Project Risk Management Advance

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Quantitative Risk Analysis (QRA) for

Date: 21^st February 2019

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Introduction

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Who We Are…

 Established vide ESA Jurutera Perunding Sdn Bhd.

 Our Services:

• Project Management & Management Consultancy

• Cost and Risk Management Consultancy

• Land Development Advisory

• Business Advisory

• Building Inspection Services

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Overview Of The Achievement & Track Record Of ESA

1. Track record since 1972

2. Achieve 4 Star Rating under SME Competitiveness Rating for Enhancement at 2014 and 2015.

3. North-South Toll Expressway (PLUS) from Ipoh-Changkat Jering Expressway

4. Rantau Petronas New Township, Kerteh 5. Biggest Airforce Camp in Sendayan

6. Damansara-Shah Alam (DASH) Expressway

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Objectives

1. To give an overview about Quantitative Risk Assessment (QRA) process

2. To demonstrate how QRA can support the decision making

3. To show how risk management can be more proactive

in managing project risks, via integration with project

controls and strategic management

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Road to Comprehensive Assessment, Integrated and Predictive Risk

Management Efforts

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History of cost and schedule overrun projects in Malaysia

KLIA 2 (2014)

Gumusut-Kakap FPU (2012) Double Track (2010)

Independent Project Analysis, 2010 Project will be fail when:

 Schedule overrun by 25%

 Cost overrun by 25%

 Series of stoppage of work until the progress cannot be move forward Tapis E Platform (2013)

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Effective Profit

The perspective of “overrun” – How do I look at it?

Direct + Indirect Costs Effective Profit

Total Project Cost

Effective Margin % Contract Value

Direct Cost Cost impact from

project risk

Effective Profit Margin % reduced

Direct Cost Cost impact from

project risk

Zero Margin %

Activity A

Activity B

On Schedule

Schedule delay lead to impact on cost

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The problem of overrun is also a problem for the client

Activity A

Activity B

On Schedule

Schedule delay lead to impact on cost

Construction Cost

+ Land Acquisition

+ Regulatory Fee

+ Others

Contingency Project Budget

Construction Cost

+ Land Acquisition

+ Regulatory Fee

+ Others

Total Project Cost

Contingency consumed Project Budget

Construction Cost

+ Land Acquisition

+ Regulatory Fee

+ Others

Over budget

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“Overrun” is caused by risks….

Project

Project Planning Contracting

Strategy

Resources Level of

scope completion Financial

capability

Construction Specific

Unforeseen ground condition

Bad weather

Unchartered utilities

Incomplete scope of definition

Design changes Poor financial management

by contractor

Budget constraint Inadequate

resources Appointment of

incompetent contractor Contractor goes

Bankrupt (financial solvent)

Poor planning

Lack of interface / integration

Poor design interfaces

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A COMPREHENSIVE risk assessment , SENSITIVE with indications of risks occurring and INTEGRATED

with all aspects of Project management

“Overrun” is caused by risks….

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Determine “Overall”

Risk Exposure

‘Pre’ versus

‘Post’

via Scenario

Analysis

Determine Appropriate Level of Contingency

Integrate with Change

Management Integrate with Project Controls (Cost and Schedule Controls) Develop sensitive Key Risk

Indicator

Determine the key risk drivers

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Strategic Risk is not part of the scope of this proposal

Strategic

Project

Political

Economy

Social Technology

Legal

Project Planning Contracting

Strategy

Resources Level of

scope completion Financial

capability

Construction Specific

Uncertainty

Risk

Opportunity

Condition

Positively affect project delivery

Uncertain Event

Negatively affect project delivery Uncertainty can be unfolded into two main categories;

risk and opportunity (Abd-Karim, 2014)

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Why QRA and Project Risk Management

Advance?

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Qualitative Risk Assessment has been operating

successfully

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Qualitative Risk Assessment however unable to

determine “how risky” the project is

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1. It is a mathematical process that combine quantified cost and schedule impacts to determine absolute magnitude of overall risk exposure to the project objectives (Cost, Schedule, Quality and HSE)

2. QRA always consists of two components

• Schedule Risk Analysis (“SRA”)

• Cost Risk Analysis (“CRA”)

3. The propose methodology is Integrated Quantitative Schedule and Cost Risk Analysis

5. QRA output normally written in 80% confidence level or “P80”

There is 80% chance that the overall cost risk exposure will be MYR 2.112 Billion or lesser

4. QRA uses modelling simulation technique – Monte Carlo.

What is Quantitative Risk Analysis (QRA)?

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Demonstration of QRA

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Output 1: Histogram with cumulative distribution (S-Curve) for the project completion date

 Indicate how likely are the project schedule targets to be met given the risks that may affect that plan.

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Output 2: Histogram with cumulative distribution (S-Curve) for the project cost

 Indicate how likely are the project cost to be met given the risks that may affect that plan.

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Output 3: Correlation between Cost and Schedule

 Indicate how many % chance that this project will satisfy both cost and schedule

 Indicate how many % chance that if the current plan is pursued to the end with the unknown and quantified risks we have chosen, will overrun both and time objectives

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Output 4 – Sensitivity Analysis

• All critical activities and top risks that driven the cost and schedule plans to deviate from the straight path.

• The focus of

mitigation strategies based on this inputs

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• Variation indicates potential “Savings” if all mitigation strategies are implemented

Output 5: Scenario Analysis

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Output 6: Total Risk Exposure

• The total Risk exposure at 80% confidence level (P80) is RM 2.1 Billion

• Assumed Post mitigation value or “Residual Risk Exposure”

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“Integrated” project risk management

approaches are essential.

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From that point, “Integrated” with project control

Project Control

Schedule Control

Cost Control

Change Management

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Example of Schedule Control

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Critical Deliverables (Percentile 90 versus Baseline)

Items Contractual Schedule

(Baseline Date)

Schedule + Risks (Percentile 90)

Spread (days)

Earthworks 16 September 2015 14 September 2015 2

Foundation Substructure 14 September 2015 3 September 2015 11 Superstructure 11 December 2015 17 December 2015 -6 Infrastructure 16 October 2015 30 September 2015 16 Architectural Works 3 September 2015 21 October 2015 -5

Mechanical, Electrical &

Piping

29 October 2015 13 October 2015 16 Overall Delivery Schedule

Contractual Schedule Schedule + Risks (P90)

14 April 2016 15 April 2016

Example of Schedule Control

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Example of Cost Control

Risk Response / Action Plan

Risk Causes Strategies Cost Impact ($)

(P80) Response Cost ($)

• QRA outputs are added into cost control template

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Example of Change Management spreadsheet

This column is meant to indicate contingency drawdown if there is, ascertained from project risk assessment (QRA) process

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The westerns have advanced ahead of us

We are still here at to-date

While they are here already

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Create sensitive via “Key Risk Indicator”

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Definition of Key Risk Indicator

Metric 1 Indicator A Factor A

Risk A : Likelihood X Impact

Occurrence Construction Risk A Materialized

Project performances affected, Project success may not achieved

A tool that has predictive power about the likelihood of a risk occurring as the project phases progresses (Rachel, 2014)

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Example Key Risk Indicators for top project risks

Risk Metric

Delay in Land Acquisition

key Access date not met

Delayed by < 1

month Delayed by 1

month to 3 months

Delayed by > 3 months

Labor Productivity

variance between actual vs

progress

< 1 month 1 – 3 months > 3 months

Damage to 3^rd Party properties

Instrumentation

Reading 0 breach of AAA 1 breach of AAA Superficial damage to structure

Prolonged Utilities Relocation

Delay of

relocation < 1 month 1-3 months Float consumed

Late approval from authority

average timing of

approval < 1 month 1-3 months > 3 months

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Summary

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All these are inputs to Risk Monitoring & Control Process

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“Buy-in” obtained from risk experts / professionals

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Knowledge Transfer

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Knowledge Transfer – Propose Training Module

Part Topics Sub-Topics

1

QRA Introduction Typical Objectives of QRA Contingency

What is Contingency

Profit & Loss Model Without Contingency Profit & Loss Model With Contingency Contingency Management

2 Critical Success factors for QRA

“Risk Event” vs “General Uncertainty”

Define Project Risk Concisely

When the quality of Risk Description is poor Correlation

3 Monte Carlo Explained in Cost and Schedule

Step 1 – Estimating the Consequences Step 2 – Create Scenarios

Step 3 – Putting them all together

Step 4 – Setting Probability Distribution Step 5 – Run Monte Carlo Simulation 4 Practical Exercises Exercise 1 – “Dice” simulation

Exercise 2 – QSRA Trial Run 5 Practical Exercises Exercise 3 – QCRA Trial Run

We propose a robust and comprehensive training programme to be rolled out to both current and future QRA users. The training module is proposed below:

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Q & A

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Thank You

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Monte Carlo Simulation Explained

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We have Project A, Risk A – We execute Project A 10x , all at the same time

2016 2022

Risk happened: Cost Impact MYR 500K

Observation Values (MYR)

1

2

3

4

5

6

7

8

9

2016 2022

500,000K

750,000K

1x

2x

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3

1

2

3

4

5

6

7

8

9

10

Cont’d

2016 2022

500,000K

750,000K

3x

4x

550,000K

800,000K

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Cont’d

2016 2022

5x

6x

1

2

3

4

5

6

7

8

9

500,000K

750,000K

550,000K

800,000K

500,000K

700,000K

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5

1

2

3

4

5

6

7

8

9

10

Cont’d

2016 2022

500,000K

750,000K

7x

8x

550,000K

800,000K

500,000K

700,000K

500,000K

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1

2

3

4

5

6

7

8

9

10

Cont’d

2016 2022

9x

10x

900,000K 500,000K

750,000K

550,000K

800,000K

500,000K

700,000K

500,000K

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Values’K Frequency of Observations (Nos.)

500,000 (3)

550,000 (2)

700,000 (2)

750,000 (1)

800,000 (1)

900,000 (1)

Record the observation

OBSV 1 OBSV 5 OBSV 3

OBSV 8

OBSV 6 OBSV 7 OBSV 2

OBSV 4

Observation Values (MYR)

1 2 3 4 5 6 7 8 9 10

500,000K

750,000K

550,000K

800,000K

500,000K

700,000K

500,000K

900,000K

550,000K

OBSV 10

OBSV 9

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Present the information graphically, in form of histogram

Values Frequency of Observations (Nos.)

500,000 (3)

550,000 (2)

700,000 (2)

750,000 (1)

800,000 (1)

900,000 (1)

OBSV 1 OBSV 5

OBSV 3

OBSV 8

OBSV 6 OBSV 7

OBSV 2

OBSV 4

OBSV 10

OBSV 9

3

2

1 4

500 600 700 800 900

Frequency

Impact

550 750

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Computerized modeling simulation should produce a similar form of histogram

We simulated the project 10x (10 iterations)

@Risk simulated 10,000x (10,000 iterations)

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People are more interested on “cumulative” : fall on, or below certain ranges

Values Frequency Cumulative Frequency

Cumulative Percent (%)

500,000 3 10 10/10 = 100%

550,000 2 7 7/10 = 70%

700,000 2 5 5/10 = 50%

750,000 1 3 3/10 = 30%

800,000 1 2 2/10 = 20%

900,000 1 1 1/10 = 10%

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Calculate the cumulative frequency

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Plot the Cumulative Probability Curve

0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000 1,000,000

0% 20% 40% 60% 80% 100% 120%

Cumulative Probability - Impact Distribution

“We are 80% confidence that the exposure of project risks will be at MYR 540K or lesser.

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0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000 1,000,000

0% 20% 40% 60% 80% 100% 120%

Cumulative Probability - Impact Distribution

Computerized modelling simulation should produce a similar

descending trend line

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The case of probability is 80%, how does this reflect on Monte Carlo simulation?

In our 10x iteration, it appears that Risk happened in any single iteration

1 2 3 4 5 6 7 8 9 10

500,000K 750,000K 550,000K 800,000K 500,000K 700,000K

700,000K 500,000K 900,000K 550,000K

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But if in 1000x iterations….or 10,000 iterations

2016 2022

Risk happened in 75% of the 10,000 iterations

2016 2022

Risk not happened in 25% of the 10,000 iterations And………….

1 2 3 4 5 6 7 8 9 10 (risk not happen) (risk not happen)

10,000

500,000K 750,000K 550,000K 800,000K 500,000K 700,000K

700,000K 500,000K 900,000K 550,000K

0 K

0 K 550,000K