Construction Cost Management & The Impact of the Project Schedule on Cost

Part 5: Cost Risk Management By Ted Garrison Garrison Associates www.TedGarrison.com www.StrategicPlanningforContractors.com www.NewConstructionStrategies.com

Module 1: Fundamentals of Cost Risk Management

Murphy s Law: If anything can go wrong it will. O Toole s Commentary on Murphy s Law: Murphy was an optimist.

(c) 2008 Garrison Associates

How Do You Minimize Risk?

Assign risk to the person/organization best qualified to manage that risk. If a person can t manage the risk, then the risk shouldn t be delegated to them because it places everyone at greater risk. Minimizing decisions minimizes risk. Minimize risk is essential to helping client & the contractor.
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Where Are We At Risk?

What

can go wrong?

How can we prevent the problem? Focus on Triple Constraints Costs Schedule Performance (Quality) What risks due we have that can t control?

(c) 2008 Garrison Associates

Managing Projects Is Not About Being Perfect!

By definition a project is something that has never been done before in other words it sa prototype. It is about getting the job done. It is about letting people make mistakes. But one of the most important skills is creative problem solving. It s minimizing decisions. Therefore, keep asking questions.
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How to Manage Risk

Identify the biggest risks to key project elements. Then develop a plan to minimize or eliminate the potential risk. This includes identifying the risks the contractor can t control, but how it will minimize them Focus on the most important issues. 80-20 rule 20% of issues will create 80% of problems.
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Manage Risk Using DMAIC

Continue improvement process Prevent reverting back to the "old way" Require development, documentation and implementation of an ongoing monitoring plan CONTROL Client/Expectations Quality issues Core Business Process DEFINE Current Performance Develop a process to collect data Implement process

MEASURE

IMPROVE Target process Design solutions to fix/prevent problems Create innovate solutions Use technology and discipline Develop and deploy implementation plan

ANALYZE

Data collected/process map Determine causes of defects Identify gap between current and goal performance Identify sources of variation

Decision Tree: Manager s Code The movement of risk.....

YES NO

Is It Working?
YES

Don t Mess With It!

Did You Mess With It?

NO

YOU IDIOT!
YES

Anyone Else Knows?

You re SCREWED!

YES

Will it Blow Up In Your Hands?

NO NO

Can You Blame Someone Else?

Yes

NO

Look The Other Way

Hide It

NO PROBLEM!

Model 2: Risk Assessment (RA) Plan

High performing contractors use the RA Plan to identify and minimize potential risk before the project/task has started. High performing contractors used the RA Plan to differentiate themselves from their competitors (to prove they are not a commodity). The use of RA Plans quickly identify high performing contractors.
Inexperienced Vendor Time Experienced Vendor Time

RA Plan Contents
List major risks unique to Project
Prioritize the list (biggest risks first) You must address how the risk impacts the project to not be completed on time, not finished within budget, or may be a source of dissatisfaction for the client Must be a unique risk to the current project Must explain why the risk is a risk

Explain how to avoid or minimize the risk.

Non-technical explanation Must explain how risk is avoided

Propose options to increase the value (expectation or quality) on the project.

RA Plan Format
The RA Plan must NOT exceed 2 pages. Should not include brochures, marketing information, or product names! It shouldn t include technical data. It s not about shifting risk back to client. However, must identify risks the contractor can t control.
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Module 3: Why You Must Plan for a Contingency

By definition projects are unique, which means there will be problems. Projects require risk taking. Our job is to manage the risk because it can t be eliminated. Projects that seek perfection are usually disasters because people are afraid to take action. Need to be able to educate the buyer in other words manage expectations.
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How to Plan for a Contingency

Keep records. Don t be afraid of the truth in other words manage expectations. Accept the fact that you must have a contingency or you are planning to fail. If they won t give you a contingency then you must build one in.
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Contingency Methods
2 Common Contingency Approaches: Percentage of entire project. Percentage of individual items or tasks.

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Module 4: Weekly Reports

What is it / Why is it important
What is it?
Spreadsheet that tracks unforeseen risks on a project

Why is it important?
Allows contractors to track unresolved client issues Allows contractors minimize risk Allows contractor a means to document all client decisions

How much effort?

Minimal (less than 5 minutes), unless vendor did not preplan, or client making decisions
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Weekly Reporting System

Spreadsheet tracks only project unforeseen risks Tracking the project should begin with notice to proceed Contractor should prepare report every week The accuracy of the report will impact the results

Self Regulating Loop

(Six Sigma DMAIC Generated)
Actions
Minimize data flow Minimize analysis Minimize control
Requirements
(DBB, DB, CMAR, DBO)

Risk Assessment Interview Key Personnel

Past Performance Information

M

Identify value (PPI, RA, V Interview, $$$$$)

R 50%

Preplanning, Quality Control Plan

V = Identify Value R = Minimize Risk M = Self Measurement M

50% M

Efficient Construction
M R

Measure again

Action Steps

Please turn to the inside of the front cover of the resource guide. Write down 1 to 3 action steps that you want to immediately implement from Part 5 of this program.