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Risk Management for
ContractorsIt's not
just about Insurance!
February 9, 2012
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Learning Objectives
At the end of this discussion, participants will be able to:
Understand how a risk management process addresses and
mitigates risks Determine the potential business and project risks that exist
Implement proven project management methods for
mitigating project risk
Understand the role of risk management in strategic planning
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New Realities
Competition willing to work for wages
Competition has doubled or tripled for your targeted
customers or projects
Historically strong sectors have disappeared
Its not coming back to the good old days any time soon
Risk is higher than ever
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What is Risk Management?
Risk Management is the structured approach to managing
uncertainty
Identifying potential risks
Analyzing the potential impact of those risks
Responding to risk factors to either mitigate or eliminate those risks
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Company Risk Management Process
1. Identify Potential Risks
2. Analyze Impact of Risks
3. Determine Potential Risk Treatments
4. Create a Risk Management Plan5. Implement Plan
6. Evaluate Plan
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Determining Potential Risk Treatments
Avoidance
Eliminate
Reduction
Mitigate
Transference
Outsource or Insure
Retention
Accept and Budget
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Insurance Costs
Insurance should be a manageable cost
Realistic way to lower insurance:
Reduce frequency of claims
Accident-free is the ultimate objective
Return-To-Work Plan - When accidents do happen, focus on
returning the injured workers to their jobs absolutely as soon
as possible
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How to Lower Insurance Costs
Better maintenance on equipment
Hiring capable employees
Continuous safety training
Efficiently training employees on equipment use
Consider increasing deductible levels to fully realize
improvements in reduced losses
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Risk Management Plan (1 of 2)
Plan should include:
Management Actions to Take Regularly
Responsibility for Risk-Management Oversight
Tools to Use to Govern the Process
Budget for Risk
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Risk Management Plan (2 of 2)
Assign a risk officer
Create anonymous risk-reporting channel
Prepare mitigation plans
Review and monitor performance
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Discussion
Common Types of Risks
Strategic
Design
Financial
Contractual Disputes
Delays
Subcontractor and Vendor
Operational Project Performance
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Discussion
Less Common Types of Risks
Political
Breach of Contract
Regulatory Changes
Transfer Restrictions
Sovereign-Guarantee Breaches
Civil Disturbance
Terrorism
War
Source: Multilateral Investment Guarantee Agency Survey of Investors, 2010
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Reducing Project Risk: Change Management
Can cost and resource-loaded schedules help the
contractor encounter unanticipated changing
conditions on the project site that impact the level of
effort?
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Schedule-Change Management
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Schedule-Change Management
Fewer surprises, resulting in reduction in risk
Increase in overall productivity
Smoother processing of changes resulting in fewer and less
costly claims
Better forecasting of project performance and management
of resources
Most importantly, its the best tool for minimizing the
impact of claims and change issues
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Reducing Project Risk: Collaboration
1. Develop Good Relationships and Communications
2. Set Standards Early in the Process
3. The Work-Breakdown Structure Is the Common Language
4. Communicate Bad News Early
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Set Standards Early in the Process
Requirements for Collaboration to Work
Define standardized processes for communication and
collaboration
Routinely enforce and practice these processes to develop aculture of collaboration
Utilize technology systems where appropriate to codify
standardized processes and ease of collaboration
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Set Standards Early in the Process
Benefits of Successful Collaboration
Standard processes for handling risk link to cost and time on a
project
Issue management and resolution Speed of notification
Ability to view reference documentation
Ability to act proactively in order to mitigate delay
Progress measurement
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The WBS Is the Common Language
Project Team must be the central hub of communication
Must have specific information that clearly shows what must be
done, by whom and with target dates of completion
This information must be communicated to all the appropriatepartners on the project
Must attach consequences for both performance and
nonperformancepersistently and consistently driving
accountability
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Activities Logic 2
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Communicate Bad News Early
Early Warning Indicators:
Accurate reportsAlerts, email notification
Key performance indicators (KPIs)
Communicate corrective action
Early Warning Indicators
Reports
Work Packages
Cost
Critical Path
Changes
Resources
SchedulePlanning and
Scheduling
Executive
Project
Controls
Project
ManagerProject
Engineers
Subs
Client
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Schedule/Cost Management
Our project managers need to do a
better job of forecasting costs and
schedules. The managers also lack
the ability to schedule. I dont mean
put together a schedule, but manage
it as if it were living and breathing.
They cant manage a dynamic
schedule and effectively use it as a
tool.
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Break the Program Into Individual Projects
Establish major milestones and create the Work Breakdown
Structure (WBS) across program
Both large and small projects can be better-defined once the major
milestones have been established
Milestones are generally represented by the completion of adeliverable (something that can be seen, touched or signed)
When everyone knows the major milestones, accountability can be
defined
Helps the project team control scope creep
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Break the Program Into Individual Projects
Most programs can readily be broken into multiple
subprojects. This allows for:
A greater degree of control for the subproject team in its area
Better collaboration within a smaller group of people
Bringing specialist talent to bear for maximum effect
It also enables a WBS for the subproject to:
More precisely define the scope and sequence logic
Can be functional-basedBy discipline Can be phased-basedChronological
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Standardize the Process and Reporting
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Establish Project Performance Indicators
Identify the Key Performance IndicatorsKPIs are essentialshortcuts to understanding the status of the project. They
enable the project team to quickly view a summary of
project performance.
Traditional Lagging Indicators Actual Cost versus Baseline Costs
Actual Schedule Milestones Accomplished
Productivity (rate or units) to date
Cash Flow to date Compared to Budget
Common Leading Indicators
Projected Total Cost to Complete
Projected Completion Date
Projected Cash Flow
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Establish Project Indicators:
KPICost Report & RFI Status
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The End Game:
Effective, Efficient Programs
Project A
Project C
Project E
Project B
Project D
Project F
Schedule,
Cost,Documents
EstimatingSystem
Dashboard
AccountingSystem
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Did You Know
A post-job review meeting is the best way to improve
performance on all projects going forward
You learn what went well, what didnt and why, so youll be more
prepared for the next job. It also provides great feedback to Estimating
about how well it performed.
Postmortem meetings are often the most
underutilized project management tool in the business.
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Key Learning Points
Common types of risks
Reducing project risks
Steps in the Risk-Management Process
Identifying Risks
Analyzing Risks
Potential Risk Treatments
Creating a Risk-Management Plan
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Lee Smither
Managing Director
Lee D. Smither
FMI Corporation
5171 Glenwood Avenue
Suite 200Raleigh, NC 27612
Tel: 919.785.9243
Fax: 919.785.9320
Email: [email protected]
Website: www.fminet.com
As managing director for consulting, Lee Smither helps construction companies and design firms
sharpen their management practices and corporate performance. He specializes in strategic
consulting, developing and implementing organizational initiatives, and designing executive
development programs. Additionally, Lee serves as a speaker for individual clients and many of
the industrys associations. Experience in conducting seminars and speaking nationally makes him
an effective and highly regarded speaker.
As manager for numerous organizational improvement engagements, Lee has overseen clientimplementation efforts ranging in scope from a single project to a corporate division to an entire
company. He has worked with a broad spectrum of industry firms, including many of the nations
largest general contractors, specialty constructors and construction managers. Having worked in
the industry prior to joining FMI, Lee has developed a practical and objective perspective.
Lee has published articles on a wide variety of topics in numerous construction trade journals
such as Transportation Builder, Midwest Contractor, Construction Weekly, Journal of Construction
Accounting and Taxation and Constructor. Lee is a member of the National Association of
Accountants and the Construction Institute of ASCE.
Lee holds an undergraduate degree in economics from North Carolina State University and a
master of business administration degree from East Carolina University. He also serves as a board
member for several industry associations and client firms.
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About FMI
FMI is the largest provider of management consulting, investment
banking and research to the engineering and construction industry.
We work in all segments of the industry providing clients with
value-added business solutions, including:
Strategy Development
Market Research and Business Development
Leadership and Talent Development
Project and Process Improvement Mergers, Acquisitions and Financial Consulting
Compensation Data and Consulting
Founded by Dr. Emol A. Fails in 1953, FMI has professionals in
offices across the U.S. FMI delivers innovative, customized solutions
to contractors; construction materials producers; manufacturers
and suppliers of building materials and equipment; owners and
developers; engineers and architects; utilities; and construction
industry trade associations. FMI is an advisor you can count on to
build and maintain a successful business, from your leadership to
your site managers.
Knowledge Expertise Relationships
Visit us at www.fminet.com