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Quantifying Cost and Schedule Risks for Major Energy Projects PRMIA Luncheon Presentation 4 November 2010. CSC Project Management Services 200-321 19 Street NW. Calgary, Alberta. T2N 2J2 (403) 233-7994 cscmain@cscproject.com. Major Project Blues.

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Presentation Transcript
slide1

Quantifying

Cost and Schedule Risks

for

Major Energy Projects

PRMIA Luncheon Presentation

4 November 2010

CSC Project Management Services

200-321 19 Street NW. Calgary, Alberta. T2N 2J2

(403) 233-7994 cscmain@cscproject.com

slide2

Major Project Blues

Over the last two decades, almost every major energy project has suffered significant cost overruns, significant schedule delays, and/or poor quality work.

Exceptions are rare and most projects that tout being “On Time and Under Budget” have re-cast schedules, significantly modified scope or revised base estimates.

The problem isn’t new. In the late 1980’s the Rand Corporation published a study showing that 80% of all major projects had significant cost and schedule overruns.

The problem is not restricted to the Alberta Environment, the oil industry, or to Canada. It is a global problem.

slide3

Major Project Blues - the Issues

Major energy projects are truly colossal in scope. Capital costs are routinely in excess of $1 Billion, equipment is sourced world-wide, labour pools are stretched.

The boom in oil prices that drives new projects results in competing project impacts on everything from bulk materials to major equipment, from camp beds to hotel rooms and from field labour to construction management.

After many years of industry retrenchment, project management and construction supervision experience has been scarce. Owner groups are not resourced to deal with the issues driven by massive capital projects.

slide4

Major Project Blues - the Solution

These major projects are being driven by economics. In order to capture the project value, a fully functioning (nameplate) project must be completed on schedule and within the capital budget.

The Project Team must identify and understand the wide range of risks facing them, and put in place an action plan that mitigates these risks. Failure to assess and identify risk issues will almost certainly doom a project.

The Project Team must bring resources to bear on the risk issues throughout the project execution life. As a project proceeds the risks change, and the risk management plan should reflect this changing reality.

slide5

Risk Management Life Cycle

Strategic

Planning

Project

Definition

Project

Financing

Project

Execution

Mid-

Construction

Project

Start Up

Year 1

Full

Operations

Project Execution Team

Internal Review

Corporate Planning

Risk Contractor Involvement

Operations Team

Corporate Review

slide6

Risk Management:

  • The most important risks and their impacts are identified and
  • communicatedto the project management and stakeholders.
  • All sources of risk and opportunity are identified including “soft”
  • items such as “organization performance” and “competing project
  • environment”.
  • Expert judgments about the likelihood of uncertain events are
  • documented, and their impacts quantified.
  • Budgets and performance targets are set at
  • appropriate confidence levels, and areas for
  • mitigation are identified and explored.
  • Project strategies are tested in a
  • “best case/worst case” scenario to analyze
  • mitigation plans and alternatives.
slide7

Risk Analysis is the centerpiece of a Risk Management Process

Base Design

& Operating Plans

Uncertain

Environment

Scheduled, Formal Reviews

Updated Model Results

(Probabilities, Tornados, Steps)

Management Risk Reporting

Risk Analysis

Risk

Monitoring System

Tornado Diagrams

Step Diagrams

Interview Issues

Probability

Distributions

Model and Test Options

Project Targets

Immediate Risk

Control Measures

Contingency Plans

slide8

The general Risk Analysis Process proceeds in a systematic sequence

Recycle to Focus on

Most Important Risks

Frame

The

Problem

Develop

Analysis

Basis

Evaluate

The

Risks

Interpret

The

Results

Risk

Management

5

1

2

3

4

Review

Alternative

Strategies.

Identify all

Important

Sources of

Uncertainty.

Model how

underlying

uncertainties

interact to

influence

outcomes

on the Project.

Identify the

Experts in each

of the uncertain

variables.

Assess the

impact and the

probability of

occurrence for

each uncertain

variable.

Calculate the

uncertainty in

the key result

measures.

Quantify the

risk & return

for each scenario.

Analyze and

document the

results.

Identify

preemptive

actions.

Develop

contingency

plans.

Recommend

actions.

slide9

Framing the problem is often the most difficult but

most valuable step in the process

  • Project scope, basic assumptions, and cost & schedule milestones
  • are identified.
  • Strategic alternatives and logical development paths are identified, and
  • decision criteria are defined.
  • All project decisions (both made and not made), and the logical
  • links between decisions, are identified.
  • All risk issues and their potential impact areas for the project are
  • identified.
slide10

Conditioning

Variables

Impact

Variables

Results

The Influence Diagram shows how the risks influence each other and their impact on the project. Correlations between variables must be properly captured.

Operating

Costs

Operating

Revenue

Scope

Changes

Organizational

Performance

Contractor

Rates

Capital

Cost

NPV

Competing

Projects

Material

Rates

Contractor

Default

Productivity

Rates

Schedule

Labour

Availability

Regulatory

Delays

Weather

Delays

Regulatory

Environment

slide11

Conditioning Variables

Organization Performance

  • Organization, Distribution of Authority
  • Continuity of Design, Coordination of Engineering
  • Information Gathering and Communication Tools
  • Baseline and Performance Measuring Tools
  • Contracting Strategies
  • Construction Productivity
  • Owner Involvement and Commitment

Competing Project Environment

  • Labour Resources
  • Engineering Resources
  • Contractor Availability
  • Material / Vendor Shop Availability
  • Construction Equipment Availability
slide12

Risk Variable Assessments

Risk Discussion

  • Discuss the Assumptions in the Base Cost / Schedule, including
  • Manpower and Equipment levels
  • Identify Risk and Opportunity factors influencing the range of
  • uncertainty
  • Discuss what factors are included and excluded from the risk
  • range for the item
  • Collect the risk range information (Assessment is a value and
  • the probability of that value occurring)
  • Identify what is driving the high and low values

Cost Variables

  • Probability of a Cost Variance, a Specific Cost, or an increase /
  • decrease from the Base Cost

Schedule Variables

  • Probability of a Duration, a Specific Date, or a Delay /
  • Advancement to the Base Schedule
slide13

The risk analysis calculates the probability distribution of potential cost outcomes. This distribution can be used to :

1. Determine the contingency required for any confidence level (probability).

2. Compare the estimate uncertainty (slope) with traditional estimate class

definitions.

Base = 1600 $MM

100%

P90 =2220 $MM

+11%

90%

80%

Slope of

Class V Estimate

70%

400 $MM

Contingency

Required for

P50 Confidence

60%

Slope of

Class 2 Estimate

Probability

50%

40%

P50 = 2000 $MM

30%

20%

P10 =1780 $MM

-9%

10%

0%

1200

1600

2000

2400

2800

CAPEX ($MM)

slide14

Road Preparation Duration

3

6

Labour Productivity Delays

-1.25

1.75

Plant Pad Preparation Duration

3

6

Labour Unrest Delays

0

2.3

Execution Organization Performance

Best

Worst

Regulatory Duration

11.3

16.5

Competing Project Environment

Low

Heated

Start-up & Commissioning Duration (Early Steam)

1.5

2.4

Terms of Reference - Duration

3

4

Regulatory Environment

Relaxed

Stringent

Terms of Reference - Application Date

1-Aug-02

1-Oct-02

Labour Availability Delays

0

1.4

OTSG Manufacture & Delivery Duration

12

16

Weather Delays

0

0.5

Long Lead Equipment Delays

-1

2

The tornado diagram identifies and ranks the key project risks and is a tool that helps the project team to focus on the most important drivers.

Days

Start Date

-60

-40

-20

0

20

40

60

EV = 20-Dec-07

slide15

Modern Day Application of Risk Management

  • Risk management is fundamental for accountability on corporate governance and on maximizing shareholder value.
  • It begins with strategic definition and continues in a consistent manner
  • throughout the project life cycle.
  • Range Estimating is not Risk Analysis.
  • Risk analysis must consider the specific uncertainties of a project, and
  • incorporate these underlying risks into the project value. Processes that
  • provide single-point outcomes or risk distributions based on the probability
  • of fixed outcomes (decision trees, KT, range estimating) do not meet the
  • definition of risk analysis.
  • Risk Management ensures that there are no surprises.
  • Documentation of assumptions and all risks. Communication of the risk
  • management plan (avoid, accept, manage) focusing on the underlying project
  • risks.
  • “Ignoring risks to a project is not an option; important decisions will be
  • made anyway, shouldn’t they be made with the best information
  • available?”
  • (Project Manager Today, October 2000)
slide16

CSC

Excellence In Risk Management

  • Specifics:
  • Supports Owner Organizations in major project development.
  • Group formed in 1982, over 250 project assignments worldwide.
  • Extensive and varied background in Project Planning and Management.
  • Specialties:
  • Risk & Decision Analysis for a wide range of capital Projects.
  • Strategic & Mitigation Planning for projects using risk models.
  • Facilitation ofProject Management, Business Planning, Environmental &
    • Safety Planning & Management and Team Building.
  • Project Management Education Workshops.
  • Development of Contract Claims and disputes and litigation support.