Risk centricity gets results on large-scale projects

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As infrastructure projects grow in scale and complexity, a culture of complacency when it comes to overspends and overruns is in danger of taking hold. Could the industry’s focus on risk management and analysis be losing ground, just when it is needed most?

The sheer size and complexity of the latest mega projects means that the risk exposure of many contractors has increased exponentially in the last decade and even the most experienced project managers are effectively entering uncharted territory. Whereas once risk management and analysis would have been regarded as core skills for project managers, today they are more likely to be covered off with bespoke software and there is a distinct lack of emphasis on keeping track of the risk exposure on projects on a regular basis. With risk increasing and genuine risk management experience harder to come by, outcomes are expected to worsen.

The announcement earlier this year that London’s Crossrail project is running significantly behind schedule and over budget was little surprise to many industry onlookers, who have come to expect large-scale infrastructure projects to miss their targets for both time and cost by some margin. It doesn’t have to be this way however, and best practice case studies exist to demonstrate how by adopting a risk-focused approach and putting appropriate contingency measures in place in good time, project managers can estimate costs effectively and in doing so restrict any overspend to within acceptable margins, in line with industry standards.

The $21 billion Apollo aerospace programme is considered a classic example of effective mega project planning and implementation. The combination of an $8 billion contingency fund, consideration of risk at an early stage and emphasis on realistic appraisal allowed it to achieve a cost over-run of only 5 per cent.

Among the reasons why large-scale project runs tend to overshoot their cost and time targets so frequently is a tendency for managers to be overly optimistic, either deliberately or sub-consciously. Renowned mega project expert, Bent Flyvbjerg, said ‘It is not the best projects that get implemented, but the projects that look best on paper. And the projects that look the best on paper are the projects with the largest cost underestimates and benefit overestimates, other things being equal.’ However, ignoring real-world risk can end up costing project stakeholders dearly. Instead, a risk-centric approach to project management can bring significant benefits for all project stakeholders – investors and those involved in project delivery – giving them a better understanding of any threats and opportunities on a real-time basis.

When adopting this approach, project managers need to be on the look-out for red flags, which might indicate under investment in risk management. For example, an overemphasis on software tools could result in risk management becoming a tick-box exercise. Other red flags might include the lack of a specialist team and dedicated budget for risk management and analysis or insufficient emphasis on risk during monthly progress meetings. Ultimately, risk should hold a constant position at the top of the project agenda, to ensure key sources of risk are addressed and kept under close review as mitigation strategies are deployed.

Finally, if project managers find themselves continually managing risk reactively, rather than adopting a proactive approach, this could be symptomatic of their processes and procedures not being up to scratch.

Where there are warning signs that risk mitigation is not being given the priority it deserves, a crucial first step is for project managers to recognise that this is an essential part of their role. By failing to make risk one of the central pillars of project assessment and management, individuals may not only miss valuable time and cost-saving opportunities but could also fail to identify threats, which in some instances could determine whether a project goes ahead at all. Where necessary, the risk management function should be relaunched, ensuring sufficient budget and resources are in place and appropriate metrics are chosen to measure its effectiveness during project delivery.

While the different areas of large-scale projects, for example, cost, time and health and safety, can sometimes be viewed as siloed activities, effective risk management processes can provide project managers with a holistic view; helping them to spot interdependencies and identify potential impacts on construction methodologies. In this sense, it is important to be aware that risk is inherent in every aspect of a project and should be measured across its entire lifecycle, from the launch phase through each stage of delivery, to its ultimate decommissioning.

Applying a robust Risk Breakdown Structure (RBS) can assist project managers in recognising areas where projects face high levels of risk and prioritising where mitigation activities are most urgently needed. This structure acts as a framework or checklist for categorising and scoring the various risks that apply, helping to ensure all potential sources of risk are considered and appropriate contingency measures put in place. By helping to provide clarity around the different factors contributing to high-level risks, an RBS can also help project managers to take a view on whether risk needs to be managed across the supply chain.

Risk modelling is another technique which can be used to facilitate decision-making during mega projects. One well-known example of this is Monte Carlo Simulation, a computerised mathematical technique, which presents individuals with a range of possible outcomes for different courses of action. By assigning a numerical probability to each scenario, project managers understand the potential cost of their risk exposure, allowing them to make informed decisions.

This year’s Carillion collapse is a powerful example of the devastating impact a lack of risk centricity can have for all those involved in the delivery of mega projects, at every level of the supply chain. If we are to avoid such events becoming commonplace in the future, project stakeholders must rethink their approach to risk management and analysis – introducing it at an early stage and making it a central part of every decision they make through the lifecycle of the project.

Bob Hide is Director at risk management consultancy, Equib