WHY RISK MANAGEMENT ? Bob Harvey PE

WHY RISK MANAGEMENT ?
Experience and Lessons Learned in Project Risk Management over 30 years
Bob Harvey PE
1
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THE CHALLENGE -- Cost/Schedule Growth of Large Capital Projects
0%
REF: E M D E D
I
Los Angeles Cathedral
Denver International Airport
Central Artery-Tunnel Project
50%
Hoover Dam Visitor Center
96%
96
%
El Toro “Y” Fwy Modification
202%
%
196% 202
196%
178%
%
165%
165
% 178
149%
149
%
Getty Center
Los Angeles City Hall Retrofit
Ronald Reagan Bldg. & Int’l Airport
Chek Lap Kok Airport Rail Link (HK)
Coor’s Field (Denver)
(Wash, DC)
DC)
World Bank Headquarters (Wash,
Channel Tunnel
L.A. Convention Center Addition
Seattle Light Rail Project (Seattle)
Staples Center Arena (Los Angeles)
Central Artery / Tunnel (Boston)
No. Outfall Sewer (San Fernando Valley)
30%
%
25%
25
% 30
50%
50
%
262%
262
%
244%
244
%
L.A. Coliseum Repair
12%
% 14
14%
%
11%
11
% 12
40%
40
%
81%
76%
%81%
75%
% 76
69%
69
% 75
67%
67
%
61%
61
%
244%
Disney Concert Hall
50%
S.F BART Extension to S.F Int’l Airport
100%
L.A. Central Public Library Renovations
150%
(Segments 1,2&3 No. Hollywood)
200%
L.A. Metro Red Line
250%
Eastside Reservoir Project (MWD of So. Calif.)
300%
E L A E E X U L L L L E O U E L
ARTICLE DATE
1/11/1999
7/1/1998
9/6/1994
3/1/1999
9/6/1994
4/3/98
10/25/99
10/18/93
10/12/93
1/3/94
4/10/95
5/1/92
2/14/96
1/25/98
12/8/99
12/16/94
12/1/97
4/24/95
6/7/91
2/26/00
1/11/99
ORG. EST. $M
$1,970.0
$4,006.7
$109.4
$1,200.0
$19.30
$8,000.0
$250.0
$310.0
$9,210.0
$186.0
$123.0
$1,560.0
$362.0
$153.0
$110.0
$35.0
$360.0
$41.6
$55.0
$5,000.0
$1,500.0
$45.0
CUR. EST. $M
$2,190.0
$4,501.8
$124.8
$1,500.0
$25.00
$11,200.0
$375.0
$500.0
$15,350.0
$314.0
$215.0
$2,750.0
$656.0
$300.0
$274.0
$92.7
$1,000.0
$123.0
$166.0
$12,200.0
$5,000.0
$163.0
REFERENCES::
3/5/98
A Associated Press, D Daily News, E Engineering News-Related, I U.S. DOT Inspector General
L Los Angeles Times, M LACMTA, N New Times, O Orange County Times, U USA Today, X Miscellaneous
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2
THE CHALLENGE – Continue and Increases
in $ Billion
Cost Growth on 21 Large Construction Projects
Actual Cost
$46.7 Billion
50
45
40
35
30
25
20
15
10
5
0
Original Cost Estimate
$29.8 Billion
Average
Over Original
Cost
56.7%
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21
Projects
NOTES
:
 Projects consisted of a sample of airports, light & heavy rail, sports centers and buildings
that were completed in the 1990s.
 Of the 21 projects, 9 were privately financed and the remaining 12 were publicly financed.
 Six of the projects are mega projects -- originally estimated to cost $1 billion or more.
 The percent over original estimate for private projects averaged 72% while public
projects were over by an average of 48%.
 The costs at completion ranged from 11% over the original estimate to 262% over.
 Not all projects experience cost growth of this magnitude, but no project is immune.
Project Delivery Institute 1999
Project
Cost Overruns (%)
Sydney Opera House
Suez Canal
Concorde
Brooklyn Bridge
1,400
1,900
1,100
100
Flyvbjerg, Mega Project and Risk
(Cambridge 2001)
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3
What Motivates Me
Paul Teicholz, Ph.D.
Professor (Research) Emeritus, Dept. of Civil and Environmental Engineering,
Stanford University
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4
Time Lines: Risk Management Tools and
Oversight Tools
EXXON
MIT
1970
1980
Lower Manhattan
Construction Command Center
Port Authority
of NY & NJ
1995
URS
2011
FUTURE
5
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RESIDENTIAL #:
COMMERCIAL #:
HOTEL #:
RETAIL #:
INSTITUTIONAL #:
INFRASTRUCTURE #:
PARK #:
174
95
32
174
27
24
48
*SOME ARE MULTIPLE USE.
HOTEL KEYS: 6,707
RESIDENTIAL UNITS: 28,869
Lower Manhattan:
Envisioning the Future
30%
17%
7%
31%
4%
2%
9%
COMPLETED:
PLANNING:
UNDER CONSTRUCTION:
STALLED:
TOTAL:
57,263,514 SQFT
9,367,328 SQFT
23,198,215 SQFT
4,826,837 SQFT
94,655,89 SQFT
60.5%
9.9%
24.5%
5.1%
TOTAL LANE MILES IN LOWER MANHATTAN
(SOUTH OF CANAL STREET)
109MI
APPROXIMATE LANES MILES OF
STREET PROJECTS COMPLETED
49MI
September 2011
Value Planning/Risk Analysis Model
Selected Value Planning/Value Engineering/Risk Mgt studies I directed lead and
managed. These studies all used Model for “Date/Cost Certain Program
Planning and Management.”
1. 2010 WORLD TRADE CENTER TOTAL PROGRAM
RECONCILIATION LED THE DEVELOPED THE NEW
SCHEDULE AND BUDGET THAT THE PROGRAM THAT IS
CURRENTLY USING KNOW AS THE “ROAD MAP”($15B) (P3)
2. MOYNIHAN STATION REDEVELOPMENT WORKSHOP (P3)
3. WTC PUBLIC SPACE MASTER PLAN/DEVELOPMENT
(ULTIMATELY LED TO PRIVATIZATION OF THE WORLD
TRADE CENTER AND ITS MALL CONCOURSE) (P3)
4. JFK IAB REDEVELOPMENT (SCHIPHOL P3)
5. PROGRAM DEVELOPMENT STANDARDS/GUIDELINES
6 . FINANCIAL RISK ANALYSIS GUIDELINES
7. AIRPORT ACCESS PROJECT P3 FINANCIAL FEASIBILITY
8. EAST SIDE ACCESS PROGRAM ($5 BILLION) EAST SIDE
ACCESS - STATION CONFIGURATION, OPERATIONS AND
FIRE LIFE SAFETY - CONCEPT VALUE PLANNING
EAST SIDE ACCESS - GRAND CENTRAL TERMINAL,
ARCHITECTURAL, STRUCTURAL, AND HVAC - VALUE
PLANNING
9 . EAST SIDE ACCESS - YARDS AND SHOP
LINCOLN TUNNEL TOLL PLAZA REDEVELOPMENT
PROGRAM
10. HOLLAND TUNNEL TOLL PLAZA REDEVELOPMENT
PROGRAM
11. REGION-WIDE EZ PASS ELECTRIC TOLLS COLLECTION
PROGRAM DEVELOPMENT
12. WTC OPERATION CONTROL CENTER
13. MULTIPLE SECURITY RELATED WORKSHOPS FOR NEW
YORK CITY LOCATED FACILITIES SUCH AS, UNDERWATER
TUNNEL, GRAND CENTRAL TERMINAL, PENN STATION, ETC.
13. WTC PERMANENT SECURITY
14. WTC BLAST RECOVERY
15. WTC EMERGENCY POWER
16. PABT BUS RAMP REHABILITATION
17. PATH CONSOLIDATED MAINTENANCE FACILITY
18. ALL AIRPORT SECURITY SYSTEM
19. AIRPORT ACCESS SEGMENTATION ANALYSIS
20. AIRPORT ACCESS TECHNICAL ANALYSIS
21. AIRPORT ACCESS PROJECT FINANCIAL FEASIBILITY
22. JFK MASTER PLAN
23. JFK ROADWAYS REDEVELOPMENT
24. JFK POLICY FACILITY
25. JFK RESTRICTED SERVICE ROADS
26. EWR FEDERAL INSPECTION SERVICES
27. EWR LANDSIDE ROADWAY DEVELOPMENT PROGRAM
28. EWR PARKING STRUCTURE
29. LGA GARAGE IMPROVEMENTS
30. LGA TERMINAL MODERNIZATION
31. NEW YORK PASSENGER SHIP TERMINAL REDEVELOPMENT
32. PORT FACILITY SIGNAGE
33. PORT FACILITY ROOF SOLAR INSTALLATIONS
34. PATH MAINTENANCE FACILITY
35, LONG-SPAN BRIDGE REPLACEMENT PROGRAM
36. WTC MEGA HIGH-RISE FIRE PROTECTION
37. WTC MEGA HIGH-RISE ELEVATOR CONTROLS
38. WTC MEGA HIGH-RISE ELECTRICAL UPGRADE
39 NEW STATEN ISLAND/NJ BRIDGE DESIGN AND DEVEL. PROGRAM
40.OUTERBRIDGE CROSSING REBUILDING PROGRAM
41. HOLLAND TUNNEL NEW VENTILATION SYSTEM PROGRAM
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7
Risk Allocation Continuum
Why is Risk Mgt. More Important Than Ever?
• Traditional
Project
Delivery
• CM/Build
• Design-BidBuild
• Holds
Contracts for
Owner –
Shares Risks
• Construction
Mgt at Risk
(CM@Risk)
• Target Price
• Guaranteed
Maximum
Price (GMP)
After Partial
Plans/Quotes
• Risks
Mitigated
• Design-Build
(Turnkey)
• EPC
• Performance
Spec
• DBOM
(SuperTurnkey)
• Performance
Spec
• Operate and
Maintain
• Financed
• Dept / Equity
Participation
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8
Benefits of Risk Management
• Relative quality measures show that large
projects without risk management as part of
professional program management on average:
– Result in the lowest possibility of meeting the
owner/developer’s expectations
– Take longer to deliver
– Have higher unit cost
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9
Challenges of Successfully Implementing Risk Mgt.
• Political timing/legacies
• Ends justifying the means
• Anchoring and Tunneling
• “Big is Bad” (scalability)
• The Ripple Effect: “Law of Unintended
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10
Challenges to the Acceptance of Risk Mgt.
• The answer driven from the top, Political
Agendas
• The need to believe (Dan Gilbert)
• Narrative Fallacy: The overall desire to follow
narratives
• Confirmation Bias
• The Construction Industry is slow to evolve
• The Black Swan (Driven by our increasingly
recursive environment)
11
Integration of Risk Management into Value Management
• The use of the “probability wheel” and other
exercises to other exercises to reduce anchoring,
bias and tunneling
• Because the Qualitative Risk Assessment
(development of a risk register) establishes the
basis level of risk for the project team it should be
the first thing done before VP or VE
• 4D analysis further informs the entire process.
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12
Risk Management
• Manage project risk
–
–
–
–
–
Scope
Budget
Schedule
Political /public
Environmental
• Communicate project risks to the
owner and delivery organization
• Facilitate development of
alternatives and mitigations
• Provide alternative measures to
owner/team before the risks
manifest
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13
Value Management
Without VP
Without
VECP
Without VE
POTENTIAL PROJECT COST GROWTH
VE
CP
Early Value
Planning/
Value
Planning VP
Value
VE
Engineering
Ideal
Final Project Cost
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Concept
Development
Preliminary
Design
Final Design
Construction
DURATION OF PROJECT
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14
Risk Management
Cumulative Probability
1.0
0.8
Contingency /
Higher Level of
Confidence
0.6
0.4
Baseline
0.2
0.0
Increasing Total Project Cost/Schedule
15
Risk Analysis 50%/80%/90%/95%
WB1840 - WTC Transportation Hub Complete : F
– Risk Analysis Methodology
90% 19/Aug/13
85% 08/Aug/13
C
80% 30/Jul/13
M
C
(
M
C
(
75% 22/Jul/13
96
70% 15/Jul/13
65% 08/Jul/13
60% 01/Jul/13
72
55% 24/Jun/13
50% 13/Jun/13
45% 05/Jun/13
40% 28/May/13
48
35% 20/May/13
• Major Key drivers
– 1 Line Box (and space below)
– PATH Hall structure (Box
Girders and Ribs)
– VSC Construction/
Commissioning
S
I
95% 02/Sep/13
120
Date P robability
– Results
A
100% 11/Oct/13
Hits
• Monte Carlo Simulation;
random generation of activity
durations.
• Calculate schedule with each
randomization
• 1000 iterations
• Probability distribution Curves
for Entire schedule and for each
activity/ milestone
30% 08/May/13
S
M
M
M
M
M
S
25% 26/Apr/13
S
9
D
P
20% 16/Apr/13
24
15% 02/Apr/13
10% 14/Mar/13
5%
25/Feb/13
0
06/Nov/12
12/Jan/13
20/Mar/13
26/May/13
01/Aug/13
07/Oct/13
Distribution (start of interval)
LMCCC
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16
3D and 4D Tools Enhance Risk Mgt
• More than 15 years of 3D design experience on
all kinds of projects from $50 million to more
than $1 billion
• 4D used in managing $15 billion World Trade
Center redevelopment
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17
Metrics on Value Management
Including Risk Mgt and BIM
• Port Authority of NY & NJ Value Mgt Program with Risk Mgt saved 13+%
• BIM/4D Benefit Exceed:
– 40% elimination of unbudgeted change (4 - 8% of project cost)
– Improve cost estimate accuracy to within +/-3%
– Bids within +/- 2.5%
– 60% less RFIs
– 80% reduction in time to generate cost estimate
– Overall savings: 10% of contract sum through clash detection alone
– 7% schedule reduction
• Combined 10X to 60X+ Return of Investment (ROI)
Stanford University Center For Integrated Facility Engineering (CIFE)
Statistics for Building Information Modeling Value
(Based on 32 major projects constructed using integrated PM techniques & a NIST study of 700 projects)
Audited Data from the Port Authority of NY&NJ on the Value Management Program
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18
Construction Coordination Room (CCR)
Value Planning Process
Value Planning/Risk Assessment/Regional Cost Benefit for the
World Trade Center Program
April 9, 2007
Inter Government/States Agencies Meeting
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19
Construction Coordination Room (CCR)
Value Planning Process
Former
Survivor
Stairs
1 Line
SubwayTower 2
Memorial
Tower
1 Pavilion
Tower 3
Subgrade
Roadway
WTC Tower
&
Escalators
Escalators Cortlandt Station
Foundation
Foundation
Foundation
Tridents
Dey Street
Connector
Tower 4
Foundation
9A Underpass
Exposed
Original
Slurry
Vehicle
Security
Center
Wall
South Pedestrian Bridge
Liberty Street Park
20
3
Freedom
Tower
Tower 2
Temp. North
Access
Fulton St. (West)
PATH
Station
Tower 3
Memorial & Museum
Tower 4
Trestle
12/26/2011
21 21
4
Value Planning / Risk Mgt. Process
• LMCCC brought in world-class experts with
experience in mega-project construction
• Created schedule adjusted for risk and identified
potential breaks in construction logic
• The Team analyzed the schedule and modeled
the construction activities using the latest 4D
techniques
• Developed a regional cost/benefit analysis to
prioritize acceleration of site components
12/26/2011
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22
CCR Process Organization
Phase 1
Issue Identification
LMCCC
Consultant
(LiRo & PMA)
Phase 2
Issue Mitigation Recommendations
Bob Harvey
Project Leader
LMCCC
Executives
Project Sponsors
CCR Active
Expert Planning
Team
Constructability
CM/PM
Geotech /
Structural
Transit
High
/
Rise
Support Team
Experts
Experts
Experts
Experts
Cost Estimators
Schedulers
Risk Analysts
Workshop Experts
B. Voorsanger
Architectural / Planning / Intangibles
Voorsanger & Assoc
Arch Review / PA Projects
Bill Faschan
Structural Interface Improvement
LERA
Shanghai WFC/ WTC
Bud Griffis
Mega Prog. / Waterside Support Expert
Dean Poly Tech. Univ.
Army Corps Eng. Reg. Com
Douglas Sahrbeck
Security Issues
SAIC
LMCAT
Gary Jentzen
Contracts/ Dispute Resolution
PMA
Central Artery
Hugh Lacy
Geotechnical Interface Improvements.
Mueser Rutledge
East Side Access
Jack Lemley
Mega Programs Organizational Expert
Lemley Assoc,
British Channel Tunnel
Mark Blumkin
Cost Analysis / Regional Cost Benefit
Deloitte
Construction Advisory Board
Peter Turton
NYC Construction Expert
WGI
Air Train
Jack Wright
Mega Programs
Mass Transit
Central Artery
Philip Craig
Rail Operations Constructability
PMA
PATH, Athens Metro
Robert Flieger
Cost Analysis
Deloitte
NYC Construction Cost
Steve Chamberlain
Construction Planning
WGI
Calatrava Milwaukee Art Museum
Douglas McKean
Station Architecture and Planning
Design Constructs
Grand Central Terminal Restoration
Steve Smith
Master Planning
Terry Farrell & Partners
Kowloon Station
12/26/2011
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24
Goal - Develop a Decision Framework
Preliminary
Interface
Assessment
(CCR)
Schedule and
Cost Risk
Analysis
Mitigations,
Workarounds
and Trade-offs
Regional CostBenefits and
Intangible
Benefits
Model
Interdependencies
Decision
Framework
Schedule
Likelihoods
Week One Workshop
Model
Mitigation
Revised Schedule—Cost (Zero Based)
Likelihoods, RCB, Intangibles
Week Two Workshop
Risk Management (CCR & Sponsors)
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Risk Management Timeline
Feb 23rd
1St Week Workshop
March 2nd, 15th
2nd Week Workshop
April 12th
Post Workshop
May 9th
Through Construction
Manage
Decide & Implement
Mitigate
Quantify
Identify
Review
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Recommendations
• The Team recommended modifications to the
Governance structure of the project
• Develop a risk based schedule and cost and
recommended risk mitigations, workarounds and
cost reductions
• Provided a regional cost benefit analysis based on
the risk analyzed schedule, costs and revenues
• Port Authority agreed to continue to participate
with LMCCC to implement a risk management
approach
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27
INITIAL
GOVERNANCE LMCCC
STRUCTURE
PANYNJ
NYSDOT
9A
MEMORIALS
Coord.
All
NYCDEP
WATER
SEWER
ConEd
Verizon, etc.
FDNY
PAPD
NYPD
NYCDOT
SPI
MTA
MEMORIAL
PATH
VSC
T1,T5
CHILLER
Dey St
Cortlandt
1,E,R/W
Station
PATH
MEMORIAL
T1
T2
T3
T4
HUB
PA
CHILLER
1, E, R/W
T4
T3
T2
VSC
T1
9A
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Recommended Organization Chart for WTC Recovery Corporation
P.A.
Executive Director WTC Construction
Delivery Partner
Executive Director
General Counsel
Briefs on Sites
Permits
Site
Construction
Manager
Plan’s
Design
Manager
Site 3,4,5
Transportation
Hub
Silverstein
Towers
NYCT
1 Line
Security
City Streets
Administrative
Officer
Communication
Business
Officer
International
Threats
Health &
Safety
Priority
Greenwich
Environmental Policy
Compliance
Community Liaison
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29
Risk Management Supported Acceleration of the Memorial Plaza
PA WTC Schedule Trending - Memorial & Museum
9/11/11 comparison
12/26/2011
30 30
4D Construction Clash Analysis
12/26/2011
QUESTIONS
32