megaprojects & risk - john reilly us

2018 BSCE Lawler, BostonJohn Reilly

Slide 1

2018 BSCE Lawler LectureMegaprojects - Characteristics, Cost/Risk Management, Supporting Systems

Boston , May 30th 2018

John Reilly, P.E., C.P.Eng.

MEGAPROJECTS & RISK

WMATA Dupont Circle Station Lake Mead TBM


2

Previous Papers & Presentations


3

Presentation will cover

1. Megaprojects – US and International Characteristics Key Goals & Objectives, Requirements Successful Examples: DC Metro, Boston Southwest Corridor Lessons-learned

2. Management Tools and Systems – Cost & Risk■ Cost Validation and Probable Cost (CEVP) Risk Identification, Response and Management

– Contracting and Delivery Methods– Team-Alignment and Partnering

Example – Applications from Lima Airport Expansion, Peru

3. Conclusions, Questions & Discussion


4

b1. Megaprojects - Examples


5

Characteristics of Megaprojects (*)

Very large - multiple billions $$ Extended schedule

– multiple political cycles High level of public involvement

and media coverage Multiple stakeholders

Federal involvement, requirements Complex and/or unusual in many respects Multiple contractors/sub-contractors/suppliers Complex and specific contractual structures Complex risk structures e.g. interdependent risk events Require advanced management capabilities Require specific procedures and applications

(*) See “Gigaprojects”, ed. Galloway, Nielsen & DignumAnd “Megaprojects” ed. Hatem & Corkum


6

Goals & Objectives, RequirementsNeed to create Public understanding and acceptance of the project – “buy-in”, support, funding, resilience for problems. Requires : Political strategy – stakeholders,

key goals, public process, support Ability to determine a realistic budget

and schedule (CEVP®) Funding – approval, availability + stability

(deal with political changes) Ability to meet budget and schedule

(Management Tools, Risk Processes) Alignment of Owner/designer/contractor Communication, media involvement

Sydney Airport Tunnel


7

Megaproject References


8

1.1 DC Metro - WMATA

Cut and Cover; Earth Tunnels; Rock Tunnels, Rock Stations; Elevated Track, Precedent-breaking underpinning of Monumental Structures, Control Center Building (Phase 1)


9

DC Metro –Tunnels/Stations Project engineering for

13 Metro contracts. Downtown core:

Rock arch station D4 Dupont Circle; D1 Earth tunnels; D2 Cut-and-Cover across the Mall; D4 Earth tunnels Smithsonian to Capitol; L1 Potomac Crossing; Operations Control Center Building

Secretary to the Board of Engineering Experts

New technologies – slurry wall underpinning, NATM tunnels, TBM technology


10

Management, DC Metro 101 Mile System

Transit Authority based on US Corps of Engineers experience and procedures

General Consultants for Engineering, Architecture, Geotechnical

Board of Experts for all underground work.

Rolling updates to cost and schedule estimates

Leadership – Jackson Graham, Carman Turner, Richard Page

Last 40 years - Inadequate maintenance funding


11

1.2 Boston - MBTA Southwest Corridor

Project Budget for Management, Design & Construction - $750 million US (current cost approximately $2.5 billion)

Final Project Cost - $743 million US Initial Project Schedule (1977) - November 1986 Actual Project Operations – May, 1987 (+6 months) Consistent with the Boston Transportation Planning Review 1972

Project included rapid transit systems (facilities, vehicles, signals, electrification); civil, structural and tunnels, arterial roadway, 3 high-speed rail lines, urban development, community outreach, educational training, park and parklands + political changes


Project Layout

Slide 12

Civil, Line & Station Structures, Underpinning , Electrical, Train Control Systems (Retrofit to Orange Line Vehicles), Urban design, Landscaping and Support contracts, Community involvement, Educational Training Program.


13

SWCP Elements, Design Details Function, Aesthetics, Character, Context, Unique


14

SWCP Management

Separate office of Southwest Corridor Development established by Secretary Salvucci (reporting to Fred)

Interstate Highway funds diverted to Rail & Transit (a first)

Guided by Boston Transportation Planning Review 1972

Responsive to community input and requirements

Construction expertise of MBTA managers (ex Turnpike extension)

Experienced designers (Architecture, Urban Design, Transit Systems, Civil, Structural, Environmental)

Innovative Educational Training & Community Outreach Programs


15

2. MANAGEMENT PROCESSES

Management processes include strategy, design & construction systems, cost & schedule control, quality and safety systems, technical/financial audits, value engineering, expert panel & peer reviews.

Not so common (but seeing now more often) : Cost Validation + Probabilistic Range Cost Evaluation Risk Identification, Characterization and Mitigation Disputes Resolution / Escrow Bid Documents Team Alignment Processes - Working in Partnership Advanced Contracting & Delivery

• Early contractor involvement (ECI)• Fixed Price Incentive Fee (FPIF) • Alliancing (Relationship Contracting)


16

2.1 Management - The Cost Issue

Planning & Scoping – we are optimistic. A PMI study found that the real scope, cost – for

a wide range of projects - was about TWICE the initial scope/cost/schedule estimated

See NASA 2009, “Symposium – the Joint Confidence Level Paradox, a History of Denial”

Results: Low estimate in the beginning

– leads to problems: Cost and schedule over-runs Resource competition

– deprives other projects Media – investigations,

negative publicity

NASA, Apollo 11(James Webb)


17

Cost – Background, 1990’s to 2002+

International Tunneling Association, Working Group 13 – survey of costs of International transit systems, mid-1990’s

Led to a 2000 survey of the costs of international projects(difficulty getting valid data)

US Underground Construction Association, 2001 Seattle conference on cost of underground projects

Presentations / discussions in:Vienna, Basel, Melbourne, St. Petersburg, New York, Oslo, Frankfurt, Mexico City, Durban, Boston, Salzburg, Beijing, Ferrara, Milan, Rome, Stockholm, London, Seattle, Amsterdam, Sydney, Singapore, Istanbul, Prague, Budapest, Toronto, Vancouver, Helsinki…

Led to the basis of new, specific risk-based cost methods in Washington State – CEVP 2002

Let to a better understanding of risk and risk management


18

Examples- AUA Conf Seattle 2001


19

Megaprojects Most at Risk Many large, complex transportation projects have significantly

exceeded their budgets and schedules – a major problem!

London JubileeLine +67%

Channel Tunnel +80%

Boston Central Artery / Tunnel

+80-100%Percent is added cost over first

announced budget.Many other examples.


20

Not All Projects Exceed Their Budget Boston Projects(1) (you normally only hear of the CA/T)

SW Corridor Project – 1% under budget, close to schedule Logan Airport Modernization Program

– within a “few percent” of budget MBTA Red Line – 9% under budget MWRA Boston Harbor Project – 4% over budget, on schedule Central Artery / Tunnel – 80 to 100% over budget, years late

Lessons-learned: We can deliver complex megaprojects on budget and schedule Advanced management & contractual systems are required The stakeholder / political environment is a key determinant Strategic approach & risk-based costing is critical in early

planning – a range of probable costs, no single point numbers Early “commitments” are remembered by the public and media Continuity of management policy is essential

(1) See the foreword in the Gigaprojects Book


21

Better Cost Estimation, WSDOT WSDOT was planning several mega-projects, possible total

value over $20 billion – concerns regarding the out-turn costs Doug MacDonald asked us to develop a better cost estimating

process. Mike McBride brought Cost-Validation from the MWRA Metrowest tunnel, I brought risk identification/risk management.

We called it CEVP® (Cost Estimate Validation Process)

Questions that we asked:1. Can we improve the cost estimating process?2. Who can be objective (unbiased) about an estimate?3. How can we include risk and “validate” costs?

Key Conclusions:1. We need to examine cost estimates and assumptions,

using independent experts to “validate” the base costestimate

2. We need to include risk (i.e. uncertainty) using statistical risk and decision analysis methods


22

Key Policy – “range of probable cost” In the beginning there is a large potential range for a

project’s ultimate cost - depending on events that may occur

Future costs must be represented by a probability distribution - a range of costs

Prob

abilit

y

Range of Probable Cost

A single cost number represents only one possible outcome, depending on circumstances and risk events

These circumstances and risk events are not directly controllable or absolutely quantifiable

The risk events, if they occur, produce consequenceswhich add cost/time to the project (sometimes opportunities)

Therefore, cost estimation must include risk (i.e. account for uncertainty) using a logical, structured process

Cost

Base Cost


23

We presented results to the public June 3 2002

Presentations to Politicians and Newspaper Editorial Boards

Release of the CEVP results, overview, process, questions & answers to the Public

Document included probable results for 20 programs

1-page summaries for all Positive public response

CEVP Process published in the BSCE Journal 2004


24

Giving citizens a range of costs, including full disclosure of the variables, “is not only politically smart, but it’s common sense”

-Reilly, quoted in the Seattle Post-Intelligencer, June 9 2002

TM

TUESDAYJune 4, 2002

- Seattle Post-Intelligencer Editorial

SUNDAYJune 9, 2002

Shocking or not, the Department of Transportation has performed an unprecedented public service with these latest costestimates. It is a much-needed dose of fiscal reality. The department offered realistic cost-range estimates.

CEVP® - Washington State DOT


25

CEVP : Explicit Management, Cost and Risk

Risk mitigation / cost-containment actions can be taken, addressing those risks driving high costs – reducing the “range of probable cost”

Allows structured risk and cost management to approved budgets

Risk Management:Work to reduce the probability and/or consequence of these high-impact events

Seattle Monorail


26

CEVP+ Process = Value Engineering + Risk Mitigation + Scope Changes (2+ Cycles)

Risk ID & Characterization

Modeling Design Definition, Cost Estimate Results

Value Engineering, Risk Management & Mitigation, Scope & Other Changes

Changes to Design, Cost Estimate, Risk Profile

Base Cost Validation

CEVP process at a point in time

CEVP+ Advanced Application, Megaprojects


27

CEVP+ Results (2010)

60% mitigated probable cost $1.96 billion


28

Doug’s view regarding CEVP & MWRA CEVP’s foundation was grounded in a strong commitment

to collaborative problem solving — fix the problem and advance the job, other than paralyze a job in friction, dispute, adversarial behavior, etc.

No better example from MetroWest was the expeditious and relatively cheap (all things considered) replacement of the failed main bearing deep underground on one of the TBMs. No rescue shaft, no “lawyering up” to stop the quick fix.

For WSDOT, CEVP was used as an instrument to embody that kind of thinking right into the very first kernels of project planning.

In that respect it was an outgrowth of established (though not everywhere consistent) best practices in the underground industry.

in putting together WSDOT’s CEVP we were able to leverage that larger approach to project management and add risk-sensitive assessment into an estimating and risk anticipation, mitigation and minimization approach

From Doug MacDonald, recent email.


29

Who Developed & Implemented CEVP? Colleagues who developed, funded and implemented

WSDOT’s Cost Estimate Validation Process

Doug MacDonald, David Dye, Michael McBride, Jennifer Brown, John Reilly + (not shown) Cliff Mansfield, Dwight Sangrey, Bill Roberds, Travis McGrath, Keith Sabol, Art Jones


30

2.2 - RISK, RISK MANAGEMENT CEVP led to more explicit risk management practices Basic risk process now well understood and are being applied ITA WG 2 – Guidelines for Tunnelling Risk (Soren Eskesen) Chapters on risk: UCA (Reilly),

Mechanized Tunnelling (Guglielmetti et. al.)

Decision Aids for Tunnelling (Einstein, Grasso et. al.)


31

Risk Response“Risk can be managed, minimized, shared, transferred, or

simply accepted - but it cannot be ignored.”

likelihood or probability

cons

eque

nces

or

impa

ct

Initial risk

Residual risk

Probability: Chance of an event occurring

Impact: The effect on the project or its objectives, measured in terms of safety, cost, schedule delay, quality of construction or other requirement (+ or -).

Risk: Combination of probability and impact

Residual risk: Risk remaining after initial risks are mitigated

ALARP Principle “As low as reasonably practicable”


32

Risk – Historical Development

Some historians believe the concept of risk arose through gaming. People in ancient civilizations played games with dice and bones –

games that evolved into chess and checkers over 2000 years ago. It is possible to trace the use of insurance back to ancient times -

mutual aid and burial societies have been documented from the earliest days of ancient Rome. These are considered the precursors of modern insurance companies.

Some historical evidence that gaming gave rise to probability theory comes from writings by Dante and Galileo (many others).

The mathematicians, Pascal and Fermat, wrote each other about games of chance in the 1600s - a correspondence that is believed to have given rise to modern probability theory.

See: "Against the Gods: The Remarkable Story of Risk,"

Peter L. Bernstein


33

Risk - Advanced Guidelines/Processes

Continuing Risk Improvements Guidelines, Manuals, Procedures, etc.

Results Cost

Cost Estimation Risk Assessment

Cost Impact

Time-related Cost

Schedule Impact

Direct Cost

Probability of Occurrence

DelayMarkup

for Unknown Knowns onBase Cost

Object Cost

Set Uncertainty for Baseline Costaccording to Object Class

TunnelStationsSubstations

WBS and Cost Schedule

StationSubstationTunnel...

Equipment Cost Labor Cost

Full Closure

Tunnel Section 1

Stations

Tunnel Section 1 Risk

Tunnel Section 1 Baseline Cost

Stations Risk

Stations Baseline Cost

Schedule Before Risk Assignment

Schedule After Risk Assignment

Contractor Risks Owner Risks

Baseline Activities

Results Schedule

Mitigation

Predicted Completion Date

Predicted Delay Caused by Contractor

Predicted Delay Caused by Owner

Delay

Completion Date / DelayCost

Identified Risk Unknown

Substations

Substations Risk

Substations Baseline Cost

Pre-Award Risk

Deadline

Two Alternatives

New risk characterization, definitions….risk correlations, dependencies, multiple occurring…

Chapter 4 – Risk Management (Reilly 2009)


34

Lake Mead Risk - in PARTNERSHIP – Lake Mead Tunnel Awarded March 2008

$447 million Compliance with ITIG

Risk procedures Starter tunnel problems

2010-2011 + delay, cost Agency & Contractor working “in

partnership” joint risk workshops. Project finished successfully,

opened to the lake, September 2015.

Tunnel Drive plan/layout TBM in chamber - production to 391’/week; Tremie concrete 12,000 cy, 11 days,

http://tunneltalk.com/images/lakeMead/Lake-Mead-TBM-in-assembly.jpg

http://tunneltalk.com/images/lakeMead/1c-Lake-Mead-alignment-TBM-position.jpg


35

Risk Management - Lima Airport Peru,

New Airport Terminal + 2nd Runway, fast-track, FPIF Contract, non-Governmental Owner, full implementation of advanced Risk Management.

Introduced current risk management practices Initial 4-day risk workshop – Program staff + Executive Define best practices for

Owner (LAP) re Risk: Risk Policy Risk Management Plan CEVP – validate costs,

define risks, model cost & schedule using:

RIAAT advanced modeling –integrated cost & schedule

PRAT Risk Register tool for workshops & input to RIAAT

Lima Airport Risk Workshop Team, June 2017


36

Risk Management - Process

Slide 36

Risk Management uses a defined Risk Policy and Process – In Lima this combines CEVP, Cost, Risk and RIAAT processes:


37

RIAAT Advanced Cost/Schedule Modeling

Integrated risk modeling software being used in Lima, New York, Europe


38

Specific Distributions for each Risk

Scenario one cave-in

Scenario three cave-ins

Scenarios four and morecave-ins

Scenario two cave-ins

Probability that no cave-in will occurDeterministic Approach: 2 x 65,000 = 130,000


39

IMPACT OF RARE EVENTS

There are rare, but very high impact events that can be disastrous

Their impact is very much out of proportion to their probability

Because they have very low probability they sometimes are not sufficiently considered

It is important that we give better consideration to such events - but it is difficult to do this.

Additionally, the possibility of “black swan” risk events is real.

Seattle SR99 Tunnel Boring Machine, 17.6m Diameter


40

2.3 CONTRACTING METHODS

The contracting method is a critical determinant We need to match the contracting process to the project

environment (considering risk, applicable regulations, agency practice, experience and capability)

Contracting procedures generally used for US Infrastructure: Design-Bid-Build (DBB) – most common Design-Build (DB) – substantial number of projects

Newer contracting procedures being used or of interest: General Contractor / Construction Manager (CM/GC) PPP – Public Private Partnership Early Contractor Involvement Fixed Price Incentive Fee Alliancing / Relationship / Consensus Contracting

Other International applications (FIDIC, NCE-3c, PPC2000 Docs)


41

Adversarial vs. Relationship Contracts

Alliancing Partnership (true) Fixed Price Incentive Fee Public Private Partnership CMGC Design–Build (DB)(*)

Design-Bid-Build (DBB)(*)Rel

atio

nshi

p C

ontr

actin

g Pr

inci

ples

Incr

ease

use

of

Adversarial

Relationship

(*) low-bid environment leads to conflicts


42

Most Collaborative: ALLIANCING

Greater benefits and performance can be obtained (e.g. over partnering) by contractually defining project relationships

First applied to the offshore oil platforms in the North Sea with the following reported cost savings:

Off-shore Oil Project (All amounts in £M)

Target Cost

Actual Cost

Cost Saving

Percent Saved

Britinnia 1,500 1,200 300 20% BE ETAP 926 742 85 9% BP Andrew 373 287.5 85.5 23% Interconnector 316.5 240 76.5 24%

Wandoo Oil Platform, WA


43

Example of Alliancing

Sydney Northside Tunnel Project 19.5 km tunnel, 3 TBMs - 6.3, 6.0, 3.8m dia. Competitive award components Client-engineer-contractor in joint venture simple contract arrangement,

open book accounting Pain-Gain (risk-reward) agreement Comprehensive performance measurement Agency satisfied with outcome

Channel Tunnel Rail Link, UK Completed under target cost,

ahead of schedule See Task Force Report to the

UK Deputy Prime Minister (“Rethinking Construction”),

UK Dept. of Environment, Transport and Regions, London 1998


44

Fixed Price, Incentive Fee Contract

From US Dept of Defense procurement strategy -Differentiate 3 types of contractual environments: Well known projects (Firm Fixed Price) Research (Cost-Plus-Fee), Large or complex projects with high risk can combine Early

Contractor Involvement, Ceiling Price and Incentive Fee resulting in a Fixed Price, Incentive Fee (FPIF) Contract.

FPIF combines cost-plus and fixed-price structures to manage (allocate) risk between Owner and Contractor. Negotiated Target Cost and Ceiling Price between Owner and

Contractor plus Pain-Gain share percentages Incentive for Contractor to reduce cost to improve profit Limits the upside potential cost for the Owner.


45

60 67 74 82 89 96 103

110

117

125

132

139

146

153

161

168

175

182

189

Range of Probable Cost

Owner’s View

Cont

ract

or’s

Vie

w

Target Cost$ 100

Share 0/100

Share 50/50

Share 50/50 (Owner/Contractor)

PTA$ 144

Total Project Cost

Profit Contractor

Prof

it

Contractor increased profit

zone

Contractor negative

profit zone

Ceiling Price$ 132

Target Profit(10% = $ 10)

Range Project Cost Owner -50% of the overrun cost + profit at PTA-50% of the savings + profit

PTA = Point of Total Assumption(above the point the Contractor pays for all costs)

Total Project Price

Target Profit

Target Price$ 110

Zero Profit

Fixed Price Incentive Fee (FPIF)


46

Contracting References

Many available


47

US Megaprojects – Investment needed

Generation after generation, giant public works projects have altered the American landscape. In the 1800’s The Erie Canal and the Transcontinental Railroad.

In the 1900’s massive urban sewer and sanitation systems, the Tennessee Valley Authority, rural electrification, the Hoover Dam, the Interstate Highway System, major subway networks in NY, San Francisco Atlanta and Washington DC

However since the mid 1960’s the level of US public investment shown in the graph –around 2.5% - is inadequate.

Lack of vision and a clear responsibility for implementation and funding is a problem.

e.g. the current dispute about the NY-NJ Gateway tunnel - Federal or State responsibility, or both?


48

Annual average infrastructure expenditures as a % of GDP worldwide 2008 to 2013

USA 2.4%

Australia, South Africa 4.7%

According to a study by D.A. Aschauer,[3] there is a positive and statistically significant correlation between investment in infrastructure and economic performance. Furthermore, the infrastructure investment not only increases the quality of life, but, based on the time series evidence for the post-World War II period in the United States, infrastructure also has positive impact on both labor and multifactor productivity.

https://en.wikipedia.org/wiki/Infrastructure-based_development#cite_note-Aschauer-3

https://en.wikipedia.org/wiki/Infrastructure

https://en.wikipedia.org/wiki/Multifactor_productivity


49

MORE INFORMATIONwww.JohnReilly.us Email: [email protected]

• Key topics and information can be accessed from the tabs on the left side.You can download presentations from the links in the boxes.

http://www.johnreilly.us/

mailto:[email protected]