Project Risk Management in Large Capital Projects
BY V. T. CHANDRA SEKHAR RAO
Project risk management has evolved over the past few decades. It probably could have started with astute project managers anticipating problems during project execution and developing a pre-planned strategy to overcome these. It has now advanced into a structured risk management process that is well integrated into all project management Knowledge Areas as defined in PMI’s A Guide to Project Management Body of Knowledge (PMBOK®)
, as well as information from the Practice Standard for Project Risk Management
Though a predictable project outcome is essential, it is becoming more and more challenging as project complexity has grown with multi-party, multi-year, and multi-location execution of projects. Margins and tolerance for undesirable outcomes by stakeholders have too been reduced. Managing risk has become the most important aspect of project execution. Yet the degree of actual implementation of project risk management varies significantly from company to company. There are organizations in which proposal teams evaluate risks at the time of bidding complex projects with a high degree of commercial focus that suffer from lack of attention on risk management by project execution teams. There are also companies in which there is a risk management procedure or system in place, but project teams see it as additional work or a formality to satisfy the corporate risk group. Implementing robust risk management is essential from the bidding stage to completion, considering growth of projects both in value and complexity.
Structured project risk management with an appropriate corporate support
A few additional suggestions and aspects of de-risking projects through the project lifecycle are explained in the following paragraphs.
De-risking at the Bid Stage
Most contractors have thorough pre-bid risk reviews, and apply qualitative and quantitative methods to de-risk project through provision of contingencies and management reserves, supplemented by a broad risk management plan to project execution teams for implementation.
During execution, there are several factors that contribute to profit leak for contractors. Such factors include geo-technical or environmental conditions, restricted site access, permitting, historic preservation, political issues, hidden conditions, and market/inflation risk in a multi-year contract. Rather than writing a contract that puts all the risks on the contractor, the owner should ideally write a contract with a common baseline of known risks at the time of award. If the actual situation turns out to be significantly different, there would be a basis for an agreement on mitigation or evaluating implications. Such practice exists in developed markets like the US or Europe.
De-risking Through Communicating Contractual Issues
Project execution has become more complex with joint ventures, multi-center execution, and dealing with multiple cultures. As the PMBOK® Guide rightly points out, 90 percent of a project manager’s time should be spent on communication including risk communication. It is important to note the following:
De-risking Issues at Project Completion Stage
- Engineering, Procurement, and Construction (EPC) projects are multi-year, long duration projects. During their initial stages, the project manager should do a contract summary briefing to all key players, including engineering leads, procurement and contracting managers, and corporate/functional managers. It may be necessary to conduct “re-emphasis” sessions during critical stages of the project as well as necessary to have regular risk reviews on the project, including briefing new key players on contractual and close-out aspects of the project.
- In EPC projects, because of long duration, the warranty phase would seem to be too far to attract enough care and attention. A problem to be fixed under a warranty may cost more than getting things right in the first place. The project manager must use organizational process assets and quality audit/quality control to ensure quick detention of any inadvertent errors followed by remedial action taken on time. Communication on delivery as per the contract, without gold plating, is equally important.
Often at the project completion stage, the gap between the owner’s expectation and contractor’s understanding translates to unanticipated risks.
Generally in EPC contracts, the risks at the project completion stage are:
- Non-acceptance of the product
- Rejection of the product
- Failure of the product after delivery or acceptance
- Loss of company proprietary information during technical handover
- Liability due to breach of third-party intellectual property rights
Preparing for project close-out and handover should start at an early stage with progressive actions and updates to the handover package. Nowadays, most complex EPC projects need the handover of engineering information to the owner. Problems arise because a majority of engineering personnel are not available to the project manager at the time of contract close-out. This aspect often becomes a victim of neglect and later turns out to be a major retardant that drags the contract close-out phase to a much longer time than what had been planned for. One way to prevent risks is to ensure that contract clauses include the right to appeal against rejections and a compensation for invalid rejections.
In summary, project risk management is an area which needs attention and robust implementation at all stages of the project, with focus on de-risking effort right from the bidding to handover stage. The key is continual evaluation of risks and mitigation actions.
(Mr. V. T. Chandra Sekhar Rao is director – operations, Foster Wheeler India, and responsible for process, engineering, procurement, construction, fired heaters, and project management departments. With more than three decades of experience in executing large Indian and international Engineering, Procurement, and Construction Management (EPCM) and front-end engineering design projects related to oil and gas, power, steel, and industrial sectors, Mr. Rao specializes in project management, risk management, and contract management of large capital projects.)