In today’s business climate, completing a new capital project (or expanding your existing facility) can feel like your project team is navigating through 20-foot ocean swells on a small, rubber dinghy. New technologies, tight money and schedules, an inexperienced management team, aggressive competitors, and governmental regulations are just a few of the risks that can threaten the success of your project team.
Failure to anticipate and manage risks can damage a company’s reputation and impair its financial health. In the past year, large companies and contractors have experienced financial difficulties and even entered bankruptcy after major projects missed important schedule and cost targets. In addition to impacts to the company, members of a management team that does not proactively identify and mitigate project risk can suffer damage to their personal and professional reputations.
To risk-proof your capital project as much as possible, I recommend an organized, disciplined effort that includes standardized roles and responsibilities, work processes, and tools. This effort drives communication, visibility and ownership of potential risks and will create a risk culture within your organization that supports continuous improvement.
Step 1 – Commit to Assessing Project Risks Early
If you’re on the project team for a capital project, you’re probably painfully aware that the key to successfully managing risk is to assess potential risks early. The process of identifying and mitigating risks should start during the initial effort to develop the plan for a new capital project. If you don’t thoroughly assess and minimize risks during the strategy and EPC (Engineering/Procurement/Construction, Start-Up/Commissioning) phases, cost and schedule of facilities completion will be impacted and you are likely to experience schedule and cost overruns, longer-than-expected ramp-up time, higher life cycle operating and maintenance cost, excessive downtime, quality issues and potential safety, health and environmental issues.
It is essential that upper management support and drive a “risk culture” that should exist through the life of the project. The first step in this support will be the funding for the risk management team and risk process. This funding will allow the committing of experienced staff for the full life cycle of the project. As part of strategic planning for a new plant or facility, this management commitment will be demonstrated by requiring an operational risk assessment process that identifies risks to the new operation early enough to confirm strategy and put in place timely, cost-effective mitigation measures that will reduce risk, boost on-time readiness, and lower long-term total cost of ownership. The risk assessment process should continue to identify, monitor and manage risks during the life of the project.
Step 2 – Provide Training for Your Project Team
Carefully evaluate the roles and responsibilities of the members of your risk management team and their experience with capital projects. You will want to establish expectations for basic risk management principles as well as provide training in risk tools, software and procedures. Ownership of the process by the risk management team is very important. Each of the team members will need to “sell” the process to others on the project to get full participation, which will drive better risk identification and mitigation.
Step 3 – Conduct an Operational Risk Assessment
An operational risk assessment will identify risks to the new operation early enough to confirm strategy and put in place timely, cost-effective mitigation measures that will reduce risk and drive compliance with project goals and objectives, improving the likelihood of on-time readiness and lower long-term total cost of ownership.
A thorough risk assessment will help your project team rate the consequence levels and likelihood for each of the categories of risk that are relevant for your operation. Once you have developed a risk register fully loaded with impact and likelihood, you can then use a Monte Carlo process to forecast the overall likelihood of each risk occurrence.
Step 4 – Develop Your Risk Register and Mitigation Plans
Your risk register, organized by category and criticality of risk, describes the risk, potential consequences, likelihood of occurrence, and priority of addressing each risk. This document guides you in creating an action plan for preventing, reducing or transferring risks, including who is responsible for each option. You’ll also need to identify a process, a schedule, and who’s responsible for updating the risk register and actions.
Step 5 – Develop Reports for Your Project Team and Upper Management
To keep everyone informed and involved you’ll need to create easy-to-generate reports appropriate for daily management as well as summary reports to keep your upper management informed about project health and the status of critical risks. Communication is one of the most effective ways to reduce risk on a project. Very seldom do risks that have been identified and mitigated in some way actually go on to negatively impact the project.
Assessing Risk Needs to Continue Throughout the Life of the Project
Assessing risk is not a one-time exercise to be completed in the early planning stages of a capital project. The size, complexity and criticality of your project will drive the detail and frequency of your risk assessment program. As you transition through the different phases of your project, new risks will be identified and old risks will be fully mitigated and drop off the active risk register. Monitoring progress and ownership of each risk will need to be a project team priority and will allow the team to better control project cost and schedule.
While no process can guarantee project success, these five steps can help you organize the core group of activities you and your team will need to perform to risk-proof your capital project.
Steve Alley serves as Director of Operational and Risk Readiness for Life Cycle Engineering, which provides consulting, services and education that help organizations reduce risk, improve operating performance and engage their employees. Steve is responsible for developing procedures, work processes and systems to support clients in the identification, quantification, and mitigation of risk. Steve can be contacted at [email protected].