report

in megaprojects

Report prepared by Guillermo Nalli, Project manager with a vast experience in engineering companies such as Hatch, Fluor, Aker and Codelco.This article provides some guidelines helping in the identification, quantification, control and mitigation of risks associated to large projects.It is important that all professionals participating in the execution of megaprojects have a clear perception of their main characteristics and associated risks, so as to identify, quantify, control and mitigate them, as necessary. This document provides some general guidelines to help in this task.

CharacteristicsMegaproject is that in which investment exceeds the amount of US$1 billion and its duration exceeds 4 years from conception to execution completion. In some cases, they exceed US$10 billion investment and a 10-year term. The main characteristics of these initiatives are:

Lengthy duration, with associated multiple lacks of knowledge, ambiguities, uncertainties and risks. They require a large amount of resources, including labor, financing, supplies and equipment. Their life cycle is hard to be defined in traditional terms. They have many stages; it is not clear when one of them starts and the other ends. Their start is lengthy, complex and critical, i.e. from start to final approvals. They present technology, design and construction complexities. Many of these projects use new technologies and require a number of stages to achieve final objectives. Their construction requires a complex organization hard to be integrated. Usually, their sponsorship and financing require of models that involve combinations of debts, subsidies, bonds and contributions, etc. In many cases they require multiple public and private sponsors. High public profile. Because of their size, the governments, press and communities are aware of them. They are subject to public scrutiny. They have impact on many areas, such as environment, communities, safety, culture, socio-economy, etc. Purchases and contracts in megaprojects are complex, require innovation to direct and assign responsibility for risks, and decide the best strategy to follow. In lengthy projects, it is hard to maintain the continuity in management. It is normal to have changes in their leadership. Often, complex projects have unique organization structures with multiple authority levels, requiring vertical and horizontal coordination, which hinders work team communication and integration. Multiples stakeholders, almost always involved in a complex net of public interests with connections and influence, having an interest on project results. It is complicated to estimate their execution cost and schedule. Due to their lengthy duration, they are affected by changes in political and economy regulations, with risk of difficult quantification and control. Assumptions considered in their estimation change over time.Main risksAbove mentioned characteristics of megaprojects have implicit associated risks, some of which are shown in Figure 1 (red for external and blue for internal ones).

Internal risksTheir generation is the result of the project execution. Most of them may be identified, quantified and controlled by means of an adequate risk management: Lack of critical resources. Mainly lack, on time and number, of critical human resources for key positions. The most adequate scenario is to have these key professionals at the start of the project.

External dependencies. These risks are related to external companies that are contracted to compensate for the lack of highly specialized resources; often times they do not work under the required quality and strictness procedures. It is important to identify the specialists that meet the projects requirements; that makes it imperative to pre-qualify them, so as to have them available when their service is needed.

Financing. Megaprojects require high capital expenditure to be contributed by diverse entities, apart from the owner, which is hard to obtain. At projects formulation stage, a financing plan must be defined and an assessment made of each one of the alternatives with the corresponding entities. Changes in management team. Key management team changes cause losses of projects recording and knowledge. There is a need for having a record of all information providing grounds to key decision-making and lessons learned. Risk inadequate transference. It is important to be clear in relation to which risks will be transferred to contractors and equipment vendors. These should be risks that may be absorbed by them. Technology, design and construction complexities. Design complexity refers to the time a megaproject takes from the approval period to engineering completion. It is many years and a vast number of changes are produced. Critical issues must be addressed with the best resources the project has. Technology complexity has to do with those innovative technologies that have not been proven at industrial level. For the projects critical processes, it is fundamental to choose technologies that have been successfully proven in similar operation situations. In relation to construction risks, constructability analysis of complex processes must be permanently performed, starting from the project conception up until its execution completion, prioritizing on individuals and goods safety, followed by the schedule and quality.

Unreasonable stakeholders public management and interests. It is important to keep public entities well informed in relation to projects progress and future evolvement to prevent generating unreasonable interests in stakeholders, especially when requiring the support of some of these entities to expedite the projects execution. Change management and claim management. It is relevant to keep a detailed record of all changes and claims generated in the project, assign individuals in charge of gathering support information, resolve and control their evolvement, setting clear dates and programs, thus preventing their accumulation at the end of the project.External risksThese are risks generated as a result of external demands. They are hard to be identified, quantified, controlled or mitigated. Obtaining environmental permits. Requirements for environmental permits increase by the day. Usually, meeting these requirement take a time longer than estimated, with no certainty that the permit will be granted. A joint work with regulatory agencies as of the projects conception, i.e. the business study. Communities. Requirements are more stringent every day and most often have a great impact on the projects cost. In some cases, even meeting community requirements, the risk persists. It is necessary to maintain good communication with communities as of the moment the idea of a project is conceived, so as to evaluate the perception of these communities. Water and power supply. This is a very complex issue in Chile, since the pace growth of mining projects versus power generating projects, dictates that in 2020 there will be no enough power to operate these plants. It is critical to identify these requirements at the study initial stage and verify whether it is possible to obtain what is required in quantity, quality and time from the existing sources. For this to be an internal risk, generation should be considered as part of the project (Codelco and Antofagasta Minerals are developing power initiatives to meet some of their project needs). In the case of water, desalinating seawater is an alternative to be taken into account, although these plants consume a great deal of power. Nature risks. These are very difficult to forecast (earthquakes, slides, rainstorms and snowstorms), and more still to quantify their material and economic impact on the project. It is recommended to request the support from institutions that have statistic records of these occurrences and their impact. Commodity price decrease. The market of commodities such as copper, gold and silver, is highly dependent and its evolvement is linked with China economy. On the other hand, production costs are ever increasing in Chile, as compared with our competitors. Changes in political and economic regulations. Political and economic instability is associated to various risks very hard to quantify, such as strikes, work stoppages and social unrest.

Permanent monitoring and mitigation plansIn summary, when these risks materialize, they impact on projects cost, schedule and scope objectives. To have these impacts under control, we require to periodically monitor these objectives and apply mitigation plans when these risks get materialized, thus preventing any deviation leading to project failure. There are two basic options available for risk management: cause management or effect management. In case of managing the causes, there are prevention alternatives, eliminating or avoiding risk, reducing its chances or potential impact, mitigating or transferring the risk. It is important to early detect risks with the key project team and control them, using the procedures and recommendations of institutions such as Project Management Institute (PMI); these are vastly applied by most of the large construction and engineering service companies, one of which is shown in Figure 2. mchReport prepared by Guillermo Nalli.References:Project Management: A Systems Approach to Planning, Scheduling and Controlling. Harold Kerzner. Megaproject Management: Lessons on Risk and Project Management from the Big Dig. Virginia A. Greiman. Managing Gigaprojects. Patricia D. Galloway, KrisR. Nielsen, Jack L. Dignum. Identifying and Managing Project Risk. Tom Kendrick.www.mch.cl December 2013 / n 390126