Project Risk Management Guidelines: Managing Risk in Large Projects and Complex Procurements

401 Pages·2004·15.611 MB·English

by  Dale F. Cooper, Stephen Grey, Geoffrey Raymond, Phil Walker

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Project Risk Management Guidelines
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Project Risk
Management
Guidelines
Managing Risk in Large Projects
and Complex Procurements
Dale F. Cooper, Stephen Grey, Geoffrey Raymond
and Phil Walker
Broadleaf Capital International
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Copyright © 2005 John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester,
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Library of Congress Cataloging in Publication Data
Project risk management guidelines: managing risk in large projects and complex procurements/
Dale Cooper...[etal.].
p. cm.
Includes bibliographical references and index.
ISBN 0-470-02281-7 (cloth: alk. paper)
1. Risk management. 2. Project management. 3. Industrial procurement—Management.
I. Cooper, Dale F.
HD61.P765 2004
658.15’5—dc22
2004011338
British Library Cataloging in Publication Data
A catalogue record for this book is available from the British Library
ISBN 0-470-02281-7
Typeset in 10/12pt Garamond by Integra Software Services Pvt. Ltd, Pondicherry, India
Printed and bound in Great Britain by Antony Rowe Ltd, Chippenham, Wiltshire
This book is printed on acid-free paper responsibly manufactured from sustainable forestry
in which at least two trees are planted for each one used for paper production.
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C
ONTENTS
Foreword vii
Preface ix
About the authors xiii
Introduction to project risk management 1
Part I The basics of project risk management 11
1 The project risk management approach 13
2 Establish the context 19
3 Risk identification 37
4 Qualitative risk assessment 45
5 Semi-quantitative risk assessment 59
6 Risk treatment 73
7 Monitoring and review 89
8 Communication and reporting 93
9 Project processes and plans 101
10 Simplifying the process 109
11 Managing opportunities 125
12 Other approaches to project risk management 137
Part II Extending the basic process 145
13 Case study: tender evaluation 147
14 Contracts and risk allocation 161
15 Market testing and outsourcing 171
16 Public–private partnerships and private financing 183
17 Technical tools and techniques 203
18 Introduction to environmental risk management 225
Part III Quantification of project risks 249
19 Introduction to quantification for project risks 251
20 Cost-estimating case studies 263
21 Case study: planning a timber development 279
22 Capital evaluation for large resource projects 295
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vi Contents
23 Risk analysis and economic appraisal 311
24 Conclusions 321
Part IV Additional information and supporting material 329
25 Risk management process checklist 331
26 Worksheets and evaluation tables 335
27 Examples of risks and treatments 357
Glossary 371
References 375
Index 379
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F
OREWORD
Project risk management has come a long way since the 1980s, when Dale Cooper
and I worked together on a range of risk management consultancy projects in the UK,
Canada and the USA, published together, and became friends as well as colleagues. In
particular, the leading edge has moved from bespoke methods and models developed
for particular organizations and situations towards generic processes. It has also come
along way since the mid-1990s, when Stephen Grey and I worked together on the
Association for Project Management PRAM (Project Risk Analysis and Management)
Guide. In particular, the debate about what shape generic processes should take has
clarified a number of issues, without leading to a consensus. Project risk management
continues to evolve in interesting and useful ways, with no end to this development
in sight.
One of the key current dilemmas is the gap between common practice and best practice.
Central to this is a widespread failure to understand the relationship between simple
approaches that work well in appropriate circumstances, and more complex approaches that
pay big dividends when the aspects they focus on deserve attention. Opinions are divided
on the scale and nature of this dilemma, and I have some views on how best to approach it
which differ from those put forward in this book. However, I think this book is very useful
reading for both experts and novices. It addresses the need for simplicity without being
simplistic in a direct manner. It has lots of useful practical advice for getting started and
dealing with simple situations. It also addresses some of the areas where more sophisticated
approaches are well worthwhile, and some of the relevant concepts and tools. In addition, it
packages the whole in a structure that works well.
A key feature of this book is the way it postpones addressing quantitative analysis and
associated process iterations (multiple pass looping) until after the basic process has been
described. Initially I found this a source of concern. However, this book is unusually clear
about the limitations of semi-quantitative approaches, the consequence rating tables
(Tables 4.3 and 4.4) make this approach unusually rich in insight, and the attractions of
the starting position adopted include a close proximity to common practice. There are
many routes to best practice, and both the best routes and the nature of the destination are
debatable. This book provides a particularly simple basic process as a starting position
without overlooking the drawbacks, and it addresses many of the implications of more
sophisticated processes later.
Another key feature of this book is the notion that best practice risk management is
shaped to particular contexts for efficiency, but the principles are universal and transporta-
ble. The chapters on environmental issues and outsourcing, for example, address very dif-
ferent contexts, but they share some basic perspectives.
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viii Foreword
This is a pragmatic and directly useful book for project risk management novices.
It is also a stimulating and challenging book for those with considerable experience of
the field.
Chris Chapman
Professor of Management Science
University of Southampton, UK
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P
REFACE
The risk management processes described in this book had their genesis well over 20 years
ago when I accepted a position at the University of Southampton. There I met and worked
with Dr Chris Chapman, already an acknowledged expert in project risk, with an estab-
lished relationship with BP and an extensive client base in Canada. Chris involved me in
his consulting activities in North America, primarily associated with quantitative risk
analyses of large projects in the hydroelectric and the oil and gas industries. This was a time
of innovation, as there were few protocols or models for the kinds of risk analyses that were
required for these projects, and the quantitative calculations used a form of numerical
integration called the Controlled Interval and Memory approach, developed by Chris, that
was implemented in bespoke software. We had to develop different model structures and
forms of analysis, and new software had to be written on some occasions to accommodate the
new structures. It was highly stimulating, at times exhausting, and great fun, and I learned
a huge amount from Chris and the clients with whom we worked.
Many of the projects on which we worked are described in published papers, and some
of them are referred to in the case material in this volume. They are all described in our
book (Cooper and Chapman, 1987).
After I left Southampton, I worked as a consultant in the finance sector, primarily with
international companies in the UK, USA, Hong Kong and Australia. Many of my assign-
ments involved risk in one form or another: risks associated with trading equities, bonds,
commodities, currencies and other financial instruments; compliance risks; new business
risks as the finance sector in the UK restructured and transformed itself at the time of the
so-called Big Bang; and balance sheet and liquidity risks associated with the management
of financial assets and liabilities having different bases and maturity structures. I then
worked as a senior line manager in the sector, where I had to develop organizational strategy and
manage its implementation, as well as run operational business areas.
One of the main lessons I learned from the finance sector, an industry that is often
perceived as notoriously risky, is this: if something is too complex to understand and explain
then it is probably too risky to undertake, as you won’t be able to design and implement
the right kinds of operational processes, controls and monitoring to manage the risks effect-
ively. That insight, and the reinforcement I have received from many clients subsequently,
has led me to simplify many of the processes and tools I use for risk management. When
complexity is needed, then it is really needed and it must be done properly, but simple
approaches are often sufficient for making sound decisions.
A large part of this book is based on simple qualitative approaches to project risk. The
processes described here had a long gestation; they were first formalized by me in the New
South Wales Government Risk Management Guidelines in 1993. The first version of the
Australian and New Zealand Standard on Risk Management (AS/NZS 4360) (1995), extended
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