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How the Project Management Unit Levers Project Cost Overruns in Terms of Risk Management

How the Project Management Unit Levers Project Cost Overruns in Terms of Risk Management. Majed Al-Ghandour, Ph.D., PE, CPM Program Development Branch NCDOT. NCAMPO 2012 Conference Asheville, NC May 2 - 4, 2012. Outline. Introduction Objectives Approach & Methodology Analysis

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How the Project Management Unit Levers Project Cost Overruns in Terms of Risk Management

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  1. How the Project Management Unit Levers Project Cost Overruns in Terms of Risk Management • Majed Al-Ghandour, Ph.D., PE, CPM • Program Development Branch • NCDOT • NCAMPO 2012 Conference • Asheville, NC • May 2 - 4, 2012

  2. Outline • Introduction • Objectives • Approach & Methodology • Analysis • Results and Discussion of Overdraft Risks • Conclusions & Recommendations 2

  3. Introduction Introduction – NCDOT STIP • The Project Management Unit (PMU)- (NCDOT) is responsible for authorization of funds for various State Transportation Improvement program (STIP) projects: • Preliminary Engineering (PE). • Right-of-Way acquisition (ROW). • Utility relocation, Construction (CON). • Mitigation, and Landscape development. • STIP (2012 – 2020 ) includes over 2,183 projects ($16 billions). • There are many factors that can determine the success or failure of transportation projects in terms of fund strategies such as: • Funding source and Authorization. • Budget constraints, Financial Strategies and management. • Fund deficiency, and fund Overdraft occurrences. 3

  4. TABLE 1 Summary of the Final STIP FY 2012-2020 As June 2011

  5. Introduction What is Overdraft (OD)? Cost Overruns? • In a simple finance world, an overdraft account occurs when the amounts of withdrawals exceed deposits. • The Overdrafts (OD) project, by the PMU, is defined as expenditures of project exceed the amount authorized by the Board of Transportation (BOT) or FHWA to the funded project. • This action results the cost estimates exceed the authorizations and cause the need for additional funding to complete projects which impacts the ability to deliver the whole program. 5

  6. Introduction Introduction – What is Risk? • Riskis “an uncertain event or condition that, if occurs, has an effect on at least one project objective (scope, schedule, cost, and quality).” • The PMU often faces a challenge in managing risks associated with project funding and management. • Specifically, risk management, tools, documentation, and communication are less standardized than any other dimension. Hence, the overarching goal of this project is to explore and develop new appropriate risk management framework. • Adopt tools that PMU can use in the future and implement in its day-to-day operations in the program funding and more specific for projects on overdraft status. 6

  7. EXAMPLE FOR RISK ELEMENT ITEM RISK ELEMENT 1 Planning or Design 2 Project Schedule 3 Interfaces 4 Experience/Capability 5 Right of Way/ Utility Involvement 6 Environmental Impacts/Contamination 7 Regulatory Involvement 8 Contractor Issues 9 Resource Availability 10 Project Funding 11 Political Visibility 12 Public Involvement 13 Safety 14 Construction Complexity

  8. EXAMPLE FOR RISK ELEMENT… CONTINUED ITEM RISK ELEMENT 15 Design Build 16 Earmarks Availability and Local/State Share 17 Local Administration 18 Disasters 19 Errors or omissions in quantities 20 Inaccurate Unit Price, and Latest Estimates

  9. Objectives • Identify and quantify risks at funding process for STIP OD projects. • Assess each of the identified risks and evaluate the potential consequences if the risk is not addressed. • Develop risk management improvement tools to control and mitigate the defined risks by determining alternative solutions. 9

  10. Methodology Identify 2 Analyze and Prioritize 1 Risk Statement Risk Assessment Document 3 5 Plan and Schedule Control Top n Risks 6 Learn Track and Report Risk Database, Risk Concepts, and Processes 4 Identify and manage risks throughout funding phase of the project (PE, ROW, CON) Approach I- Construct Quality Dimensions FIGURE 1 A Proactive Approach to Controlling & Mitigating Risks. 10

  11. Methodology II- Collect Data • Collecting available data (Estimate Status and Expenditure Status). • Analyzing process is in progress. • Data Sources: • SAP/R3 Enterprise System and Business Intelligent Reports to Project Management Unit (PMU). • Financial and STIP (State Transportation Improvement Projects) Files. • State Project Funding Unit. • Federal Project Funding Unit. • State and Federal Regulations. • Current PMU Business processes. • PMBOK Guide and Standards documents : • (http://www.pmi.org/PMBOK-Guide-and-Standards.aspx). • PMI Guidelines and Standards. 11

  12. Methodology FIGURE 2 Sample of Estimate Status for ROW and CON. Source:(NCDOT Preconstruction Dashboard Report) 12

  13. These gauges compare the Latest Estimate for a Sub-TIP to the current TIP estimate. • The gauge criteria are: • If the latest estimate is less or equal to the TIP estimate: Green • If the latest estimate exceeds TIP estimate by 10% or less: Yellow • If the latest estimate exceeds TIP estimate by more that 10%: Red • The pie charts display the number of projects with Red, Yellow or Green Status. • Example: • Sub TIP U-2412B in the construction phase has a TIP Estimate of $ 40.9M and the Latest Estimate is $45.8M. • Since the Latest Estimate is 11.98% more than the TIP Estimate, the Construction Estimate Status for U-2412B is Red.

  14. Methodology FIGURE 3 Sample of Expenditure Status for PE and ROW. Source:(NCDOT Preconstruction Dashboard Report) 14

  15. These gauges compare the Encumbered Amount of a Sub TIP • to the amount funded in the PE and ROW phase. • The Encumbered Amount is the sum of the actual expenditures plus any • commitments. • The criteria are: • If the Encumbered Amount is <= 90% of the funded amount: Green • If the Encumbered Amount is 90 to 100% of the funded amount: Yellow • If the Encumbered Amount is > funded amount: Red • The pie charts display the number of projects with Red, Yellow or Green Status. • Example: Sub TIP B-3635, PE Phase has a funding of $161,480 but encumbered • amount is $322,447 which puts the PE Expenditure Status of B-3635 in Red Status.

  16. FIGURE 4 Sample of OD for PE before Risk Ranking.

  17. Analysis Cost Overrun % = (Expenditures- Funding)* 100/ Funding FIGURE 5 Sample of Cost Overrun Graph.

  18. Analysis Decision Making: Risk Levels Metrics • 1 High Risk OD • High risk ODs are those OD occurs because the estimate cost of the project was severely underestimated. • The OD ratio is 100% and more (catastrophic). • These OD projects can be extremely volatile and in many cases disrupt all projects budgets and PMU and Management find themself losing some or all allocated funds for other projects. • The sensitivity level is 3.

  19. Analysis Decision Making: Risk Levels Metrics • 2 Moderate Risk OD • Moderate (Medium) risk ODs are those OD occurs because the estimate cost of project was underestimated and increase in PE or ROW or CON cost (inflation). • The OD ratio ranges between 50 to 100% (inflation related). • These OD projects can be less impact in many cases in disrupting projects budgets. • The sensitivity level is 2.

  20. Analysis Decision Making: Risk Levels Metrics • 3 Low Risk OD • Low risk ODs are those OD occurs because slight increase in the cost of the project due to the increase in PE or ROW or CON cost (redesign in field due to scope change). • The OD ratio is less than 50% and below (redesign either in field or office). • These OD projects have insignificant impact in many cases in disrupting projects budgets. • The sensitivity level is 1.

  21. FIGURE 6 Sample of OD for PE after Risk Ranking.

  22. Results: • Table 2 Risk Assessment Matrix Example 22

  23. Results: Sensitivity Analysis TABLE 3 Sample of Sensitivity Levels 23

  24. Results Quantify Risk R(isk) = V(ulnerability) x T(hreat) x I(mpact) C(ountermeasures) Probability: 2 3 4 Very Low Medium High Very High Unlikely A less likely Likely occur Very likely occur Example Applying the formula: V= Vulnerability=Probability= Medium = 3 T=Threat: a 10 percent risk. I= Impact: of a $24 million loss due to Environmental Impacts & Complex Project. C= Countermeasures: You can spend $0.6 million on a preliminary engineering study that mitigates the chance of that loss.  Risk Level =(0.05 x 24) / 0.6 =2= High Risk. 24

  25. Case Study: • Project B-2500 • Latest Estimates Construction: $236,000,000 • PE= 10% Construction= $23,600,000 • Spent PE= $36,449,775.56 • Funded PE=$34,678,898.59 • Cost Overrun=5.11% Cost Overrun % = (Expenditures- Funding)* 100/ Funding

  26. Risk Assessment Checklist

  27. Risk OD Projects Report

  28. Top Ten Risks Report Where: *Probability: 1: Very likely occur (probability in excess of 75%) 2: likely occur (probability in excess of 50%) 3: A less likely event (probability between 25% and 50%) 4: Unlikely (probability less than 25%) **Impact: 4: Critical failure: Threatens the viability of the project programs 3: Severe impact: threatens the achievement of the program or severely cuts project benefits 2: Less severe impact: may delay achievement of the program visions or reduce the project benefits 1: Minor impact: no impact on the project programs but may increase project costs and schedule.

  29. Flow Chart

  30. NCDOT Research 2012-06 Development of Funding Project Risk Management Tools University of North Carolina at Charlotte In Progress Source: NCDOT Research 2012-06 - University of North Carolina at Charlotte- in Progress (Draft)

  31. Conclusions & Recommendations (1 of 3) • Development strategy is very critical for development the risk analysis framework that needs coordination between the PMU and each project manager. • By using a more proactive method to model the OD projects amount under different projected scenarios, allow senior management to visualize the project’s risks and strategies more clearly. • There is a need to re-aligning funding and risk management. 32

  32. Conclusions & Recommendations (2 of 3) • We recommend to strengthen the application of project risk management and practice by conducting risk strategies output expected to manage risk per OD STIP projects using PMBOK (Project Management Body of Knowledge ) standards are as follows: • Avoiding the risk, • Transferring the risk, • Reducing the negative effect of the risk, and • Accepting some or all of the consequences of a particular risk. 33

  33. Conclusions & Recommendations (3 of 3) • We also recommend to design and implement Risk Assessment Document for every OD project- Table 3. • Finally, we recommend expanding the Risk Responsibility and Ownership per project. Table 3. Content of the Risk Assessment Document 34

  34. In summary • Risk management tasks for OD Projects: • Identification • Assessment • Prioritization of risk • Followed by coordinated resources to minimize, and • Monitor, and control the probability and/or impact of unfortunate events. 35

  35. ContactInformation & Questions Majed N. Al-Ghandour, Ph.D., P.E., CPM, M.ASCE Assistant Branch Manager, Engineering Manager Program Development Branch - NCDOT 1534 Mail Service CenterRaleigh, NC 27699-1534 Tel.: 919-707-4621 Fax: 919-733-3585 Emails: malghandour@ncdot.gov THANK YOU 36

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