Risk Analysis & Management
24th March 2015Warwick
Max BrookerBSc(hons), MBA, AMIMechE, MAPMDirector/Partner – OTB Engineering
O: 020 7099 2608 M: 07799 765 [email protected]
www.otbeng.com
Agenda
• Introduction
• Definitions
• Qualitative & Quantitative - Risk Analysis
• Project Examples
• Application Case Study – PPP Risk Allocation
Crossrail – Farringdon Station
DefinitionsMonte Carlo Simulation & Risk Analysis
source (Wikipedia)
Monte Carlo SimulationMonte Carlo methods (or Monte Carlo experiments) are a class of computational algorithms that rely on repeated random sampling to compute their results. Monte Carlo methods are often used in computer simulations of physical and mathematical systems. These methods are most suited to calculation by a computer and tend to be used when it is infeasible to compute an exact result with a deterministic algorithm. This method is also used to complement theoretical derivations.
RiskThe ISO 31000 (2009) /ISO Guide 73:2002 definition of risk is the 'effect of uncertainty on objectives'. In this definition, uncertainties include events (which may or not happen) and uncertainties caused by ambiguity or a lack of information. It also includes both negative and positive impacts on objectives. Many definitions of risk exist in common usage, however this definition was developed by an international committee representing over 30 countries and is based on the input of several thousand subject matter experts.
ABI BTS Joint Code of PracticeRisk Management of Tunnel Works
in the UKICE - Risk Analysis and Management in Projects (RAMP)
(www.icevirtuallibrary.com/content/book/100868)(source: www.britishtunnelling.org.uk)
Project Risk Management ProcessBased on ISO 31000(The Institute of Risk Management – www.theirm.org)
Risk – cost overspend
Likelihood * Impact = Risk Exposure
Say 50% chance of task overspend of £100k = £50k Risk Exposure
Mitigation actions options include:-• Project action to reduce likelihood or impact• Contractors all risk insurance• Liability caps.• Subcontract package and risk• Don’t accept risk –> compensation event
Project Example Qualitative Project Risk Analysis
Risk Severity Metrics
1 Set up Risk Register2 Identify and define Risks3 Assess Likelihood of Occurrence and Impact if it occurs4 Assign Risk Severity levels R/A/G5 Plan, Implement and Manage Risk Mitigation Actions
The Basic Process Quantitative Project Risk Analysis
(source: @RISK www.Palisade.com)
Step 1 Set up a risk model functions:- Likelihood * Cost Impact = Risk Exposure
Risk 1 Binomial 30% *
Risk 2 Binomial 50% *
Risk 3 Binomial 50% *
Exposure
Exposure
Exposure
Sum Cost Exposures =
Step 2 Run Monte Carlo Simulation and interpret results
Project ExampleQRA Risk Modelling
Quick look at – Thames Tunnel Risk Register
Risk Analysis & ManagementCase Study
Private Public Partnership (PPP)Procurement
Risk Allocation ProcessPPP Agreement and Main Contracts
Procurement Authority
Project Co Ltd(SPV)
Lending Banks
PPP Project Agreement
Facility Agreement
ConstructorsE, C, W
DesignE, C, W Operator Maintainer
ISPShareholders
Shareholders Agreement
Main Contracts
Direct Agreement
PPP Risk Allocation Principles
• Risks are allocated to the party best able to manage the risk.• Risk are transferred or allocated through the mechanism of the PPP
Agreement and Main Contracts.• All risks need to be owned and managed by parties to the project
contracts, except external and Force Majeure risk events.• Risk mitigation costs are included in each risk owners cost base.• The risk ownership and management responsibility needs to be clear,
unambiguous, agreed and funded.• Risk allocation and acceptance is proportional to cost.• Risk allocation and acceptance agreement is achieved through negotiation
(e.g. Competitive Dialogue & Risk Workshops)• Government guarantees, insurance and contract terms (e.g. restricting
competition) are legitimate risk mitigation mechanisms.
Typical PPP Risk Allocation MatrixRisk Description Authority Shared SPV
Requirements – Output Specification •
Demand/Usage • cap
Outline Planning Consent •
Outline Design •
Land Purchase/Provision •
Private Finance •
Detailed Design – design liability transferred •
Construction •
Availability – of the Service •
Operational Performance – set of KPIs •
Legislative Changes – specify categories •
Environmental Compliance • cap
Ex Risks - Delays & Cost IncreasesRisk Description Force
MajeureAuthority Shared SPV
Delayed start – Financial Close/Planning •
Interfaces at contract boundaries
Ground Condition – Geotechnical Baseline • ins
Archaeological Finds •
Unexploded Munitions • def
Severe Weather • def
Construction – Noise/Dust/Odours •
Changes in Requirements/Tech. Specifications •
Economic instability • cap
Material & Labour Cost Escalation • cap
Default of Contractor •
Insurance Arrangements • •
Procurement Authority’sPPP Shadow Project Risk Register
• Logical structure; award, design, site, construction, operations, maintenance, hand-back, transversal.
• Comprehensive and realistic mitigation strategies.• Analytical quantitative rigour.• What-if scenarios developed and analysed.• Clarity of risk ownership.• Cross referenced to PPP Agreement Terms and Project Plans.• Risk exposure estimated through project lifecycle.
Risk Identification Risk Analysis Risk Mitigation StrategyRef.ID No. Risk Description Cause Risk Impact/Effect Likelihood Consequence Risk Rating Basis of Evaluation Current Control Measures & Effectiveness Mitigation Action Owner
Risk Mitigation
Strategy
Mitigation
1
Contractor has inadequate experience, resources and equipment to achieve the required performance standards and response times.
1. Contractor has no local experience in road maintenance nor any experience in undertaking performance based maintenance contracts. 2. Contractor has not demonstrated that it has resources or equipment which will enable it to achieve the response times.
1. Expected performance and service outcomes not achieved (likely). 2. Contractor disputes over penalties applied for non performance (likely). 3. Significant effort and concessions by DOT to assist the Contractor (likely) 4. DoT required to reduce requirements to avoid major contractual issues (possible) 5. Contractor stops work and defaults, requiring termination and re-tender (worst case) > all leading to negative outcome for DOT and negative perception of the performance based approach.
C 2 I
It is likely that the Contractor will sub-contract the works to a more experienced maintenance contractor - however, no details of any nominated maintenance sub-contractor were included in submission
1. Financial penalties in contract for poor performance, and provisions for termination of contractor after three months poor performance. 2. Consultant to assist Contractor during early stage of contract to reach required standards and performance
DOT PM
1. Request full details of the proposed maintenance sub-
contractors and the proposed contractual terms of
engagement / agreement with the sub-contractor/s. 2. Ensure
adequate reference checks have been undertaken in relation to
most recent three projects undertaken by each company (requesting references from
Bidder if not already provided).4
No clear plan for the initial condition assessment
Lack of adequate planning and resources
1. Delays to the completion of the first year construction works claims 2. Contractor claims > all leading to negative outcome for DOT and negative perception of the performance based approach.
C 3 II
1. Contract penalties in place for late completion. 2. Requirement for submission
of detailed plan during the mobilsation periodDOT PM
Request that Bidder submits detailed method statement /
resources plan for the construction works.
5Financial insolvency of the contractor
Inadequate cash flow to meet the mobilisation and upfront costs
1. Delays (possible) 2. Termination and re-tender (worst case) E 3 III
1. Bidder has signifcant site establishment allowance in Bid which will assist it in
meeting upfront costsDOT PM
Request that Bidder Joint Venture companies submit company financial statements for past
three years
Contract Bidding NegotiationsCompetitive Dialogue Stages
Authority / Bidder Competitive Dialogue Stages
CD start
Project Co
Risk
Proposal
Version: a
CD end
Project Co
Risk
Proposal
Version: z
Structured Risk Workshops
• Initial Clarification / Understanding / Planning• First Focus on D&C Stage Top 10 Risks• Second Focus on Other D&C Risks• Third Focus on O&M Stage Risks• Fourth Focus on Financial & Legal Risks• Lastly Consolidate
Quantitative Analysis of RisksTo Support Cost Analysis and Debt Justification
Nº Nom de la tâche
1 T0
2 System
3 System and Load anaylsis
4 Make or buy
5 Interfaces
6 Plan for Hardware Aspects for Certif
7 Reliability and maintenability
8 Sub-system performance
9 TRU 230VAC/28VDC
10 Definition phase
11 Prototype manufacturing
12 Delivery TRU Prototypes
13 Equipment performances
14 Environement validation
15 TRU Regulated
16 Definition phase
17 Trade off study
18 Trade off results
19 Delivery prototypes R TRU
20 Equipment perfomrances
21 Environment validation
22 Battery
23 Trade off study
24 Trade off results
25 Delivery prototypes batteries
26 Equipment performances
27 Envrionment validation
28 Auto Trasfo 230VAC/ 115VAC 75 KVA
29 Definition phase
30 Brass Board manufacturing
T0
T0+6mth
T0+6 mth
T0+18mth
T0+7mth
T0+18mth
06 07 08 09 10 11 12 01 02 03 04 05 06 07 08 09 10 11 12 01 02 03 04 05 06
2003 2004
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0.86
1.72
2.59
3.45
4.31
5.18
6.04
6.91
7.77
8.64
9.50
10.3
611
.23
12.0
912
.96
13.8
214
.69
15.5
516
.41
17.2
818
.14
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0.86
1.72
2.59
3.45
4.31
5.18
6.04
6.91
7.77
8.64
9.50
10.3
611
.23
12.0
912
.96
13.8
214
.69
15.5
516
.41
17.2
818
.14
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0.86
1.72
2.59
3.45
4.31
5.18
6.04
6.91
7.77
8.64
9.50
10.3
611
.23
12.0
912
.96
13.8
214
.69
15.5
516
.41
17.2
818
.14
model risk on planning, budget
Project Risk Register
Monte C
arlo simulation
probability curves
tornado / sensitivitydiagrams
Project Team
criticality diagram
Procurement Authority’sPPP Competitive Adjudication - Risk
Most likely
90% level
0
10
20
30
40
50
60
70
80
90
100
10 20 30 40 50
Cost (£m)
Pro
babi
lity
(%)
Scenario 1
Scenario 2
C: Compare Scenario Risk Exposures
B: Compare Bidder Proposals& Cost Risk Exposure
Informed Evaluation & Decisions through Competitive Dialogue stage outputs
A: Compare Bidder Risk Management Competency
Examples of D&B Project Bidder Risk Mitigation Strategies
• Material cost escalation – set limits to indexed increases.• Delayed start – define cost escalation factors.• Environmental – Clarify Authority’s EIA parameters• Design liability – lock to Authority’s Output Specification
parameters.• Site Ground Conditions – Authority’s Geotechnical Baseline
Report, ground surveys.• Construction – use competent experts, team approach.• Project Assumptions – clarify boundaries of liability, clarity
external dependencies e.g. Planning Approvals.• Demand – set minimum thresholds in Payment Mechanism.
Summary & Conclusion
• Risk Management ISO31000, BTS Code of Practice, ICE RAMP
• Project Risk Management & Risk Registers• Qualitative & Quantitative Analysis• Risk Modelling by Monte Carlo Simulation• Application Case Study - PPP Procurement • Example of Bidder PPP Risk Mitigations
Thank you for your attention
Any Questions