November, 2000 Slide 1 Project Services Division RISK MANAGEMENT Project Services Division Presentation By: Adam Malkhassian November, 2000

November, 2000Slide 1

Project Services Division

RISK MANAGEMENTRISK MANAGEMENTProject Services DivisionProject Services Division

Presentation By: Adam MalkhassianPresentation By: Adam Malkhassian

November, 2000November, 2000



AACE INTERNATIONAL’S PROFESSIONAL AACE INTERNATIONAL’S PROFESSIONAL PRACTICE GUIDE TO RISKPRACTICE GUIDE TO RISK

RISK MANAGEMENT DICTIONARYRISK MANAGEMENT DICTIONARY

PUBLISHED PUBLISHED

OCTOBER 1995 & APRIL 2000OCTOBER 1995 & APRIL 2000



ALLOWANCESALLOWANCES

CONTINGENCYCONTINGENCY

ESCALATIONESCALATION

DESIGN DEVELOPMENTDESIGN DEVELOPMENT

CLIENT RESERVECLIENT RESERVE

RISKRISK



RISK = THREATS + OPPORTUNITIESRISK = THREATS + OPPORTUNITIES



RISK MITIGATIONRISK MITIGATION

Risk mitigation takes place primarily before contract award, and Risk mitigation takes place primarily before contract award, and consists of the limitation or elimination of risk items by consists of the limitation or elimination of risk items by exclusions, sharing, insuring or by the use of appropriate legal exclusions, sharing, insuring or by the use of appropriate legal documentation and financial instruments.documentation and financial instruments.

RISK CONTROLRISK CONTROL

Risk control takes place primarily during the project execution Risk control takes place primarily during the project execution phase and consists of the prompt identification and anticipation phase and consists of the prompt identification and anticipation of risk items by rigorous scope, quality, cost and schedule of risk items by rigorous scope, quality, cost and schedule control, by a comprehensive program of insurance, and by being control, by a comprehensive program of insurance, and by being constantly alert to the potential concerns, interests and behavior constantly alert to the potential concerns, interests and behavior of third parties.of third parties.

DEFINITIONSDEFINITIONS



RISK MANAGEMENTRISK MANAGEMENT

RISK ASSESSMENTRISK ASSESSMENT

RISK ANALYSISRISK ANALYSIS





RISK ASSESSMENTRISK ASSESSMENT

IDENTIFICATION OF UNCERTAINTIESIDENTIFICATION OF UNCERTAINTIES

THREATSTHREATS

OPPORTUNITIESOPPORTUNITIES

NOTE: ALLOWANCES ARE ALSO SUBJECT TO ASSESSMENTNOTE: ALLOWANCES ARE ALSO SUBJECT TO ASSESSMENT




QUANTIFICATIONQUANTIFICATION

PROBABILITY OF OCCURRENCEPROBABILITY OF OCCURRENCE LOWLOW MEDIUMMEDIUM HIGHHIGH

POTENTIAL IMPACTPOTENTIAL IMPACT LOWLOW MEDIUM MEDIUM HIGHHIGH



RISK MITIGATION (RESPONSE DEVELOPMENTRISK MITIGATION (RESPONSE DEVELOPMENT))

DEVELOPMENT OF RISK MANAGEMENT PLANDEVELOPMENT OF RISK MANAGEMENT PLAN

ELIMINATE OR REDUCE PROBABILITY OF A THREAT ELIMINATE OR REDUCE PROBABILITY OF A THREAT OCCURRINGOCCURRING

ELIMINATE OR REDUCE IMPACT OF THREAT IF IT DOES ELIMINATE OR REDUCE IMPACT OF THREAT IF IT DOES OCCUROCCUR

ENSURE OR INCREASE PROBABILITY OF AN ENSURE OR INCREASE PROBABILITY OF AN OPPORTUNITY OCCURRINGOPPORTUNITY OCCURRING

INCREASE THE IMPACT OF AN OPPORTUNITY IF IT DOES INCREASE THE IMPACT OF AN OPPORTUNITY IF IT DOES OCCUROCCUR




IMPLEMENTATION OF RISK MANAGEMENT PLANIMPLEMENTATION OF RISK MANAGEMENT PLAN

PREDEFINED ACTION PLANPREDEFINED ACTION PLAN INSURANCEINSURANCE ALLOWANCEALLOWANCE SCHEDULESCHEDULE QUALITYQUALITY

TRIGGER POINTSTRIGGER POINTS

MONITOR POINTSMONITOR POINTS



GUIDELINES FOR SUCCESSFUL RISK GUIDELINES FOR SUCCESSFUL RISK ANALYSISANALYSIS

WELL-DOCUMENTED COST ESTIMATEWELL-DOCUMENTED COST ESTIMATE COSTS SHOULD REPRESENT MOST-LIKELY SCENARIOCOSTS SHOULD REPRESENT MOST-LIKELY SCENARIO COSTS MUST NOT CONTAIN HIDDEN CONTINGENCIES COSTS MUST NOT CONTAIN HIDDEN CONTINGENCIES

& ALLOWANCES& ALLOWANCES COST ESTIMATE MUST BE REVIEWED AND APPROVED COST ESTIMATE MUST BE REVIEWED AND APPROVED

BY PROJECT TEAMBY PROJECT TEAM

RISK FACILITATORRISK FACILITATOR OVERVIEW AND GUIDELINES OF RISK ANALYSISOVERVIEW AND GUIDELINES OF RISK ANALYSIS RISK ANALYSISRISK ANALYSIS INTERPRETATION OF RESULTSINTERPRETATION OF RESULTS



RISK SOURCESRISK SOURCES

PROJECT SPECIFIC RISKSPROJECT SPECIFIC RISKS

TECHNICAL RISKSTECHNICAL RISKS

COMMERCIAL RISKSCOMMERCIAL RISKS

PROJECT RELATED RISKSPROJECT RELATED RISKS

COUNTRY & LOCATION RISKSCOUNTRY & LOCATION RISKS

CLIENT RISKSCLIENT RISKS

SLI RISKSSLI RISKS



TECHNICAL RISKSTECHNICAL RISKS

LEVEL OF ENGINEERING DESIGNLEVEL OF ENGINEERING DESIGN

EFFICIENCY & PERFORMANCE EFFICIENCY & PERFORMANCE

PROVEN / UNPROVEN TECHNOLOGYPROVEN / UNPROVEN TECHNOLOGY

EQUIPMENT CAPACITIESEQUIPMENT CAPACITIES

SOIL CONDITIONSSOIL CONDITIONS



COMMERCIAL RISKSCOMMERCIAL RISKS

SUPPLY & LABOUR PRICINGSUPPLY & LABOUR PRICING

PRODUCTIVITY & AVAILABILITYPRODUCTIVITY & AVAILABILITY

TRANSPORTTRANSPORT

INSURANCE & BONDSINSURANCE & BONDS

SCHEDULE RISKSSCHEDULE RISKS

LEGAL CLAUSESLEGAL CLAUSES



COUNTRY & LOCATION RISKSCOUNTRY & LOCATION RISKS

POLITICAL SITUATIONPOLITICAL SITUATION

LAWS & REGULATIONS INCLUDING TAXESLAWS & REGULATIONS INCLUDING TAXES

ALL PERMITS & APPROVALS ALL PERMITS & APPROVALS

UNIONS & WORKING CONDITIONSUNIONS & WORKING CONDITIONS

WEATHER CONDITIONSWEATHER CONDITIONS

CORRUPTION & CRIMINAL ACTIVITIESCORRUPTION & CRIMINAL ACTIVITIES



CLIENT RISKS (TO SLI)CLIENT RISKS (TO SLI)

FINANCIAL STATUSFINANCIAL STATUS

AUTHORITYAUTHORITY

COMPETENCE OF PROJECT TEAMCOMPETENCE OF PROJECT TEAM

PAYMENT POLICYPAYMENT POLICY

APPROVAL METHODOLOGY & TIMINGAPPROVAL METHODOLOGY & TIMING



SLI RISKSSLI RISKS

TECHNICAL KNOW-HOWTECHNICAL KNOW-HOW

AVAILABILITY OF (RIGHT) STAFFAVAILABILITY OF (RIGHT) STAFF

PARTNERSPARTNERS

OTHER RESOURCESOTHER RESOURCES LOCAL CONTACTSLOCAL CONTACTS SUPPLY POINTSSUPPLY POINTS FINANCING SOURCESFINANCING SOURCES




AVOIDANCEAVOIDANCE

LEGAL CLAUSESLEGAL CLAUSES

INSURANCEINSURANCE

RISK ALLOWANCERISK ALLOWANCE

ACCEPTANCEACCEPTANCE




CAUSECAUSE

EFFECTEFFECT

RANKINGRANKING

PROBABILITYPROBABILITY LOW - MEDIUM - HIGHLOW - MEDIUM - HIGH

IMPACT IMPACT LOW - MEDIUM - HIGHLOW - MEDIUM - HIGH



PROBABILITY & CONFIDENCE LEVELPROBABILITY & CONFIDENCE LEVEL

PROBABILITYPROBABILITY A MEASURE OF HOW LIKELY A CONDITION OR EVENT A MEASURE OF HOW LIKELY A CONDITION OR EVENT

IS TO OCCUR IS TO OCCUR RANGES FROM 0 TO 100 PERCENTRANGES FROM 0 TO 100 PERCENT

CONFIDENCE LEVELCONFIDENCE LEVEL PROBABILITY THAT RESULTS WILL BE EQUAL TO OR PROBABILITY THAT RESULTS WILL BE EQUAL TO OR

MORE FAVORABLE THAN THE AMOUNT ESTIMATEDMORE FAVORABLE THAN THE AMOUNT ESTIMATED PROBABILITY THAT RESULTS WILL BE EQUAL TO OR PROBABILITY THAT RESULTS WILL BE EQUAL TO OR

LESS FAVORABLE THAN THE AMOUNT ESTIMATEDLESS FAVORABLE THAN THE AMOUNT ESTIMATED



CHOOSING THE “RIGHT” CONFIDENCE LEVELCHOOSING THE “RIGHT” CONFIDENCE LEVEL

GROSS MARGINGROSS MARGIN OVERHEADOVERHEAD RISKRISK PROFITPROFIT

OTHER ALLOWANCESOTHER ALLOWANCES

ESCALATIONESCALATION

CONTINGENCYCONTINGENCY

WORST CASE SCENARIO = ZERO PROFIT & ZERO LOSSWORST CASE SCENARIO = ZERO PROFIT & ZERO LOSS



Distribution for TOTAL ESTIMATEDVALUE / TRIANGULAR/B62

Prob ofValue <=

X-axisValue

Values in Millions

0.000

0.200

0.400

0.600

0.800

1.000

530 540 550 560 570 580 590 600 610 620 630 640

$610 M$582 M



RISK ANALYSIS (DISCRETE DISTRIBUTION)RISK ANALYSIS (DISCRETE DISTRIBUTION)

Distribution for TOTAL ESTIMATEDVALUE / TRIANGULAR/B62

PR

OB

AB

ILIT

Y

Values in Millions

0.000

0.025

0.050

0.074

0.099

0.124

530 540 550 560 570 580 590 600 610 620 630 640



EFFECT OF RISK ANALYSISEFFECT OF RISK ANALYSIS

ESTIMATEESTIMATE= $570 MILLION= $570 MILLION

-15%-15% +15%+15%

RISK RISK ALLOWANCEALLOWANCE

++$12.6M$12.6M

REVISED ESTIMATE @ 50% = $582.6MREVISED ESTIMATE @ 50% = $582.6M



RECOMMENDATIONRECOMMENDATION

ANALYSIS VALID FOR ANY TYPE OF ESTIMATE / ANALYSIS VALID FOR ANY TYPE OF ESTIMATE /

PROJECTPROJECT

CARRIED OUT ON PARTIAL OR TOTAL PROJECT CARRIED OUT ON PARTIAL OR TOTAL PROJECT

DISCUSSION OF RISK ITEMS BETWEEN TEAM DISCUSSION OF RISK ITEMS BETWEEN TEAM

MEMBERS ESSENTIALMEMBERS ESSENTIAL

PROJECT SPECIFIC & RELATED RISKSPROJECT SPECIFIC & RELATED RISKS

RISK CAN BE POSITIVE OR NEGATIVERISK CAN BE POSITIVE OR NEGATIVE



CONCLUSIONCONCLUSION

ASSESSMENT ASSESSMENT

ANALYSISANALYSIS

MITIGATEMITIGATE

NOWNOW

Documents

November, 2000 Slide 1 Project Services Division RISK MANAGEMENT Project Services Division Presentation By: Adam Malkhassian November, 2000