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

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27 INTRODUCTION As described in Chapter 2, the first step in the risk management process is to describe the base project to facilitate the rest of the process. Objectives The primary objective of structuring a project for risk management is to adequately define the base project, relative to which risks can be identified, assessed, and eventu- ally managed. As discussed in Chapter 2, the base project consists of a set of project assumptions about how the planned project will perform with respect to the project’s performance measures (e.g., in terms of actual ultimate cost, schedule). The base project excludes other possibilities, which are generally described as risks or oppor tunities. It should not include any cost or schedule contingencies, or other conservatisms, that are intended to cover those risks (i.e., only planned or known items of work should be included). If done appropriately, such structuring facilitates risk identification (Chapter 5) and risk assessment (Chapter 6) and forms the basis for risk analysis if needed (Chap- ter 7) and risk management planning (Chapter 8). A secondary objective of structuring a project for risk management is to develop a clear and common understanding of that project, including the project scope and strategy, and the key project conditions and assumptions. Although this is not strictly within the purview of risk management, many project managers find it to be a valu- able side benefit because it allows for an evaluation of the consistency of project cost, 4 STRUCTURING A PROJECT FOR RISK MANAGEMENT Adequately but efficiently define the base project scenario, against which risk and op- portunity can be identified, assessed, and eventually managed.

28 GUIDE FOR THE PROCESS OF MANAGING RISK ON RAPID RENEWAL PROJECTS schedule, and other performance estimates with the project scope and strategy, consid- ering the key project conditions and assumptions. Another objective is to complete this step in the overall risk management pro- cess efficiently, producing accurate and defensible results that are compatible with the other steps of the process (which in turn is compatible with the project management approach). To achieve this efficiency, it is especially important that the level of detail be appropriate. This guide includes examples and forms to assist in defining the appro- priate level of detail for risk management. Facilitated consensus among a broad group of project-team and independent subject-matter experts is key to successful structuring. Philosophy and Concepts As discussed in Chapter 3, the relevant project performance objectives for evaluating rapid renewal projects include minimizing project cost, schedule, and disruption dur- ing construction and maximizing longevity. Also as discussed above (and in Chapter 2), each such performance measure consists of a base component (based on a particular set of assumptions or scenario) and a complementary risk component that covers all other possible outcomes. The base component must be clearly defined before the risk component can be defined. The DOT must develop cost and schedule estimates for a project to establish budgets and schedule milestones. These cost and schedule estimates are necessarily established on a large set of assumptions about planned project scope, strategy, and conditions. In deterministic estimates, some of these assumptions are explicitly stated, but most are implicit and incorporate various degrees of unstated bias or conserva- tism. Cost contingencies (as a percentage of base costs) typically are used to cover the cost risks. Schedule contingencies (time in addition to the base schedule) are sometimes used to cover schedule risk. However, the DOT can develop these cost and schedule estimates in various ways and at different levels of detail, based on the types of information (e.g., ranging from past experience to direct contractor quotes). Generally, for costs, the DOT identifies a set of cost items, then estimates quantities and unit costs (uninflated) for each item, and then sums and inflates (based on an assumed schedule) the resulting costs. Simi- larly, for schedule, the DOT identifies a set of schedule activities, characterizes their sequence and precedence requirements (including external milestone dates), estimates the duration for each item (e.g., by estimating the quantities and progress or produc- tion rates), and then evaluates the critical path through the schedule. The set of items used for cost analysis and for schedule analysis needs to be com- prehensive but nonoverlapping (i.e., does not double-count anything). Typically, but not always, the cost and schedule are estimated separately, in which case they might be based on different assumptions and therefore be inconsistent with each other. Clearly, it is important that these estimates be consistent with the specified project scope and strategy, as well as the known project conditions, and with each other. It is also helpful if all other significant assumptions are clearly stated. In establishing the base project cost and schedule for the risk management process, the DOT needs to remove from the estimates any conservatisms and contingencies that are intended to cover these risks. Conservatisms and contingencies will be accounted

29 GUIDE FOR THE PROCESS OF MANAGING RISK ON RAPID RENEWAL PROJECTS for in a formalized and structured manner in later steps of the risk management pro- cess. The risk management process will be used to replace these traditional estimate items with a more individually defined set of risks and a conscious policy decision on the appropriate level of confidence (reliability) in planning. It is also often useful to “abstract” detailed cost and schedule estimates to a com- mon, relatively broad level of detail, which the DOT can explicitly link to establish a base cost-loaded schedule, which in turn can be used to more accurately determine inflation and cash flow. Such an explicit link can be provided, for example, by a simple matrix that allocates each portion of each item in the cost estimate to each schedule activity. Similarly, the project scope and strategy, in combination with the actual project conditions, will also determine the actual disruption and longevity of the project. For consistency with the base cost and schedule estimate, the DOT should estimate the base disruption and longevity on the same set of assumptions. For example, as dis- cussed in Chapter 3: • Disruption might be determined by estimating the number of users affected dur- ing each project phase (e.g., average number of people affected per day times the number of days) and their average delay. • Similarly, longevity might be determined by the net present value (NPV) of opera- tions and maintenance (O&M) cost and replacement cost, appropriately consider- ing the duration of operations, the cost and disruption of O&M (e.g., average per year) and of replacement, and a net discount rate. Similar to base cost and schedule, the base disruption and longevity, to which the risks will subsequently be added, should be stripped of any conservatisms and contingencies. Note that, even before considering risks, there typically will be significant uncer- tainty in what the various base factors (e.g., unit cost, quantities) actually will be. Such base uncertainties are usually covered by conservatisms in the estimate, as well as by contingencies. The intent is to assess the mean value for each uncertain base factor (before considering risks). Base uncertainties can be then treated as a risk (see Chapter 6) or, if quantitative risk analysis is being conducted, treated separately and explicitly (see Chapter 7). PROCESS OF STRUCTURING This section provides an overview of methods and some guidance for successfully structuring a project for risk management, but details on how to conduct this pro- cess are not included here. Refer instead to the Simplified Risk Management Training course. As discussed briefly in Chapter 10, this process of structuring is usually final- ized in a facilitated workshop, although much of it can be done offline beforehand. The key elements of structuring, which the DOT should adequately document, include

30 GUIDE FOR THE PROCESS OF MANAGING RISK ON RAPID RENEWAL PROJECTS project scope, planned delivery strategy, key conditions and assumptions, and base project performance (cost, schedule, disruption and longevity), which are described individually below in more detail. Project Scope The scope of the project outlines what the project will construct, what it will remove or demolish, and, perhaps, what the project will not construct. This description deter- mines, for example, the types and quantities of cost items, and consists of broad items such as the project limits, vertical and horizontal alignment, capacity, access, disrup- tion requirements, and longevity (O&M and design life) requirements. In more detail, the scope includes, for example, the type, size, and location of new or rehabilitated lanes, interchanges, and intersections; structures (and their foundations); cut and fill retaining walls; type of pavement; and the type and extent of mitigation required. Sometimes the DOT will want to consider alternative scopes, such as different alignments or different types of structures. Because the different scopes might have some different risks, they might be evaluated separately and their performance com- pared to facilitate a decision between them. In this case, it is often useful to identify one scope as the basis for comparison and simply identify just the differences for any other scopes. Often, it is useful in developing a common understanding and as a communication tool to develop a simple project schematic that adequately depicts the key scope ele- ments (e.g., for each alternative, if more than one). Planned Delivery Strategy The strategy for delivering the project scope, which determines the project schedule as well as affecting project cost, disruption, and longevity, consists of a series of project activities to accomplish each phase of project development. As discussed in Chapter 3, the project phases primarily include preconstruction, construction, O&M, and replacement, all of which require adequate DOT funding. Traditionally, all pre- construction activities (e.g., design, funding) must be completed before going to pro- curement and then to construction. However, this could be done through multiple procurements (or contracts), which are phased to allow some construction to start before other parts are ready, or by having the builder complete the preconstruction activities and start construction in overlapping phases (design–build). Also, funding required for the project might be provided in phases or by the builder (instead of by the DOT), which might have to be paid back with interest or in exchange for some or all operating revenues. Hence, the delivery strategy consists of contract packaging (number and size of contracts), type of contract (design–bid–build versus design– build), and funding source (DOT versus private, and phases), as well as more detailed elements (e.g., approach to environmental process, approach to public involvement, construction phasing). Often, it is useful for the DOT to develop a simple project flowchart to help gain consensus on a reasonable and accurate project delivery and schedule logic, as well as to provide common understanding and a communication tool. This flowchart, which also serves as the basis for integrated cost and schedule analysis (Chapter 7), depicts

31 GUIDE FOR THE PROCESS OF MANAGING RISK ON RAPID RENEWAL PROJECTS the major project activities and their sequence and precedence requirements. As dis- cussed later, the project schedule can subsequently be determined from this flowchart by assessing activity durations, lags, and external milestone dates. Key Conditions and Assumptions The key conditions under which the DOT will achieve the specified project scope via the specified strategy, which in turn will determine project performance, include items such as • Requirements and constraints, including — Political commitments; — Design standards and specifications; — Environmental standards and process (e.g., documentation, approvals); — Mitigation requirements; and — Procurement. • Technical conditions, including — Existing infrastructure and potential interfaces (transportation, utilities); — Environmental conditions (wetlands, streams, parks, historic areas); — Real estate (land use, development pressure); and — Subsurface conditions (geotechnical, groundwater). • Political or other external conditions, including — Stakeholders; — Owner policies; — Funding; and — Market conditions. Some of these conditions will be known as fact, whereas others will be uncertain and must instead be assumed. When such assumptions must be made, they should be reasonable as well as documented and recognized as only assumptions, not fact. Even though reasonable, some assumptions might turn out otherwise, which constitutes risk (see Chapter 5). Often, it is useful in developing a common understanding and as a communication tool to add these key conditions and assumptions to the simple project schematic (e.g., a one-page diagram) and simple project flowchart previously discussed. For example, it might be assumed that funding, which is a prerequisite for particular schedule activi- ties, will be available by a particular date—this can easily be shown on the project flowchart.

32 GUIDE FOR THE PROCESS OF MANAGING RISK ON RAPID RENEWAL PROJECTS Base Project Performance Base project performance includes the base project schedule, cost, disruption, and lon- gevity. All bias, conservatisms, and explicit contingencies should be removed from the base performance measures; these will be added in the later risk assessment and risk analysis, as discussed in Chapters 5 through 7. The performance models and unbiased assessments of the model inputs should be confirmed by facilitated consensus among a broad group of project-team and independent subject-matter experts. If mean input values are used, then the approximate mean output value is produced by the model. Schedule After developing the project flowchart and assessing the base duration, lags, and exter- nal milestones consistent with the base project scope, strategy, and conditions (includ- ing any assumptions), the DOT can determine the base project schedule via critical path analysis. Various software packages (e.g., Microsoft Project or Primavera Project Planner) are commercially available to accomplish this type of analysis. For the pur- pose of risk management (as opposed to project controls), the level of detail can be relatively broad (e.g., typically several tens of activities). In fact, simple standard flow- charts have been developed for two primary project delivery approaches, which are traditional design–bid–build and design–build (see Figure 3.2), and the base schedule analysis for each has been programmed in Microsoft Excel (see Appendix C). Cost The base project cost consists of the sum of the base costs of all the project activities, inflated to future [year-of-expenditure (YOE)] dollars depending on when they will occur and the appropriate inflation rate for that type of cost and time frame. Typically, however, the cost through construction is considered separately from postconstruction cost, which will instead be considered under longevity. The base cost of each project activity (e.g., for engineering, for real estate acquisition, for construction) in turn must be adequately assessed (e.g., as the product of assessed quantities and unit costs) con- sistent with the project scope, strategy, and conditions, including any assumptions. However, as for schedule, for the purpose of risk management (as opposed to project controls), the level of detail can be relatively broad (e.g., several tens of key cost items, including miscellaneous items to collectively capture all smaller items). These cost items can then be allocated to the project activities to determine a simple cost-loaded schedule, which allows relatively accurate determination of inflation and cash flow (if desired). Regarding a schedule, if one of the simple standard flowcharts (Figure 3.2) is used, the uninflated costs for each flowchart activity can be estimated and then readily analyzed because the base cost analysis for each has been programmed in Microsoft Excel (see Appendix C). Disruption The base project disruption consists of the sum of the base disruptions associated with all project activities, typically expressed (as previously discussed) as cumulative users’ lost time. Typically, however, as for cost, disruption through construction is considered separately from postconstruction disruption, which will instead be considered under

33 GUIDE FOR THE PROCESS OF MANAGING RISK ON RAPID RENEWAL PROJECTS longevity. The base disruption for each activity in turn must be adequately assessed. For example, base disruption during construction could be calculated as the product of these assessed values: • Number of days when delays will occur (e.g., as a fraction of that activity’s duration); • Average number of users affected each of those days; and • Average delay for an individual user. These factors must be assessed consistently with the project scope, strategy, and conditions, including any assumptions. As for cost and schedule, if one of the simple standard flowcharts (Figure 3.2) is used, the disruption for each flowchart activity can be estimated (as described above) and then readily analyzed because the base disrup- tion analysis for each has been programmed in Microsoft Excel (see Appendix C). Longevity The base project longevity consists of the combination of costs and disruption after construction, during O&M and replacement, discounted to NPV depending on when they will occur (e.g., schedule of replacement), the value of disruption, and the appro- priate discount rate. The base cost and base disruption for O&M and for replacement must be adequately assessed, and the value of disruption and net discount rate speci- fied. For example, • Replacement base disruption (million hours, Mh) could be translated to equivalent cost ($/h), and then added to direct cost ($), and the NPV of this combined cost can be determined as a function of design life (years) and net discount rate (%/ year); • O&M base disruption (Mh/year) could be translated to equivalent cost ($/h), and then added to direct cost ($/year), and the NPV of this combined annual cost can be determined as a function of design life (years) and net discount rate (%/year); and • The NPVs of O&M and replacement can be summed as a reasonable measure of longevity. For example: If disruption occurs during about 10% of the construction period, which is 1,000 days long, and an average of 10,000 people per day are affected, losing an aver- age of 1 hour each, then the disruption is 1 million hours.

34 GUIDE FOR THE PROCESS OF MANAGING RISK ON RAPID RENEWAL PROJECTS As for cost, schedule, and disruption, if one of the simple standard flowcharts (Figure 3.2) is used, then the cost and disruption for each postconstruction flowchart activity can be estimated (as described above) and then (with values for disruption and net discount rate) readily analyzed because the base longevity analysis for each has been preprogrammed in Microsoft Excel (see Appendix C). Combined Performance (for Evaluating Severity of Risks) An overall measure that appropriately combines all of the more detailed project per- formance measures (i.e., cost, schedule, disruption, and longevity) is needed to express the severity of risks (in terms of change in combined performance associated with that risk), as well as to compare alternatives. This is done by defining trade-offs among those more detailed project performance measures, so that they can be expressed in common terms and meaningfully combined. For example, if trade-offs are approxi- mately linear and independent of each other, • Base project schedule (i.e., completion date) could be translated to equivalent cost (YOE$/month) based on the amount the decision maker would be willing to pay to change that schedule. • Base project disruption during construction (Mh/year) could be translated to equivalent cost (YOE$/h) based on average user costs. • Base project longevity (NPV$) could be translated to equivalent cost (YOE$) based on the amount the decision maker would be willing to pay to change longevity. • The above three translated measures could be summed with escalated base project cost (YOE$) as a reasonable measure of combined performance. For example: If • disruption averages 0.1 Mh/year during O&M and 1 Mh during replacement, • the value of disruption is $10/h, • direct cost averages $1 million/year during O&M and $10 million during replacement, • replacement is in 50 years, and • the net discount rate is 5%/year, then the NPV of postconstruction cost and dis- ruption (longevity) is • O&M: $1 million/year + 0.1 Mh/year × $10/h = $2 million/year, which over 50 years at 5%/year has an NPV of $36.5 million. • Replacement: $10 million + 0.1 Mh/year × $10/h = $20 million, which over 50 years at 5%/year has an NPV of $1.8 million. • Longevity: $36.5 million + $1.8 million = $38.3 million.

35 GUIDE FOR THE PROCESS OF MANAGING RISK ON RAPID RENEWAL PROJECTS As for cost, schedule, disruption, and longevity, if one of the simple standard flow- charts (Figure 3.2) is used, then trade-offs for schedule, disruption, and longevity can be specified and readily analyzed because the base combined performance analysis has been programmed in Microsoft Excel (see Appendix C). Documentation It is important for the DOT to adequately document the base project scenario to pro- vide the basis for subsequent risk management steps. As previously stated, risk man- agement is an iterative process that is repeated at various key milestones and project phases. Documentation at each stage is a key to efficient and successful risk manage- ment. Similar to a basis for cost estimate, the base documentation for risk management also helps to qualify the results of the process so that if the base changes (e.g., a major change in scope), it becomes clear that the old results might not be applicable any longer and should be updated. Such documentation can be done at a broad level of detail, suitable for qualitative risk assessment, using the forms provided in Appendix C (see also form examples in Figure 4.1). As described in Chapter 7 on quantitative risk Figure 4.1. Examples of forms (Appendix C). 15 2014.01.09 R09 05 Guide Chapter 4_final for composition.docx   the base documentation for risk management also helps to qualify the results of the process so that if the base changes (e.g., a major change in scope), it becomes clear that the old results might not be applicable any longer and should be updated. Such documentation can be done at a broad level of detail, suitable for qualitative risk assessment, using the forms provided in Appendix C (see also form examples in Figure 4.1). As described in Chapter 7 on quantitative risk analysis, however, more detail might be appropriate, including (a) a custom project flowchart with an explicit allocation of the various cost items and risks to those more detailed project activities; and (b) explicit uncertainties in (and correlations among) the base factors (e.g., various unit costs), separate from risks. [Inse t Figure 4.1] [caption] Figure 4.1. Examples of forms (Appendix C).

36 GUIDE FOR THE PROCESS OF MANAGING RISK ON RAPID RENEWAL PROJECTS analysis, however, more detail might be appropriate, including (a) a custom project flowchart with an explicit allocation of the various cost items and risks to those more detailed project activities; and (b) explicit uncertainties in (and correlations among) the base factors (e.g., various unit costs), separate from risks. CONCLUSIONS ON STRUCTURING Structuring a rapid renewal project for risk management is a necessary and valuable first step in the risk management process. It provides the base for identifying risks and opportunities, assessing them, and eventually managing them; it also documents the current state for future reference. If done appropriately, structuring facilitates subse- quent risk identification and assessment as well as clarifies the important elements of the project, providing a common understanding and a communication tool. For rela- tively simple projects, the DOT can accomplish this efficiently (and compatibly with the other steps of risk management) through the use of the forms provided in Appen- dix C, which can be filled out before (to the extent possible), and then finalized during, a facilitated workshop. For more complex projects and for quantitative risk analysis, more detail typically is required. Example The hypothetical QDOT case study (see Appendix D), which is used to illustrate the various steps of an adequate risk management process and a risk management plan (RMP; see Appendix E), was structured following the principles outlined in this chapter, as documented in RMP Section 2, and as summarized below: 1. QDOT presented the project’s scope, strategy, status, key conditions and assump- tions, and the associated cost, schedule, and disruption estimates to the combined group of key project-team staff and independent subject-matter experts. 2. Facilitated by a base lead, the group reviewed, “de-biased” (i.e., removed any over- or underestimates), and validated the cost, schedule, and disruption es- timates for the stated assumptions. The results were base cost, schedule, and disruption estimates, exclusive of risk and opportunity. Note: Subsequently, a quantitative risk analysis was conducted, for which uncertainties in and correla- tions among the base costs, schedule, and disruption estimates were assessed; see RMP Addendum X. Facilitated by a risk lead, the group adopted a design– build (D-B) standard simplified flowchart describing the sequence of major project activities (see RMP Figure E.1), and the cost, schedule, and disruption estimates (continued)

37 GUIDE FOR THE PROCESS OF MANAGING RISK ON RAPID RENEWAL PROJECTS were allocated to those flowchart activities. This simplified flowchart serves as the basis for subsequent risk identification and assessment, and then proactive individ- ual risk reduction identification and evaluation. Note: Subsequently, a quantitative risk analysis was conducted, for which a more detailed flowchart was developed; see RMP Addendum X 3. Mean (i.e., probability-weighted average) base project performance (i.e., sched- ule, uninflated and inflated cost, and disruption total both for the project and by project activity) was then approximated using an appropriate risk model (a Micro- soft Excel workbook template). For subsequent risk and risk management evalua- tions, QDOT established trade-off values (which are policy rather than technical issues) that allowed the various project performance measures to be combined, for example, (a) combining postconstruction schedule, cost, and disruption into longevity; and (b) combining schedule, cost, and disruption through construction with longevity into severity.