Applying a Risk Management Process

(RMP) to manage cost risk for an EHV

transmission line Project
Mr. V M Rao Tummala Mr. John F Burchett

Guided By : Prof Kanchan Joshi

Prepared By : -
Anuj Sharma
1907003
PGPEX-VLFM03
 Risk Management Process (RMP)
• The European Community promoted a comprehensive risk management
methodology (RISKMAN) consisting of several phases. RISKMAN provides a
more comprehensive framework to enumerate and assess potential risk factors
associated with a project.
• Risk identification,
• Risk assessment,
• Risk evaluation,
• Risk mitigation,
• Risk contingency estimate,
• Risk decision making
• Risk control and monitoring.

The RMP provides a systematic framework to enumerate and assess the

consequences and the likelihood of their occurrences of all potential risk factors
associated with a given project. It is an effective tool of confronting unknown risks,
responding quickly in finding out what could go wrong and developing strategies to
control risks for project success.
 Steps of Risk Management Process
STEP I - RISK IDENTIFICATION
The risk identification starts with a Base Cost and Schedule, which is prepared when the project was first selected, together with a Risk List that is used to assist in
categorizing potential risk factors associated with the project. Then identifying the strategic importance of the project and the corresponding project mission, aims and
objectives. The mission and aims must be driven by the overall business strategy of the corporation.
STEP II - RISK MEASUREMENT
Risk measurement stage then models each of the risk factors identified on checklists in terms of consequential cost as a range estimate (magnitude of impact), and with the
assistance of the Work Breakdown Structure at various levels, cost relationships to determine the total project cost.
STEP III - RISK ASSESMENT
The risk assessment phase determines the likelihood of occurrences of consequences of each risk factor in the form of objective or subjective input probability distributions,
and then by using Monte Carlo simulation analysis, determines the output prob- ability distribution of the project cost.
STEP IV - RISK EVALUATION
The risk evaluation phase of the RMP involves identifying several decision alternatives and evaluating them based on the risk probabilities obtained in the risk assessment
phase and taking necessary corrective actions if the project outcomes are at variance with the planned outcomes. It requires project managers to review and interpret the
cost forecasts produced by the risk assessment phase and decide on an expected cost or instruct changes in the modeling of project cost or structure.
STEP V - RISK CONTROL & MONITRING
The risk control and monitoring phase is used to monitor the expected cost and make necessary adjustments to the capital budget or, based on authorized criteria, report
significant variances to management who may cause the project plans to be reconsidered. The project manager can examine the progress as well as any deviations that
would occur and corrective actions required for achieving the desired objectives of the project.

It can be applied to any stage of the project life cycle, examining the progress in terms of the planned outcomes and take corrective actions necessary if any deviations
would occur.
Transmission Line Project Description
China Light & Power Company Ltd, Hong Kong reviews the viability of applying a risk management process to enhance capital
investment decisions, when planning the construction of an extra-high voltage (EHV) overhead transmission line project that could be
designed and built in the next 10 years.
Different project proposals will be considered for this transmission line as well as different completion dates. Each scenario will be
investigated to determine the rate of return and expected cost to customer, using the net present value model.
The lowest ‘cost to customer’ approach would be the normal criterion for project selection, assuming all proposals are technically
viable and compatible with Hong Kong Government infrastructure plans.
A RMP based risk management model for transmission line costs
Mission
• The mission of the project is to `develop, operate and maintain CLP's Transmission Business Group activities by safely
obtaining and delivering quality electricity supplies and providing services in a way that meets the expectations of
customers, shareholders and employees.

Aim
• The specific aims for the project is then to set up, relocate and empower resources in the execution and construction of
new EHV transmission

Cost Breakup of the Project

10, 10%
12.8, 13%

15.4, 15%
61.8, 62%

Overhead lines Land & Wayleave

Associated works Project Contigencies
I - Risk Identification

• The work breakdown structure (WBS) assists in the

identification of risk factors by simplifying the project
structure into smaller units (or cost centers), for estimating
the project cost more accurately and analyzing correlations
that may exist between any two cost centers.

• In addition, the tools of risk identification must be made

available to that individual, for example, techniques such as
physical inspection, checklists, flow charts, fault tree
analysis, event tree analysis, FMEA and system hazard
analysis.

To ensure that the process of risk identification is effective,

the task of risk identification must be allocated.
II - Risk measurement
Each cost component identified as a potential risk will have possible consequences, which tend to make the expected cost
outcome have a range of possible cost values, rather than a single value. Statistical data is used to represent the range of
possible values and valid information.
Cost estimates or range estimates are therefore made for each cost element by using the knowledge of experienced project
staff, which although the most reliable, will be subjective in nature.

This information would be extremely useful in assessing probability distributions at the assessment phase

III - Risk Assessment

Subjective or Objective probability distributions for cost components
If objective (historical) data is available, one can determine the most appropriate objective probability distributions by
employing Best Fit with Chi-square test for goodness-of-fit. If the Delphi method of brainstorming is used along with a
questionnaire in assessing the above-mentioned probability distributions.

The triangular distributions for other cost elements used to determine the optimistic (minimum), most likely and
pessimistic (maximum) values
The @Risk software is used in this fashion to simulate all possible outcomes in order to determine the cumulative
probability distribution of project cost

The output distributions obtained above are to be evaluated in the next phase, and an appropriate
adjustment made to the budget, with reference to the expected value.
IV - Risk evaluation
A further stage of estimation would show whether the forecast ranges are reducing towards an end where contingency can
be reduced further, and uncertainties have been controlled or eliminated. If an adjustment cannot be made, then corrections
will need to be made to the project in the risk control and monitoring stage. The uncertainty in terms of the range of the
project cost distribution is reduced from project budget preparation stage to definition stage.
Once the assessment of risk is completed, strategies to mitigate undesirable risks needs to be developed.
• Risk reduction - This is the First step in loss control to make sure that the risk is as low as possible. Two possible aspects
are involved, namely pre-loss and post-loss reduction.
i. Pre-loss reduction involves steps, which the risk manager can take, once a risk has been identified but prior to any loss.
ii. Post-loss reduction involves steps where the risk manager can reduce the impact of a loss once the event has taken
place.
• Risk retention - Depending on the level or value of potential risk, some retention of risk can be made by the responsible
project manager. Some of this may be covered by an agreed contingency or, depending on the cost of cover, by insurance.
• Risk transfer - This is essentially trying to transfer the risk to another party. Three methods of contracting were considered
as described below
i. Turnkey contract - This contract is a total package, the contractor (or a consortium or joint venture) takes over the
wayleave tower sites from the client at the outset, executing the whole of the civil, mechanical and electrical
engineering, construction and commissioning through to commercial operation.
ii. Multi-contract - This would divide the project into numerous parcels of work of varying sizes, each individually
contracted. The advantages are in the competition achieved by contracting parcels directly with a specialist supplier and
avoid mark-up of an intermediary.
iii. Island contract - The island contract is effectively a compromise between the other two above-mentioned approaches.
 V - Risk control and Monitoring

• In the risk control and monitoring phase, we examine the targets set and contract
strategies employed as a result of risk evaluation periodically and observe if any deviations
would occur.
• The development and distributing periodic reports on the progress of the project, including
the milestones, to the concerned senior management and project personnel is carried out in
this phase.

• At the end of every project life cycle and at the commissioning of the project, the person
re- sponsible should collect data and store it in risk data- bases for easy access.
Thank You