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RAMP

RAMP. Risk Analysis and Management for Projects. Background to RAMP. Joint Publication by the Faculty and Institute of Actuaries with the Institution of Civil Engineers. Published in 1998, Revised 2002. Recommended by HM Treasury as a tool for managing risk. Definition of RAMP.

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RAMP

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  1. RAMP Risk Analysis and Management for Projects

  2. Background to RAMP • Joint Publication by the Faculty and Institute of Actuaries with the Institution of Civil Engineers. • Published in 1998, Revised 2002. • Recommended by HM Treasury as a tool for managing risk.

  3. Definition of RAMP • RAMP is a comprehensive and systematic process for identifying, evaluating and managing risks in capital investment projects. • It covers the entire life of a project from inception to close-down, not just the construction phase.

  4. Risk • Risk is a threat (or opportunity) which could affect adversely (or favourably) achievement of objectives of an investment. • A risk event is a specific happening which can have an affect on the project. • One is interested in identifying all possible risk events and the liklihood and impact of outcomes associated with these.

  5. Investment Life-Cycle • Identify (Cost) • Appraise (Cost) • Plan (Cost) • Create (Cost) • Operate (Cost) +Revenues • Close down (Cost) +Revenue

  6. RAMP Process • Launch • Appointments, terms of reference, budgets • Baselines, parameters, assumptions • Review • Management • Close down • Review of project output • Review of RAMP process

  7. The Review Stage • Identify • Evaluate • Mitigate • Assess and plan to deal with residual risk • Communicate Strategy

  8. Identification • Consider objectives, deliverables or activities associated with given stage. • Brainstorm to get a first list of risks. • Examine a risk matrix and identify further risks. • Use lists from other projects, reviews, studies or even a site visit. • Add all these to a ‘risk register.’

  9. Identification (II) • Add an ‘impact’ to each risk – e.g. ‘possibly significant’ or ‘probably insignificant’ • Review in plenary and record • Cause or triggers to risk events • Consequences and activities affected • Ownership of risk • Possible responses to mitigate

  10. Evaluation • Likelihood or probability of each risk. • The impact if the event occurs (financial). • The score (product of these) for the risk. • Where there is a risk which could have very serious consequences, special care is needed. • Overall, if a full value analysis is possible this should be done (e.g. MC of NPV.) • More general assessment is possible.

  11. Evaluation. Assessment (I) • Description Prob Scale Val • Highly Likely >85% 16 • Likely >50% 12 • Fairly Likely >20% 8 • Unlikely >1% 4 • Very Unlikely <1% 2 • Extremely Unlikely <0.01% 1

  12. Evaluation. Assessment (II) • DescriptionScale Value • Disastrous 1000 • Severe 100 • Substantial 20 • Marginal 3 • Negligible 1

  13. Evaluation (IV) • Score Action • >=1000 Must Eliminate or Transfer • <1000 Avoid or transfer • <100 Retain and Manage • <20 Can be ignored

  14. Mitigation • Risk mitigation is the taking of actions in order to ensure that the effect of a risk event is lessened. • This may take the form of a reduction in the probability of a risk event. • Alternatively the impact of an event should it occur may be altered. (E.g. taking an umbrella.)

  15. Impact on NPV • Risk mitigation may often cost money. • However, this is offset by the reduction in volatility associated with the project returns. • A reduction in expected returns may be perfectly acceptable to a risk averse investor (recall concave utility.) • Sometimes a higher ‘risk premium’ is demanded. This is not mitigation and is an incomplete strategy in project management.

  16. Mitigation Strategies • Reduce the probability or impact of risk event • Transfer the risk (insure) • Avoid the risk entirely (>cost) • Absorb or pool risks • Further information may help understand a particular risk better and may be appropriate to help decide on a strategy.

  17. Reducing Risk • Risk can be reduced by recognising that the possibility of an event exists and acting to reduce the probability of its occurrence. • For example, training staff or putting up warning signs can reduce the chance of an industrial accident. • The mandatory wearing of protective clothing can reduce the impact of some accidents. • Getting key project individuals to fly on different flights is an extreme method but a valid risk reduction strategy.

  18. Transferring Risk • Insurance is an obvious way to do this. • A tightly worded contract might serve to transfer risk. For example, a fixed price contract for construction work passes the cost of delays to the contractor. • Hedging currency risk is a method of transferring risk to the market.

  19. Avoiding Risk • Sometimes it is possible to avoid a risk entirely. • For example, the use of hydrogen in airships was dangerous because it is explosive. • Using helium eliminates the risk of explosion entirely (at an acceptable cost).

  20. Absorbing Risk • If it is not possible (or economically worthwhile) to eliminate risk, then it has to be absorbed. • A risk is said to be pooled if there is an agreement to bear it jointly. • For example, a partnership to build and rent 12 houses with 12 other parties imlplicitly pools the risk of not being able to rent one.

  21. Further Information • Sometimes it may be evident that a risk event will be critical to the viability a project. • For example, the existence of underground channels in the construction of a metro. • If a substantial channel is on the route it may make the project too costly. • Taking soil samples at the planning stage could give accurate probability estimates or eliminate the possibility.

  22. Strategic Analysis • Each mitigation strategy should be evaluated. • The effect on risks and consequences should be clearly identified. • Secondary risks caused by the strategy need to be highlighted. • The cost of each mitigation strategy should be summarised. • A decision on whether to implement then needs to be made.

  23. Residual Risk • Residual risk is that which is left after the mitigating strategies are implemented. • These need to be summarised to inform decision about the project. • The impact of these on the bottom line, or NPV of ins and outs should be investigated (perhaps using MC techniques.) • Associated with each residual risk should be a risk response plan.

  24. Management • The management involves the communication of the residual risk analysis, mitigation strategy and risk response plan. • “The risk mitigation strategy and the risk response plan must be fully integrated with the management systems and processes which determine the principal activities of the client.”

  25. Management (II) • From the analyst point of view it is important to ensure that the strategies are being implemented. • Updating of the plans takes place at regular review meetings. • Monitoring of risks should be more regular, and should include all risks (even those some time in the future.)

  26. Example 1.I • Company with project requiring 1000 investment in computer system in year 1. • Saving will be 300 the following year and 400 in each of 3 years after that. • What is the NPV for this project (with discount rate of 6%)? • Of course this is the plan!

  27. Example 1.II • Having gone through the identification of risks phase, the following were highlighted; • System know-how could be resold (10%, 200 in year 2) • Technological delay (15%, one year delay and cost of 300 in year 2) • System doesn’t work well (10%, savings reduced by 100 p.a.) • Both delay and not work well (10%)

  28. Example 1.III Exercise • Write down a schedule showing the NPV for each of the 5 possibilities. • This gives a probability distribution of NPVs. • The expected value of the project can be calculated.

  29. Example 1.IV • The contractor offers to cover the cost of the delay that may be experienced for an upfront additional cost. • This is for 80 in year 1. • What are the possibilities now? • Calculate expected NPV.

  30. Example 2 • Appendix 8 of the RAMP manual gives another example. • This is of a major construction project (to build a bridge/tunnel.) • It contains some interesting examples of mitigation strategies and methods of reducing risks for important events.

  31. Summary • RAMP is a tool for risk analysis in the context of the management of projects. • It contains 4 main steps. • This brings the process from start up through review and management to close down. • It is a widely accepted methodology and provides a good mixture of quantitative as well as ‘practical’ strategies.

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