks that the team cannot avoid or completely elimi- nate. Risk reduction, by definition, does not completely eliminate the risk, and in fact, new risks may surface during the reduction efforts. Contingency amounts and recovery plans are the tools to deal with residual risks. Effective risk management processes budget for contingency and plan for recovery on the basis of the residual risks to ensure that the project will meet budget and schedule milestones. Because risks are resolved as the project evolves (i.e., if they occur, they are covered by contingency, if available; but if they do not occur during their phase, they are retired), the residual risks tend to decrease as the project evolves, regardless of what happens up to that point. Some risks will remain when the project is let for a contract. Rapid renewal projects often involve the allocation of risks to the designer or construction through alternative project delivery methods such as design–build. The residual risks are allocated at this point in project development through the provisions of the contract. Such transfer of risk comes at a price (in the contractor’s bid) and might not be as effective as expected. With these objectives and philosophies in mind, the rest of this chapter discusses the risk management planning process. PROCESS OF RISK MANAGEMENT PLANNING The process of risk management planning generally involves addressing risks (a) individually and proactively through risk reduction (including risk allocation) and (b) collectively and reactively through contingency management and recovery plans. Risk reduction is a proactive process of employing cost-effective actions to reduce risks (e.g., through avoidance or transfer, including risk allocation, which involves contrac- tually assigning the residual risks to a party in the contract). Contingency management involves the maintenance of adequate resources in the case that residual risks occur. Recovery plans involve ways to continue the project (possibly changed) if the contin- gency is exceeded. The RMP essentially documents these plans. This section briefly describes the risk management process. Example benefits of risk management in terms of “mitigated” cost (can also evaluate other project performance measures)

93 GUIDE FOR THE PROCESS OF MANAGING RISK ON RAPID RENEWAL PROJECTS Risk Reduction The goal of risk reduction is to proactively and cost-effectively reduce (mitigate) indi- vidual risks. The risk identification process (Chapter 5) will identify many risks, even for the least complex projects. Because the list of risks can be extensive, teams should start with the most significant risks as identified through the risk assessment process (see probability and impact rating techniques in Chapter 6) or a more rigorous risk analysis process (see sensitivity analysis output in Chapter 7). These risk assessment and analysis techniques are important because intuition and informal engineering judgment are not always reliable when choosing the most significant risks on which to focus risk reduction effort. Additionally, the risk assessment and analysis efforts will yield useful information in terms of creating a baseline of unmitigated risks when considering the cost–benefit aspects of implementing risk reduction efforts. The project team will need to examine the most significant project risks to see if there are management strategies or actions for reducing a risk’s probability of occur- rence or impact if it does occur; similarly, for opportunities, the objective is to increase (rather than decrease) its probability of occurrence or impact if it does occur. The iden- tification of strategies and actions can be done through project-specific team efforts (e.g., brainstorming) or through the use of generic risk management action lists. The Rapid Renewal Risk Categories and Potential Risk Management Actions by Project Phase section in Appendix B contains a comprehensive list of risk management actions that correspond to common rapid renewal strategies and related risk categories that can commonly occur with these actions. Teams should use this table to spur new ideas or improve the team’s ideas for risk reduction after they have exhausted their own ideas on risk reduction. An example from the project scoping phase of the section in Appendix B is shown below. This example identifies risk management actions that can help to reduce risks. There are likely to be many potential risk management actions for each risk. The risk management actions will require an investment, and the risk management action that results in the highest reduction with the least investment (i.e., most cost-effective) should be selected for implementation. Note that in some cases, combinations of actions might be employed to manage a particular risk or set of risks; in this case, synergy and overlap among the various actions should be considered to avoid underestimating or overestimating (respectively) the combined effect of those management actions. Also, in some cases, one risk management action might affect multiple risks; in this case, the multiple benefits should be considered to avoid under- estimating the overall benefit of that action.

94 GUIDE FOR THE PROCESS OF MANAGING RISK ON RAPID RENEWAL PROJECTS The implementation materials for this guide provide instructions and tools for how to calculate the cost–benefit analysis for each option. The example below pro- vides a format for conducting these analyses. It provides for the four primary catego- ries of risk response: avoid, mitigate, transfer (allocate), and accept. Some actions may use more than one of these strategies. The intent of using these categories is to spur the development of possible risk management actions. Implementation of these efforts will require resources (e.g., additional design hours, additional coordination efforts, use of more expensive materials). The results of the management actions will be a reduction in the probability of occurrence for the risk event and/or a reduction in the impact. All of these data will provide the necessary information for a cost–benefit analysis of each risk management option. However, care must be taken to not underestimate the implementation costs and to not overestimate risk reduction benefits. Example of potential risk management actions (from the Rapid Renewal Risk Categories and Potential Risk Management Actions by Project Phase section in Appendix B) Rapid Renewal Strategy Related Risk or Opportunity Categorya Potential Risk Management Actionb Accelerate the environmental documentation process Examples • Leverage master planning (see Project Scoping) • Conduct early coordination (see Planning) • Identify documentation requirements early • Identify and avoid major impacts early (historical, cultural, archaeological) Different type of documentation required Example causes or issues • Project’s impacts are greater than originally assumed (because of design changes, originally underestimated impacts), so more substantial documentation is required (e.g., environmental impact statement instead of environmental assessment) • Additional discipline studies are required • Additional (new) alternatives must be developed and documented • Documentation requirements change • Modify the project design to reduce the impacts that are triggering a different type of documentation • Anticipate potential concerns with main alternatives, and develop additional alternatives early in process to address those concerns • Anticipate and plan for or start additional (targeted) discipline studies earlier to reduce impact to project schedule if they are later required • Develop alternative (or additional/more detailed) documentation in parallel with presumed appropriate documentation to reduce impact to schedule if alternative documentation is later required a The individual risk categories (and their related examples) could apply to any or all of the renewal category examples. b The potential risk management actions could apply to several risk categories.

95 GUIDE FOR THE PROCESS OF MANAGING RISK ON RAPID RENEWAL PROJECTS The companion Simplified Risk Management Training course addresses risk reduc- tion in more detail, including a form (Figure 8.1; see also Appendix C) and a spread- sheet workbook template for conducting evaluations of cost-effectiveness (including automatic analyses), appropriately considering risk and opportunities, as well as the performance measures and activities for rapid renewal, especially for simple projects (see http://onlinepubs.trb.org/onlinepubs/shrp2/SHRP2_R09ExcelTemplateUsersGuide.pdf). As will subsequently be discussed, to illustrate, risk reduction plans have been developed for the hypothetical QDOT case study (see Appendix D). Risk Allocation Risk allocation is one specific way to reduce project risks for the owner, but war- rants further discussion, especially for risky rapid renewal projects. The contract is the vehicle for risk allocation. Whether the contract is for construction, construction engi- neering and inspection, design, or design–build, or some other aspect of rapid renewal design and construction, the contract defines the roles and responsibilities for risks. Risk allocation in any contract affects cost, time, quality, and the potential for dis- putes, delays, and claims. Example Risk Reduction Evaluation (this is not the hypothetical case study) There was a risk of a landowner being unwilling to sell a parcel needed to construct a project. When it was first identified, there was a high probability (50%) that the owner would not be willing to sell and the impact of this risk was $500,000 and a 2-month delay, with an expected value of about $300,000 [including increased escalation and extended overheads (OHs)] and 1 month (critical path). However, a management ac- tion was identified that would avoid this risk by designing around the parcel, at a cost of about $100,000 ($150,000 including increased escalation and extended OHs) and 1-month delay. The resulting reduction in risk meant that about $300,000 and 1 month less contingency was required; however, the resulting cost ($150,000) and delay (1 month) of the mitigation effort had to be added to the base cost and schedule. This is clearly cost-effective, with a net cost savings of $150,000 and no net schedule impact. Based on such updates of the various inputs if the action is adopted, the contingency requirements (and recovery requirements) could be recalculated.  

96 GUIDE FOR THE PROCESS OF MANAGING RISK ON RAPID RENEWAL PROJECTS Figure 8.1. Forms (Appendix C). 2014.01.15 Figures 8.1 and 8.2 for R09 Guide Figure 8.1 for R09 Guide Figure 8.2 for R09 Guide The risk allocation principles embedded in the industry’s guide specifications are tested and well established in case law. However, their use can promote a “one size fits all” process of risk allocation. The rigorous process of risk identification, assessment, analysis, and planning described in this document allows for a more transparent and informed understanding of project risk. When risks are understood and their conse- quences are measured, decisions can be made to allocate risks in a manner that mini- mizes costs, promotes project goals, and ultimately aligns the construction team (DOT, contractor, and consultants) with the needs and objectives of the traveling public. The objectives of risk allocation can vary depending on unique project goals, but DOTs should attempt to follow four fundamental tenets of sound risk allocation: 1. Allocate risks to the party best able manage them. 2. Allocate the risk in alignment with project goals. 3. Share risk when appropriate to accomplish project goals. 4. Ultimately seek to allocate risks to promote team alignment with customer- oriented performance goals. A fundamental tenet of risk allocation is to allocate the risks to the party that is best able to manage them, as long as, if it is being transferred (e.g., to the contractor or to the insurer), the transfer price is reasonable. The party assuming the risk should be best able to evaluate, control, and bear the cost, and benefit from its assumption. For example, the risk of an inadequate labor force, a breakdown in equipment, or specific means of construction is best borne by the contractor, whereas a risk of securing proj- ect funds or project site availability is best borne by the DOT. Following this principle of allocating the risks to the party that is best able to manage them will ultimately result in lowest overall price because contractors will not be forced to include as much

97 GUIDE FOR THE PROCESS OF MANAGING RISK ON RAPID RENEWAL PROJECTS contingency for possible financial losses or take gambles in an extremely competitive bidding environment. Inappropriate risk shifting from the owner to the contractor can result in higher prices, misaligned incentives, mistrust, and an increase in disputes. Risks should be allocated in alignment with the project goals in a manner that maximizes the probability of project success. The definition of a clear and concise set of project objectives is essential to project success, and these objectives must be under- stood to properly allocate project risks. This is particularly true when using rapid renewal techniques. For instance, if the public needs a project completed sooner than would be achievable under traditional contracting and risk allocation methods, the DOT may be forced to ask the contractor to assume more risk for timely or expedited completion and it must be willing to compensate the contractor for assuming this risk. The concept of risk sharing is often used synonymously with the concept of risk allocation. However, the term “risk sharing” can be somewhat misleading. In reality, there is no risk that is truly shared, but rather, exposure to the risk is split among the parties. Risk sharing is clearly defining the point at which the risk is transferred from one party to the other. These transfer points should be scrutinized for appropriateness and then explicitly and clearly addressed in the contract. For example, a risk that is commonly shared is the risk for unusually severe weather. A contract provision for unusually severe weather may grant the contractor a right to a time extension while not providing for additional compensation of costs. In this situation, the DOT is allo- cated the risk of delay while the contractor is allocated the risk of additional costs. The ultimate goal of risk allocation should be to help align the project team with customer-oriented (e.g., public-oriented) performance goals. Although this concept may seem to be a significant departure from traditional practices in the United States, DOTs are already doing this through the use of alternative contracting techniques. For example, A + B (time + cost) procurement is used on selected projects in the major- ity of DOTs in the United States. In essence, A + B procurement passes the risk for completion delays to the contractor to achieve a customer goal of satisfaction with the service. In an extreme example, the use of public–private partnership techniques is shifting the risk for customer satisfaction almost entirely to the private sector. DOTs and the industry should strive to innovate and develop new risk allocation techniques that align all team members with customer goals. Contingency Management Contingency is an amount of money or time that is included in an estimate to cover re- sidual risks. Contingency management involves the maintenance of adequate resources in case significant risks occur in the future. Risk management practices and tools can assist in the calculation of appropriate contingencies to account for these potential costs and delays. If a risk occurs, its impacts are realized and the base should be adjusted accord- ingly; that is, costs are transferred from contingency to base. On the other hand, if a risk does not occur during its “window,” then it will never occur, and contingency is not needed to cover that risk any longer. Contingency can be established either (see Figure 8.2):

98 GUIDE FOR THE PROCESS OF MANAGING RISK ON RAPID RENEWAL PROJECTS • Objectively, to achieve a specified (DOT policy) level of confidence (e.g., 80th per- centile), but only if quantitative risk analysis (see Chapter 7) has been conducted; or otherwise • Subjectively (consistent with available information) or even empirically (if enough historical information is available to be analyzed), although it might not achieve the desired level of confidence. Contingency is only needed to cover remaining risks at any point in time. Typi- cally, as previously discussed, risks (and thus the need for contingency) decrease as the project develops. As shown in Figure 8.3, contingency can be determined by phase (based on the risks that might occur during that phase). Contingency must be carefully managed to ensure that it is not wasted and is avail- able when (and if) needed. Similar to any project expenditure, drawing on contingency should be subject to DOT approval, with increasing scrutiny as the amounts get larger. DOTs should have a policy to describe what project teams should do with any unused Figure 8.2. Determination of contingency. Figure 8.3. Contingency by project phase. for Phase A for Phase A for Phase A for Phase B for Phase B for Phase B for Phase C for Phase C for Phase C 0 1 2 3 4 5 6 7 A B C Project Phase C on tin ge nc y ($ M )

99 GUIDE FOR THE PROCESS OF MANAGING RISK ON RAPID RENEWAL PROJECTS contingency. If the purpose and need of the project are met, this policy ideally would ask the project team to return the unused contingency to the overall program (for use on other less fortunate projects) instead of adding scope to the project baseline. Other- wise, contingency becomes a self-fulfilling budget, which is never underrun. As will subsequently be discussed, to illustrate, contingency has been developed (by project development phase) for the hypothetical QDOT case study (see Appendix D). Recovery Plans Project teams should develop options to improve project performance, if needed, as risks are realized at various stages in project development. In some cases, remaining contingency funds might not be enough to pay for the realized risk (or schedule float might be used up), so that the realization of risks will trigger a need to adjust the project approach (i.e., adjust the project’s base plan, as described in Chapter 4). In some cases, this might result because some realized risks might also create new risks that are difficult to foresee. For example, many rapid recovery strategies will require early coordination of innovative designs with partner permitting agencies. If a permit is not granted in a timely fashion, the project team will need to spend additional re- sources on an alternative approach to complete the project. This new approach might in fact have its own new risks. Recovery plans consist of specific options that are available during each phase of project development to recover project cost or schedule. Typically, each such option is available only through a particular phase of project development, and is no longer available, or its recovery value is substantially reduced, after a particular point. Some typical examples of recovery plans include: • Overtime or additional crews or equipment to accelerate remaining schedule, for which there is less “capacity” later in the project; • Reduction (or deferral for political reasons) of project scope, especially to reduce cost, which might be relatively easy to implement before bid (during design, al- though it often results in delays, especially if it affects the environmental process) but might require contractual options (e.g., to include the reduced scope only if money is available) to be implemented after contract award. To prevent delays and expedite decisions, recovery plans should be developed before depletion of contingency and their implementation. As part of this and as mentioned earlier, DOTs should establish policy on release of contingency (Should unused contin- gency be retained, for example, as program reserve, for later phases to reduce the need for recovery or must it be returned to the program?). Similar to contingency, specific cost and schedule recovery capacity should be specified for each phase. Ideally, such recovery capacity would be determined objectively in the same way as contingency (Figure 8.2), to provide (in conjunction with contingency) a specified level of confidence in meeting project budgets and milestones. For example, if the contingency provides an 80% confi- dence, recovery might be designed to increase the confidence level to 90% or 95%. As will subsequently be discussed, to illustrate, recovery plans have been developed (by project development phase) for the hypothetical QDOT case study (see Appendix D).

100 GUIDE FOR THE PROCESS OF MANAGING RISK ON RAPID RENEWAL PROJECTS Risk Management Plan A structured risk management process will result in a formal risk management plan (RMP). The project development team’s strategy to manage risk provides the project team with direction and a basis for planning. Ideally, the RMP should be developed during the planning and programming phases, and then updated during the prelimi- nary and final design phases. The RMP is the roadmap that tells the project team members how to approach all phases of risk management at a project or program level. Because it is a map, it may be specific in some areas, such as the assignment of responsibilities for DOT and contractor participants and definitions, and general in other areas to allow users to choose the most efficient way to proceed. An RMP should contain some or all of the following items: 1. Introduction (including summary, definitions, project description, risk manage- ment strategy and approach, and organization, roles, responsibilities); 2. Risk identification, assessment, and analysis (including risk register); 3. Risk reduction; 4. Contingency (including reserve and recovery plans); 5. Implementation (including risk monitoring and updating, information gathering and distribution); and 6. Risk register, documentation, and reports. Each RMP should be adequately documented, but the level of detail will vary with the unique attributes of each project. Smaller projects might use a risk register as the only formal RMP, whereas larger projects should have a formal RMP with the sections listed above and as well as using computer-based risk management informa- tion systems. Ideally, the RMP will integrate into the overall project management plan through coordination with tasks such as periodic cost estimates, value engineering, constructability reviews, and design reviews. As will be discussed, to illustrate, a formal RMP has been developed and is pre- sented for the hypothetical QDOT case study (see Appendix E). CONCLUSIONS ON RISK MANAGEMENT PLANNING The primary objective of risk management planning is to optimize future project per- formance, specifically with respect to risks. Risks and opportunities that have been identified and analyzed earlier in the risk management process serve as the inputs to the risk management planning for the project. Risk management planning develops specific actions and assigns responsibilities to cost-effectively deal with risks and capi- talize on opportunities. The RMP is the output of the process. The RMP should be accurate, defensible, and cost-effective. Following a rigorous process of risk identification, assessment, and analysis before risk management plan- ning will help to ensure accuracy and defensibility. Effective risk management planning establishes budgets and schedule milestones with contingencies to adequately cover

101 GUIDE FOR THE PROCESS OF MANAGING RISK ON RAPID RENEWAL PROJECTS the uncertainty that remains, even after the best risk reduction planning efforts. The process of risk management planning generally involves proactive risk reduction, risk allocation, contingency management, and the development of recovery plans. Risk reduction is a proactive process of using the most cost-effective actions, through a cost–benefit analysis, to mitigate risks that cannot be avoided. Risk allocation involves contractually assigning the residual risks to a party in the contract. The party assum- ing the risk should be best able to evaluate, control, bear the cost, and benefit from its assumption, at a reasonable risk transfer price. Contingency management involves the maintenance of adequate resources in case residual risks occur. If many significant risk events do in fact occur, exceeding available contingency, recovery plans must be put into action. The RMP essentially documents these plans. With this context of risk management planning in place, Chapter 9 discusses implementation of the RMP. Example The hypothetical QDOT case study (see Appendix D), which is used throughout the guide to adequately illustrate the various steps of the risk management process and includes a risk management plan (RMP; see Appendix E), involves management of each of the significant risks in the risk register individually and collectively (using the meth- ods and guidance described in this chapter), as documented in that RMP and summarized below. After risk assessment and prioritization, QDOT identified and planned specific risk management actions to address the key risks to its project objectives, both individually and collectively. The complete project RMP (see Appendix E) consists of (1) proactive risk reduction plans (RMP Section 5), (2) contingency management actions per QDOT procedure (by project phase) (RMP Section 7), and (3) recovery plans (by project phase) (RMP Section 8). QDOT first focused on identifying cost-effective actions for reducing the highest-rated (i.e., highest-priority) risks, considering synergy among risk management actions as appropriate. For each of the high-ranking risks, the follow- ing was done: (a) possible proactive risk management actions were identified; (b) the estimated mean cost, sched- ule, and disruption (by activity) to implement each action was assessed; (c) the anticipated mean effectiveness for reducing the various risk factors from each action was assessed; and (d) the overall cost-effectiveness (of reduction in severity) for each action was calculated (using the Microsoft Excel workbook template). Cost-effective actions were then selected, and responsibility and schedule for implementing those actions were established. Below is one example of risk reduction action identification and evaluation for one rapid renewal risk for this proj- ect. The cost-effectiveness of this particular action was determined to be a net savings of about $250,000 (regard- ing change in severity, in equivalent year-of-expenditure), which was the fourth highest of the actions identified and would be recommended. (continued)

102 GUIDE FOR THE PROCESS OF MANAGING RISK ON RAPID RENEWAL PROJECTS QDOT then determined the revised base and residual risks (assuming that the selected risk reduction actions were actually implemented), from which they determined approximate mitigated mean project performance (i.e., for completion date and escalated cost) in the same way (using the Microsoft Excel workbook template) as for unmitigated mean project performance (as documented in RMP Section 6). On the basis of this information, in conjunction with industry guidance, QDOT used judgment to establish appropriate contingency requirements (as documented in RMP Section 7) and recovery requirements (as documented in RMP Section 8). Note: Subse- quently, a quantitative risk analysis was conducted, which objectively determined the values for the specific QDOT- established targets of 80% and 95% confidence of the mitigated project performance (i.e., completion date and escalated cost) for establishing contingency and recovery requirements, respectively; this was done in the same way as for unmitigated project performance; see Appendix E, RMP, Addendum X. Risk or Opportunity Addresseda Potential Risk Management Actionb Change in Base Factors Change in Risk Factors Responsibility Schedule RU3. Unwilling sellers QDOT’s principal risk from unwilling sellers is increased right-of-way acquisition cost. Hence, QDOT could take the following actions to reduce this risk (see guide, Table B.11): Make reasonable, early offers: conduct thorough research on the values of these properties, and present reasonable offers to the property owners. Do this early to provide more time to reach negotiated settlements (and therefore avoid court proceedings). This action would likely reduce the probability of cost increase but not the magnitude of a cost increase if it occurs. +$0.05M to ROW, minor delay and disruption Reduce probability of occurrence to half (from H to M), minor change in impacts Design manager (design) and ROW manager (public outreach) Implement now; check by end of 30% design a See risk register for description. b Proactive actions: mitigate, avoid, allocate.

Next: 9 IMPLEMENTING RISK MANAGEMENT PLAN »
Guide for the Process of Managing Risk on Rapid Renewal Projects Get This Book
×
MyNAP members save 10% online.
Login or Register to save!
Download Free PDF

TRB’s second Strategic Highway Research Program (SHRP 2) S2-R09-RW-2: Guide for the Process of Managing Risk on Rapid Renewal Projects describes a formal and structured risk management approach specifically for rapid renewal design and construction projects that is designed to help adequately and efficiently anticipate, evaluate, and address unexpected problems or “risks” before they occur.

In addition to the report, the project developed three electronic tools to assist with successfully implementing the guide:

• The rapid renewal risk management planning template will assist users with working through the overall risk management process.

• The hypothetical project using risk management planning template employs sample data to help provide an example to users about how to use the rapid renewal risk management template

• The user’s guide for risk management planning template will provide further instructions to users who use the rapid renewal risk management template

Renewal Project R09 also produced a PowerPoint presentation on risk management planning.

Disclaimer: This software is offered as is, without warranty or promise of support of any kind either expressed or implied. Under no circumstance will the National Academy of Sciences or the Transportation Research Board (collectively "TRB") be liable for any loss or damage caused by the installation or operation of this product. TRB makes no representation or warranty of any kind, expressed or implied, in fact or in law, including without limitation, the warranty of merchantability or the warranty of fitness for a particular purpose, and shall not in any case be liable for any consequential or special damages.

Errata: When this prepublication was released on February 14, 2013, the PDF did not include the appendices to the report. As of February 27, 2013, that error has been corrected.

  1. ×

    Welcome to OpenBook!

    You're looking at OpenBook, NAP.edu's online reading room since 1999. Based on feedback from you, our users, we've made some improvements that make it easier than ever to read thousands of publications on our website.

    Do you want to take a quick tour of the OpenBook's features?

    No Thanks Take a Tour »
  2. ×

    Show this book's table of contents, where you can jump to any chapter by name.

    « Back Next »
  3. ×

    ...or use these buttons to go back to the previous chapter or skip to the next one.

    « Back Next »
  4. ×

    Jump up to the previous page or down to the next one. Also, you can type in a page number and press Enter to go directly to that page in the book.

    « Back Next »
  5. ×

    To search the entire text of this book, type in your search term here and press Enter.

    « Back Next »
  6. ×

    Share a link to this book page on your preferred social network or via email.

    « Back Next »
  7. ×

    View our suggested citation for this chapter.

    « Back Next »
  8. ×

    Ready to take your reading offline? Click here to buy this book in print or download it as a free PDF, if available.

    « Back Next »
Stay Connected!