Risk management is the subject of increasing attention in recent years. In the US, when Federal funds are committed to projects, risk management is a required programmatic activity. Even when it is not mandated by law or regulation, risk management is prudent for expensive, long-duration projects. Frequently, risk management is based on a risk register, and often captures as a list of typical problems with design and construction that a contractor has experienced. Risk registers vary in quality and usefulness. Some contractor submissions appear to be more “pro-forma” documents, while more useful risk registers will include anticipated risks tailored to the complexity of the scope of work and the contractor’s anticipated solution. This qualitative approach can develop a reasonable view of key risks and work to mitigate them. Recent experience at Arup has shown that this approach, while valuable as an initial approach, is limited by its quantitative nature. This paper will explore some of the key lessons learned and emerging practices that have been successfully used in recent work in detail. Key topics include: • While the essential elements of risk management apply across a wide range of markets, the planning and construction of risk management for due diligence, privately funded and partnership funded (both government and PPP) projects require different emphases and tailored approaches. • Appropriate risk structuring is required to identify key project risks that may be unrelated or marginally related to design and construction. Developing clear and effective ancillary risk statements (e.g., for marketing, finance, permitting and regulatory requirements) is important to successful risk management. • Where partnering is used for funding, there is a greater need for clarity and good communication. Planning documents require special consideration to minimize difficulties. Planning documents also need to be efficient and effective. • Large, sometimes geographically diverse, teams benefit from alternative approaches to risk workshops. • Large, expensive and long duration projects benefit by shifting risk analysis toward a more quantitative approach. Modeling techniques such as Monte Carlo simulation require special software (@Risk or Primavera) and sound input. Analyses that move risk statements from the essentially qualitative (such as severity of 4 and likelihood of 3) to agreed quantitative inputs are important. • Cost and schedule contingency are key concerns for funding agencies, whether in-house or external. The underlying structure for effectively constructing contingency depends on the contracting structure, sequencing of work, unit price allowances and other factors, in addition to the analysis of the contingency requirements of technical and other specific risks. • Special analyses for items of particular concern, for instance, the adequacy of escalation allowances or geotechnical risks, can also be helpful, particularly in the context of emerging technologies such as HSR. Risk management is coming of age, and is more than a risk register. Projects benefit from a more qualitative approach. Not every technique applies to every project, of course, but most projects, small and large, can benefit from a more structured, quantitative approach to risk management.
Model risk: illuminating the black box
