Risk Is Complex Stuff

 

Risk Is Complex Stuff

By Gerard Hillenbrand, P.E.

RISK is complex stuff was the conclusion that attendees arrived at after our Wednesday, June 22nd, meeting at Con Edison Headquarters in Manhattan. This meeting was jointly sponsored by the Institute of Electrical and Electronics Engineers (IEEE), The Power Engineering Society (PES), The Industrial Applications Society (IAS), The Edison Engineering Society (EES) and, of coarse the ASME. More than 85 engineers attended and 35 of these stated that they were members of ASME. The meetings speaker was Ronald Saporita, P.E., whose forty-year engineering career specialized in the planning, design, construction and operation of Industrial Facilities and the associated infrastructure. Mr. Saporita’s presentation was entitled “Managing Risk in Design and Construction Projects.”

It goes without saying that risk is always present in any engineering and construction project. The multi-million dollar costs of many of these projects mandate that all aspects of risk be minimized since substantial financial losses may result if the attended risks are ignored or glossed over during design and planning. In recent years substantial studies have been made attempting to exercise control over these risks and one of the more potent techniques developed is the critical path analysis which provides a risk management process for all sizeable projects. Mr. Saporita’s lengthy presentation was well illustrated with detailed slides providing elaborate details defining the major aspects of this management process.

Broadly speaking, engineering and construction projects may be broken down into the planning phase, the design phase, and the construction phase. During each of these three phases the attendant risks must be first identified, then fully analyzed, and, lastly, these risks must be controlled and/or minimized. These procedures must be implemented whether one or several organizations are involved in the projects and whether or not efforts are limited to one or more phases or a unitary design/build approach.

Obviously, the planning phase is extremely important and must take into account such goals and objectives as the economic incentives, the industrial improvements to be achieved, the relevant constraints confronting the project, and the achievable time frame for completion needless to say, failure to complete any sizeable project cannot be an allowable option or goal. First of all, the scope and objectives of the project must be accurately and carefully defined and will determine the project’s cost and time frame. Such relevant issues as safety and quality are not really variable or negotiable and become a fixed factor in the project’s objectives. Similarly, the risks inherent in the project are directly determined by its scope and the dependent risks of cost and time are merely a reflection of the project’s scope.

More specifically, the many risks involved may be ranked in a relative sense by contrasting the frequency of risk occurrence (frequent, infrequent, never) against the consequences of assuming the risk (severe, moderate, none), and then assigning a relative rating (Low = 1 to High = 4) to the risks under consideration in each category. When ranking the risks under these procedures it is important to realize that risks may be divided into two types: Those over which the engineer has direct control and those which the engineer has only indirect control. The direct control risks include such circumstances as design errors, quality controls, and project complexity versus simplicity, schedule flexibility, and the ability to organize efficient worker teams. Among the many indirect control risks are specific contract clauses, variable weather conditions, untimely material delivery and non-guaranteed quality, unknown site conditions, the availability and quality of the labor force, preliminary site access and cost, schedule, quality and safety issues. Incidentally, over seas projects are much more difficult to complete satisfactorily because of varying customs and work rules as well as third world political instability. The cumulative effects of all these risks make obtaining adequate insurance very difficult. The risks related to quality issues have not proven too high over time. For example, mandatory rework, omitted engineering errors, deficient contractor coordination, and contractual performance guarantees may each be assumed to be one percent, or less, of the total project budget. Similarly, risks related to safety issues may be assumed to be consistent with industry-wide averages. In summary, the rating of specific risks may be considered to be a product of the probability (Frequency) rating and the consequence rating, as described above. The risk of the overall project cost exceeding the project budget is the summation of all the specific risks modified by an experience factor based on the history of similar projects multiplied by an estimate of accuracy of the budget preparation.

If the planning phase has been well executed, the design phase can be efficiently completed in time and at cost. Based on the project economics and the relevant codes and standards, plans, documents and specifications should be completed without substantial risk. The project’s size, shape, volume, style, weight and surface specifications should be subjected to conventional strength of materials analysis to determine the final proportions of all components. Consideration must also be given to such features as part interchangeability, part life cycles, component reliability, and environmental and safety standards. Careful attention must also be given to controls and instrumentation design. An important decision is to define primary mode of controls operation, i.e., pneumatic versus electronic versus computerized processes. The design phase should also take into account the “Just-In-Time” technique in component manufacturing as well as the increasingly global nature of component sources. Finally, the design phase should produce a realistic schedule for completion with consideration of the available funding and reliable cash sources to finance the completion of the project.

The construction phase is that phase which validates the accuracy of the planning and design phases. There are several types and choice of the appropriate contract for each project is critical for successful completion. They are:

  • Lump Sum (or Fixed Price) Contract
  • Cost Plus (or Reimbursable) Contract
  • Unit Price (Individual Components) Contract
  • Guaranteed Minimum Price Contract
  • Penalty Clause (For Time and/or cost overruns) Contract
  • Design/BID/Build and/or operate Contract
  • The most common type of contract is the lump sum and, because of its frequent use, it is the best defined. Uses of the other contract types has been limited and, therefore, their terms have not been well defined and their effectiveness and scope are not well known in all their applications.

    Adherence to the project schedule and cost is the objective of the construction manager and his associates. The manager has several criteria, and tools helpful in achieving the schedule’s goals. Deadlines for completion of the project’s critical phases are commonly employed. The identification of critical path items and tracking their compliance with the schedule parameters is essential. The definition of daily tasks and their completion is basic, as is maintenance of a record of cumulative days leading to completion. Manpower assignment efficiency is essential in controlling costs. Basically, the number of workers employed increases sinusoidal as the project construction progresses. Mechanical workers are used heavily at the start of construction and then less intensively as the project nears completion. However, general construction laborers and electrical personnel are increasingly employed toward the end of construction.

    In large construction contracts cost and time overruns are difficult to avoid because of lost time due to unpredictable weather, price inflation due to unsettling economic conditions, and errors and omissions in the planning and design phases. Scheduled time extensions, additional financial appropriations and design and construction change orders become necessary. When these changes exceed $50,000 in value, contract revisions and legal resolution may become necessary.

    Experience in large construction projects show the following breakdown in the various phases of the project:

    • Planning = 5% of Budget (± 30%)
    • Concept Design = 10% of Budget (± 20%)
    • Basic Design = 20% of Budget (± 15%)
    • Detailed Design = 25% of Budget (± 10%)
    • Construction = 40% of Budget (± 40%)
    • Commissioning = <1% of Budget

    Hence, it is abundantly clear that careful assignment of risks during the various project phases is essential for completing projects in time and on budget. The more carefully the various risks are analyzed and applied, the more successful will be the project. In other words, risk analysis correctly applied and executed, assures that project quality and success are attained correctly the first time.

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