Complexity, Risk… and Pirates How to Manage Complexity and Risk in Project Development

1. Complexity, Risk… and PiratesHow to Manage Complexity and Risk in Project Development Robert Fraga, FCMAA, AIA Valerie Wells, Esq. Willard Powell, PE

2. Fundamental Concepts Complexity: Consisting of interrelated parts. Composed of two or more units. Intricate, involved, difficult (number of players / level of difficulty) • Complexity increases with technological advances (new materials, products, systems) and industry specific conditions (specialization, regulatory environment, litigation). Increasing complexity is inevitable. • Increasing complexity has led to further segmentation and specialization. More project team members require additional coordination and integration • Increasing complexity increases risk. Increasing risk increases cost. Increasing costs impedes project development • Project delivery systems, regulatory and legal framework and existing technologies are proving inadequate to deal with complexity and risk • SOLUTION: Identifying and managing project-specific complexity and risk through collaboration and technology

3. Project Team: Historic Perspective Period Project Team Prior to the Renaissance Owner, Master Builder (designed and built the facility) After the Renaissance Owner, Architect, Builder After the Industrial Revolution Owner, Architect, Engineer, Builder Mid- 20th Century Owner, Architect, Engineer(s), Construction Manager, Builder, Subcontractors  21st Century and beyond Owner, Architect, Engineer(s), Construction Manager, Builder, multiple consultants or subcontractors including: Building Information Technology (BIM), sustainability, information technologies, security and antiterrorism, automation and mechanization, commissioning, insurance brokers, expeditors, lawyers, lawyers, lawyers and many others Note: The owner is the only constant in this progression. From ancient times to the present there has always been an owner. It is fair to say that owners have had more experience screwing up projects than any other member of the project team

4. Metcalfe's Law • Metcalfe's Law – assess the value of a network • The impact of an additional node (n) can be expressed mathematically n(n-1)/2 • 2 nodes can only make 1 connection • 5 nodes can make 10 connections • 12 nodes can make 66 connections • Exponential growth with each additional node (team member)

5. Historical Perspective / Technology / Other Factors • Technology: Mid to late 19th century – development of mechanical and electrical systems. • Other Factors: Exponential growth in complexity in the late the 20th century as a result of: • computers / information technology revolution • new materials and products • increasing regulatory mandates • segmentation and specialization • global economy and international supply chains • complex owner organizations • increasing demands for energy efficiency, sustainability, security • increasing disputes and litigation

6. Key Factors Adding Complexity Segmentation / specialization Low productivity and innovation Regulatory environment / contracting laws Litigation / insurance coverage Global economy / international supply chains Owners’ internal organizations Intellectual and human resources

7. Complexity Cycle Segmentation Low productivity and innovation Regulatory environment / contracting laws Litigation / insurance coverage Global economy / international supply chains Owner’s internal organizations Intellectual and human resources

8. Dealing with Complexity Managing complexity requires: collaboration and technology Collaboration: Two or more entities working together to achieve a common objective

9. Complexity and Collaboration • Increasing complexity – Consider: • Playing tennis (singles match) • Playing tennis (doubles match) • Playing basketball • Playing football, baseball, hockey With increasing complexity, the best team wins • The greater the level of complexity, the greater the need for collaboration

10. Collaboration is not Kumbaya • Collaboration is not about liking each other, or holding hands…Collaboration is about execution • There are countless examples where individual team members dislike each other and yet collaborated successfully • Gilbert and Sullivan (would not speak to each other) • 1907 Detroit Tigers (The team hated Ty Cobb and each other) • Hernan Cortez (Burnt the ships after landing in Vera Cruz) • The Manhattan Project (Intellectual rivals, prima donnas) These teams understood their mission and objectivesand they were motivated by an alignment of interestthat overcame or mitigated self interest and induced them to collaborate

11. Let's Consider Pirates • During the 16th and 17th century piracy flourished in the Caribbean and other parts of the world. The life of a pirate was not glamorous. They lived and worked in uncomfortable ships on the open sea. Food, medical care and other amenities were scare. • Their objectives, finding and attacking merchant ships carrying treasure from the New World to Europe, was complex and extremely risky. With the available technology, finding merchant ships in open sea lanes was nearly impossible. Pirates were subject to getting lost, being sunk by storms, hitting uncharted reefs, clashing with competing pirates or being captured by naval forces of the Colonial or European powers. • If they were captured, the penalties for piracy were severe.

12. Let's Consider Pirates • The crew of pirate ships was made up of run away slaves, English, Spanish and Portuguese privateers or escaped criminals. They were generally uneducated and often could not speak a common language. • Yet, even under these horrible conditions, pirates succeeded and for nearly two centuries successfully plagued the waters of the Caribbean and other parts of the world. Why? • They selected their officers and captains based on skill and merit. (Effective Leadership) • Their mission was discussed and voted on by the crew considering risk and potential rewards (Well defined goals and objectives, clearly communicated) • Loot was distributed equally among crew members with an additional share for officers based on their skill and rank (Motivation, alignment of interest)

13. Let's Consider Pirates • Pirates had a code. There were severe penalties for stealing from other crew members. (A culture of accountability) • Their ships were faster and more maneuverable than the British or Spanish naval vessels (facilitate escape) and more heavily arm than merchant ships to better overwhelm their victims (Most appropriate use of technology) Pirate culture was one of the most collaborative institutions of the times. A pirate had greater personal freedoms than most enlisted personnel in the Spanish or British navies Piracy thrived in spite of complexity and risks, at a time of slavery, indentured service, strict military and social norms. Piracy offered unprecedented freedom and potential rewards Pirates succeeded because they established norms that promoted collaboration from the captain to the lowest ranking member of the crew

14. Let's Consider Pirates • Piracy and project delivery are not exactly the same (although we all have worked with some pirates) • Because piracy and project delivery are complex and risky businesses, optimizing collaboration is a prerequisite for success • All projects are not equal in complexity, but the greater the degree of complexity the more important it is to create a collaborative environment • Collaboration does not occur naturally, it has to be planned and nurtured

15. Optimizing Collaboration Ideal Conditions • Leadership (by an engaged knowledgeable owner) • Clearly defined and communicated goals, objectives and expectations for quality, cost , duration , safety and other important factors • Selecting the “best project team” based on capabilities, past performance and past experience, and record of collaboration • Identifying , allocating and managing project risk • Motivation (alignment of interest of the project team members) • Selecting the most appropriate delivery system, project / project management technologies • Consistent and effective communication for rapid decision making and dispute resolution • Creating a culture of accountability (everyone admits their mistakes, everyone works together to resolve mistakes) • Effective, rapid and equitable dispute resolution • Sustained and effective project monitoring and administration

16. Optimizing Collaboration Minimum Requirements • Selecting the best project team • Motivating project team members (alignment of interest) • Effective communications and rapid dispute resolution • Selecting appropriate technologies • Identifying, allocating and managing project risk

17. How to Select the Best Project Team • Selecting the best project team is the most important factor for project success • A good project team will overcome many project challenges (poorly defined scope, schedule delays, etc) • A bad project team will ruin an otherwise good project • The most effective way to select the “best project team” is through a Quality Based Selection (prequalification) of all individual team members by considering: • Capabilities • Past Experience • Past Performance • Record of Collaboration

18. How to Select the Best Project Team Capabilities: • Key personnel • Resources • Consultants and Subcontractors • Financials ( Financial statement, credit record, claims) • Back log Past Performance • Comparable and non-comparable projects • Customer Satisfaction • Performance Indicators (project growth, claims, safety, etc.) Past Experience • How large was the project? What type of building? What was the delivery system? What was the duration of the project? What were the key building systems? Structural? Curtain wall? Roof? HVAC? Labor issues? Environmental issues?

19. How to Select the Best Project Team Record of Collaboration • Records of claims / disputes • Company culture • Communication, negotiations and conflict resolution Note: • Price and price related factors should be considered only after the identification of the “most highly qualified” team members • The selection process needs to focus on selecting the best team not necessarily the best individual members • In complex projects Quality Based Selection should extend to key consultants and subcontractors

20. Motivating the Project Team • Motivating the project team through incentives (and disincentives) designed to achieve desired objectives: • Completing the project on time • Completing the project within budget • Quality / systems performance / energy consumption • Meeting safety goals • Limiting project growth • To promote collaboration, incentives and disincentives should apply to all key members of the project team, designer, construction manager, builder, key subcontractors and consultants

21. Motivating the Project Team • Financial incentives: • Share savings • Performance awards (meeting schedule milestones, safety goals, project growth, performance objectives, etc.) • Penalties (liquidated damages, financial penalties for performance failures , litigation) • Other powerful incentives: • The promise of repeat business • Reducing / sharing risks (increasing profitability) • Professional pride (National Museum African American History and Culture) • Fear (Cortez)

22. Motivating the Project Team • Incentives work best when they are applied to measurable performance objectives and they reward the project team not just the owner or individual members of the team. For example, shared savings and other financial rewards may be distributed among key project team members proportional to their contribution, risks and other factors

23. Effective Communications • Establish a protocol for meetings and communication • Monthly executive meeting (key members of the project team) Executives • Monthly progress meeting (on the job site) Project Managers • Weekly look ahead meetings (on the job site) Field Personnel • Ad Hoc meetings (as required) • All meetings should follow have an agenda and assignment of tasks (who is going to do what? when?) Progress against assigned task needs to be monitored at subsequent meetings

24. Effective Communications • Establish time frames for processing project information (RFI, shop drawings, other submittals) Consider incentives for processing information under specified time frame • Select appropriate technology to facilitate communications: • Electronic communication platforms (website, web-based project management, e-procurement) • E-Communication tools should be compatible with key members of the project team • Establish procedures for rapid communication for urgent matters (hierarchical versus matrix communications)

25. Effective Communications Hierarchical Communications Builder A/E CM Matrix Communications Builder A/E CM

26. Effective Communications • Whenever possible, decision making and dispute resolution should be made by the project team members closest to the problem and escalated quickly, if necessary, to avoid delays • Once the project is under construction, personnel with authority to make decisions and resolve disputes should be present, near to, or on site to expedite decisions and dispute resolution • Project documentation and communications are most effective when they aid in rapid decision making and dispute resolution

27. Effective Communications • The owner and the project team should agree in advance on mediation or arbitration procedures to resolve challenging disputes in order to keep the project going • Set time frames for resolving or escalating disputes from the field to a mediator, for example: • Field 14 days • PM 14 days • Executives 30 days • Mediation board 30 days • Mediation should focus on “narrowing differences” and reaching an accommodation (not always a financial accommodation)

28. Selecting Appropriate Technologies • Technology helps by gaining efficiencies, (cheaper, faster, better) or better integrating and coordinating the work • The are many technologies available to the project team: • E-communication, e-project management, e-commerce • BIM • RFID • GPS • Electromagnetic tomography • Many others

29. Selecting Appropriate Technologies • Selecting project specific technologies must be a thoughtful process that considers: • Cost / benefit of utilization • Familiarity of the project team with proposed technology (past experience) • Benchmark (when and where has the technology has been used successfully) • Effect of the technology on individual key members of the project team • Beware of the “shiny new technology syndrome” Trying untested or project inappropriate technologies that promise great savings

30. Identifying/Allocating/Managing Risk • Collaboration does not eliminate risk • Project risk comes in many forms • Site • Programmatic • Project size • Project duration • Financial • Approval process • Political /regulatory • Labor • Weather / Acts of God • Project growth • Many other/ unique to the project

31. Identifying/Allocating/Managing Risk • There are certain project development activities that consistently have a higher level of risk in most projects • Site development (excavation, foundations, getting the project out of the ground) • Differing site conditions in renovation projects • Coordination of building systems (mechanical, electrical, controls, etc.) • Design and installation of the building envelope (curtain walls, roof, windows) • Weather related delays • Misc. administrative risks (effective communications, timely decision making, timely processing of modifications, resolving disputes, etc.)

32. Identifying/Allocating/Managing Risk • Risks are different in magnitude and impact for different members of the project team • In all cases, team member’s deal with risk by: • Assuming responsibility for risk • Assigning risk • Sharing Risk • Ignoring risk*   • *Note: Ignoring risks does not seem like a good approach but in fact it is acceptable to ignore a risk when the risk has a low probability occurrence and a low impact for the project. This type of risk can be covered through general contingency funding

33. Identifying/Allocating/Managing Risk • Risk analysis is a science that relies on quantifiable data to determine the degree of probability of certain occurrences and the impact of those occurrences to an enterprise or individual. Insurance companies rely on risk analysis to set premiums for their policies • Since all projects are different, it is difficult, if not impossible, to quantify probability and risk in a statistical manner. • Experience and due diligence can go a long way to quantify these risks using the following analysis:

34. Identifying/Allocating/Managing Risk Type of Risk Risk can be: High probability / high impact Require special attention – mitigation strategy High probability / low impact Requires some attention Low probability / high impact Requires attention Low probability / low impact May be ignored – risk accounted for through the project’s general contingency Probability Impact

35. Identifying/Allocating/Managing Risk Let’s evaluate site development risk for two similar projects (say a postal processing plant) • Project A: Is located in a virgin flat (Greenfield) site in an industrial park in a suburban location. Roadways and utilities are known and were installed by the developer. There is a single jurisdiction responsible for zoning, permitting, etc. • Project B: Is located in an urban area. The site was previously developed. The structures on site were condemned and demolished by the city. One of the buildings was a gas station. There are no adequate records of demolition of existing foundations, utilities and other subsurface structures. Tying into existing underground utilities requires trenching through major thoroughfares. This works needs to be done by the city. There are multijurisdictional entities requiring permits and approvals. A river is located near the southern boundary of the site.

36. Identifying/Allocating/Managing Risk • The risk associated with site development • Project A can be categorized as low probability, low impact. No extraordinary mitigating strategies may be needed for risks associated with site development. This risk can be assumed without significantly increasing costs and covered through the project general contingency • Project B is clearly high probability, high impact. It is prudent to develop strategy and countermeasures to mitigate potential risks for differing site conditions, delays. This risk may be assumed or shared to reduce project cost.

37. Identifying/Allocating/Managing Risk Project B Mitigation Strategies Significant site investigation including soil analysis (contamination), soil borings, test wells (water table), electromagnetic tomography (identify subsurface structures) Extensive search of property titles, building records, to ascertain previous site utilization Obtaining the services of an expediter to secure approvals from multiple jurisdictions Develop a separate site development package apart from the construction package (mitigate extended overhead costs due to site development delays) Contract with the best civil / demolition / environmental contractors available to do the work. Establish allowances and negotiated rates for the removal of unsuitable soils above and beyond anticipated work Establish site development specific contingency funds and additional time based on an estimate potential adverse impact Consider developing the project on another site.

38. Complexity / Risk Inventory • Increasing complexity and risk requires that the project team conducts a Complexity / Risk Inventoryof the project beginning during the planning phase of the project and adjusted to deal with changing conditions • This inventory is designed to quantify the relative complexity of the project, the project specific risk and the risk mitigating strategies or countermeasures. The inventory should be discussed with the project team to arrive at a consensus • Quantifying the relative complexity of the project (hospital versus a warehouse) may take the form of a narrative to inform key project delivery decisions such as: the composition of the project team, the delivery system, the schedule, incentives, technology, project administrative procedures (remember the greater the complexity the greater the need for collaboration)

39. Complexity / Risk Inventory Complexity narrative and risk inventory during planning stages drive key project delivery and technology decisions Degree of Complexity Strategies Hospital QBS subcontractor level, GMP open book IPD, CM at Risk, Web-base project management, BIM, performance incentives, advance procurement, dispute resolution procedures, etc. Warehouse QBS key members, firm fixed price, design-bid- build / design build

40. Complexity / Risk Inventory Project Specific Risk Inventory

41. Complexity / Risk Inventory Example: Project B –Site Development

42. Complexity / Risk Inventory • Establishing Contingencies • Contingency (funds and time) are an asset to the project that need to be managed throughout the life of the project • Complexity and Risk Inventory help in establishing project specific contingency (funds and time) and a mechanism for managing contingencies • The inventory assigns specific contingency costs to specific portions of the work. If the contingency is not used, it can be applied to other needs of the project (Project B – site development)

43. Complexity / Risk Inventory • Owners often fail to systematically analyze project complexity and risks even though these risks are often evident in the early stages of the project. Project contingency funds are established based on past experience (similar projects) or simply “gut feelings” or rules of thumb (5% for new construction, 10% for renovations) • Other important project decisions such as the selection of the delivery system, the project schedule, purchasing strategies, financial and funding strategies are often made without a serious and systematic analysis of project complexity and risk. • With increasing complexity and risk, owners cannot afford to make fundamental project delivery decisions without a thorough, systematic understanding of project complexity and risk.

44. Conclusions Individual Projects • Due to the impact of increasing complexity, owners and members of the project team must systematically develop collaborative and technological strategies to reduce risks and costs Industry • Owners, architects, engineers, builders and other project development professionals must work together to reduce legal, regulatory, technological, protectionist impediments to greater collaboration

45. A Final Thought “A bad doctor treats the symptoms, a good doctor treats the disease, a great doctor treats the patient” In project development: the symptoms are increasing cost, the disease is increasing risk, the patient is increasing complexity

46. Questions?