How to Achieve Sustainable Cost Reductions in Projects from an Owner Perspective

Owners devote a lot of thought to findings ways to do more for less in the current commodity market. They aim to ensure that their developments will be less costly, less capital intensive and less risky for them. Sometimes this translates into simply shifting risks to Contractors who are forced to take them in the current market. In our new White Paper ‘How to Achieve Sustainable Cost Reductions in Projects from an Owner Perspective, or How to Overcome the Fallacy of Short-Term Risk Transfer’, we explain how transferring risks to Contractors is in a large measure an illusion on the medium term; the sustainable solution lies in making project execution more reliable overall, and requires Contractor development.

Ways to achieve these objectives are discussed in a systematic manner and can form the basis for an action plan from the Owner perspective. This new paper complements White Paper 2014-18 ‘How to Be more Cost-Effective in Project Execution’ which was written from the Contractor perspective.

Sustainable long-term solutions include:

• Making sure that Contractors minimize Cost of Non Quality, increase productivity and resolve all dysfunctions that adversely affects their delivery,
• Implementing a series effect on Owner developments,
• Simplifying Owner’s technical specifications (refer to our White Paper 2015-06 ‘How to Overcome the Curse of Excessively Detailed Specifications Leading to Uneconomic Infrastructure Projects’),
• Minimizing the complexity managed by the Owner, in particular the interface between Contractors,
• In general, ensuring that the Contractor properly implements the best practices of project delivery to maximize the odds of success,
• Implementing where possible standardization of requirements across Owners,
• Finding new project financing approaches that allow to transfer Capex to Opex and shifting the financing setup to the contractor.

The paper explains in detail the challenges of seeking a series effect, and how the contracting landscape might change in the energy and commodity development market.

Limiting the cost and risk of large complex projects to respond to the expectations of Owners is a long term effort that requires a lot of advance preparation and strategizing. Transferring risks on the short term to contractors is not sustainable for an industry.
Achieving a series effect is a well proven solution to minimize cost and increase reliability of delivery. Owners should aim resolutely at this objective. At the same time, the entire contracting strategy should be reviewed and new approaches implemented consistently to allow the emergence of new Contractors that will be able to better respond to the upgraded needs of Owners.

Read our  new White Paper ‘How to Achieve Sustainable Cost Reductions in Projects from an Owner Perspective, or How to Overcome the Fallacy of Short-Term Risk Transfer’!

How to Manage Project Low Probability, Catastrophic Risks

Low probability, high consequence risks (called in this White Paper ‘catastrophic risks’) are very significant when one looks at the history of major project-driven organizations. At the single project and at the portfolio level, a single occurrence can change the fate of entire organizations and even industries. Yet these risks are not properly covered by conventional Project Opportunity and Risk management process. In our new White Paper 2015-11 ‘How to Manage Low Probability, Catastrophic Risks: Industrial Risk Management’ we describe some adequate approaches and methods that have been proven to be particularly effective to prevent these risks.

Avoiding catastrophic events is, on the long term, a key competitive advantage for individual Project organizations; and for the industry as a whole. Insurance can only cover very limited direct impacts and cannot be relied upon to protect the organization from the actual consequential effects of a catastrophic event.

We call ‘Industrial Risk Management’ the discipline that seeks to prevent catastrophic risks. This discipline is not commonly placed under the same organizational umbrella than general ‘Project Opportunity and Risk’; it is sometimes managed by the Engineering function, or the Health & Safety function. However because catastrophic events can have a huge impact on Projects as well as entire organizations, even if their probability is relatively low, Project Managers must make sure that the subject is addressed within their Project.

Common methods to analyse possible events (such as FMEA and HAZOP) have limits, and the most dramatic is that they don’t allow considering the combination of independent faults, which is almost always at the root of all catastrophes. Other methods such as Fault Tree Analysis do exist in high reliability industrial organizations that can be used in Project execution environments to prevent the most catastrophic events to happen. These methods need to be supplemented by a robust and transparent Lessons Learned and root cause analysis process.

Catastrophic event prevention methods have been successfully used by Project Value Delivery in a number of instances in Project execution contexts, leading to structural changes in the way some construction activities were undertaken. Read our new White Paper 2015-11 ‘How to Manage Low Probability, Catastrophic Risks: Industrial Risk Management’ to understand what approaches you can use.

How to Build a Proper Project Schedule Hierarchy in Large Complex Projects

While having a single integrated schedule that includes all Project information is a good practice for very small, simple Projects, this is not a sustainable practice for Large, Complex Projects. In this instance, a Schedule Hierarchy must be built that will allow to track information at the right level. In particular, the Integrated Project Schedule that will be the prime tool of the Project Manager needs to avoid unnecessary congestion. This simple setup is not always understood or executed properly. In our new White Paper 2015-14 ‘How to Build a Proper Project Schedule Hierarchy’ we develop the practical concept of Schedule Hierarchy with the intent to make it a standard for Large Complex Projects.

The schedule hierarchy has to cover 3 main schedule levels:

• strategic level
• project coordination level
• operational level

To clarify usual scheduling hierarchies we propose a more specific breakdown, with:

• convergence planning for the strategic level
• Integrated Project Schedule at the project coordination level, with a limited level of detail
• Detailed Functional Schedules for the operational level

A proper schedule hierarchy with schedules of adequate levels of detail for each usage is a key concept that needs to be applied more systematically in Large Complex Projects. Discover more about Project Value Delivery’s recommended schedule hierarchy in our new White Paper 2015-14 ‘How to Build a Proper Project Schedule Hierarchy’.

8 Best Practices for Monte Carlo Method Project Cost Risk Calculations

In our new White Paper 2015-10 ‘8 Best Practices for Project Cost Risk Calculations Using the Monte Carlo Method’ we describe some key fundamental practices that need to be implemented when running Monte Carlo simulations of Project Cost with the aim to determine and/or justify a contingency amount. It is important to realize that as any simplified representation of reality, Monte Carlo simulations must obey certain basic rules consistent with its mathematical fundamentals to be representative of the Project situation, and that the method also has significant limitations.

The eight practices discussed in the White Paper are:

1. Check that the model has converged
2. Limit the number of lines
3. Remove low probability, high consequence risks
4. Make sure the built up of the Monte Carlo model is adequate in terms of line aggregates
5. Run a Model sanity check with the Project Manager
6. Avoid double dipping (in particular with allowances)
7. Treat explicitly common causes and correlations
8. Check that you did not include inadequate revenue opportunities

The best practices described in our new White Paper 2015-10 ‘8 Best Practices for Project Cost Risk Calculations Using the Monte Carlo Method’ are rarely all implementation which leads to issues with the result of calculations of contingency with this method. Monte Carlo as a way to calculate contingency might not always be sufficient, but when it is used it is important that the basics are covered to give some reliability and repeatability to the result.

While this White Paper elaborated on best practices for the conventional way of calculating a cost reserve based on a Monte Carlo analysis of the Project budget, this approach is not always sufficient to protect the Project against all Known-Unknowns.
There is actually no other way to determine the ‘right’ level of contingency than to rely on actual experience in a specific domain or industry. In some particular instances, it can be adequate to add very significant amounts of contingency. The Apollo Project mentioned in our handbook provides a good example. Other considerations include the dominance of time delays as a source of cost risk, refer to guidance given in our White Papers 2012-11 and 2012-12 ‘Estimate Your Actual Risk Level in a Project: the PVD Risk Level Formula’.

7 Simple Methods to Improve your Project Risk Brainstorming Sessions

The brainstorming of Opportunities and Risks for any projects is an essential process which seeks to be as complete as possible. It is thus essential to open as much as possible the results of the brainstorming process. Our new White Paper 2015-09 ‘7 Simple Methods to Improve your Project Opportunity and Risk Brainstorming Sessions’ focuses on a few conventional and less conventional methods that can be used easily to greatly enhance the power of the brainstorming exercise.

Here are the methods developed in the paper:

1. Require a facilitator
2. Brainstorm as a team
3. Brainstorm Opportunities before Risks
4. Use Post-Its
5. Use the Pre-Mortem method
6. Use Lessons Learned from previous projects
7. Use general categories for project failure as prompts

Proper effective brainstorming of Opportunities and Risks should be taken seriously. It enhances the changes to capture effectively events that could impact the project and more generally, pushes back the boundary of the Unknown-Unknowns. Without more effort from the project team members, using proper brainstorming approaches will greatly enhance the effectiveness of the process and the quality of the result. Follow the simple rules and methods exposed in our new White Paper 2015-09 ‘7 Simple Methods to Improve your Project Opportunity and Risk Brainstorming Sessions’ and you’ll be astonished at how the effectiveness of your brainstorming sessions increases!

How Some Contractual Terms Are Essential For Preventing Killer Project Risks

In general, it is well known that Contractual Terms and Conditions have a very significant role in the assignment and transferring opportunities and risks. The disciplined application of Contractual Principles is also essential to prevent major risks that could have a life-or-death effect on the project-driven organization. This aspect is sometimes misunderstood and overseen in the heat of contract negotiations. In our new White Paper 2015-08 ‘How Some Contractual Terms Are Essential At Preventing Killer Project Risks’ we take a hard look at those essential contractual clauses and how they will prevent major risks.

We thus need to ensure as much as possible that the Projects constituting our portfolio do not show a long tailed behavior, which means, in practical terms, that the probability for these Projects to end up costing significantly more than expected must be extremely low. We thus need to ensure that there is almost no chance that a Project will finish up costing significantly more than what was expected, at least without compensation. This leads to strong contractual clauses around termination, suspension and overall limit of liability.

While most Project-driven organizations have contractual norms that follow these principles, their importance is not always understood and when it comes to contractual negotiations, they are sometimes waived under the commercial pressure.

When it comes to the survival of the organization it is essential to prevent long-tailed risks, i.e. the possibility that a project goes very significantly beyond any reasonable limit in terms of losses and time spent. To achieve this, strong limits of liability are essential contractual terms that should not be waived for any reason. The risk might be considered remote but if it occurs it can destroy the organization. Be disciplined in applying the adequate contractual principles in that area! Understand more in our new White Paper 2015-08 ‘How Some Contractual Terms Are Essential At Preventing Killer Project Risks’.

5 Contrarian Disciplines to Improve the Effectiveness of Your Project Risk Process

Through our consulting practice we have observed a number of Project Opportunity and Risk management processes as applied in a number of project-driven organizations, in particular for Large and Complex Projects. We have found that their effectiveness was sometimes low compared to the related expenses and hindered by some simple issues. In our new White Paper ‘Five Contrarian and Simple Disciplines to Improve the Effectiveness of Your Project Risk Management Process’ we share some simple yet contrarian ideas that, if applied consistently, will greatly enhance the effectiveness of that process.

Here are the five disciplines we have identified:

1. Implement Effective Prioritization prior to Action
2. Implement Actual Portfolio Risk management
3. Do not over-trust the results of Monte-Carlo calculations
4. Focus more effort on preventing low probability, high consequence risks
5. Recognize the psychological effects accompanying failure and the risk of inadequate risk taking

It is our firm belief that Project Opportunity and Risk Management should be one of the key processes at the center of Project and Project portfolio execution. While the process is well established now in most Project-driven organizations, it remains too often a bureaucratic exercise and still requires substantial improvement to really deliver the impact that is intended to the business. We have given in our new White Paper ‘Five Contrarian and Simple Disciplines to Improve the Effectiveness of Your Project Risk Management Process’ some simple key disciplines and we know from experience that some risk practitioners might find these suggestions too unusual. Still, it is our expectation that these hints will give the Project risk community and the Project-driven organizations’ decision-makers sound insights about the reforms that are required to make the process significantly more impactful and better contributing to the organization’s long term sustainable business results.