Risks of International Projects: Reward or Folly? By: G. Edward Gibson, Jr, Ph. D, P.E. and John walewski Abstract Assessing and managing risk is a complex and critical task for international construction projects that support new business ventures. Indeed, it could be argued that the word risk and the term international projects could be used interchangeably. Driven by such factors as new markets, domestic competition, and trade liberalization, U.S. owners and contractors have in recent years aggressively pursued international business opportunities and projects. International work requires owners to assess a diverse set of political, geographic, economic,environmental, regulatory, and cultural risk factors when contemplating an international capital project. In addition, contractors must consider a similar set of risk factors in determining whether to undertake uch projects, and how to price and schedule the work if they do. A limited amount of research has been undertaken to address these issues. and current efforts to assess and evaluate the risks associated international construction are fragmented and fail to provide adequate assistance to project managers. Can be systematically addressed and mitigated on these types of projects or is it folly to attempt this process? This paper will report the results of our research project focused on international projects sponsored by the Center for Construction Industry Studies(CCIS), the Construction Industry Institute( CIl) and the Project Management Institute(PMi). This research included input from over 100 industry experts representing 58 organizations. Data from 65 international projects, with a total cost of approximately $27 billion(U.S )were analyzed. We will present key risk issues and a management approach to help mitigate risks. Included in that discussion will be the International Project Risk Assessment(PRA) tool developed in collaboration with dustry. This management tool provides a systematic method to identify, assess, and determine the relative importance of international-specific risks across the projects life cycle. The reward of risk management on international ventures will be explored. How industries other than construction can gain from this research will be outlined ntroduction Construction is a major worldwide industry accounting for approximately $3. 4 trillion USD, or almost ten percent of global Gross Domestic Product(ENR 2000, Batchelor 2000; Bon 2001). Proportionally, the majority of international construction activity is conducted by local, regional, or national entities, yet an increasing percentage of industry participants operate on an international level (Bon 2001 ). Although the United States is the largest construction market--estimated at over $800 billion USD--projects completed outside of the domestic market, have become an even greater part of the capital investment portfolio of U.S owners. Historically, U.S. companies have been significant participants in most global markets and U.S.-based contractors have a long tradition of overseas work. The growth and activities of multinational corporations has been a major contributor to the creation of an international construction market (United Nations 2001) Facility construction involves a wide variety of risks. International projects- defined as those in which the investor, owner and/or contractor are from a country different than where the project is physically located- typically involve a wider range of risks than"domestic" projects. In effect, moving outside of ones al business jurisdiction interjects many unknowns. Political interference, social unrest, and currency exchange are some of the concerns that add to the complexity of international ventures. Assessing and managing risk is therefore a complex and critical task for international construction projects and has proven to ustin Industries Endowed Teaching Fellow and Professor of Civil Engineering, University of Texas at Austin, I University Station, Austin, Texas 78712, phone 512-471-4522, fax 512-471-3191, email gibson @mail. utexas. edu 2 Ph.D. Candidate and Graduate Research Assistant, University of Texas at Austin, I University Station, Austin, Texas 78712
1 Risks of International Projects: Reward or Folly? By: G. Edward Gibson, Jr.1 , Ph.D., P.E. and John Walewski2 Abstract Assessing and managing risk is a complex and critical task for international construction projects that support new business ventures. Indeed, it could be argued that the word “risk” and the term “international projects” could be used interchangeably. Driven by such factors as new markets, domestic competition, and trade liberalization, U.S. owners and contractors have in recent years aggressively pursued international business opportunities and projects. International work requires owners to assess a diverse set of political, geographic, economic, environmental, regulatory, and cultural risk factors when contemplating an international capital project. In addition, contractors must consider a similar set of risk factors in determining whether to undertake such projects, and how to price and schedule the work if they do. A limited amount of research has been undertaken to address these issues, and current efforts to assess and evaluate the risks associated with international construction are fragmented and fail to provide adequate assistance to project managers. Can risks be systematically addressed and mitigated on these types of projects or is it folly to attempt this process? This paper will report the results of our research project focused on international projects sponsored by the Center for Construction Industry Studies (CCIS), the Construction Industry Institute (CII) and the Project Management Institute (PMI). This research included input from over 100 industry experts representing 58 organizations. Data from 65 international projects, with a total cost of approximately $27 billion (U.S.) were analyzed. We will present key risk issues and a management approach to help mitigate risks. Included in that discussion will be the International Project Risk Assessment (IPRA) tool developed in collaboration with industry. This management tool provides a systematic method to identify, assess, and determine the relative importance of international-specific risks across the project’s life cycle. The reward of risk management on international ventures will be explored. How industries other than construction can gain from this research will be outlined. Introduction Construction is a major worldwide industry accounting for approximately $3.4 trillion USD, or almost ten percent of global Gross Domestic Product (ENR 2000; Batchelor 2000; Bon 2001). Proportionally, the majority of international construction activity is conducted by local, regional, or national entities, yet an increasing percentage of industry participants operate on an international level (Bon 2001). Although the United States is the largest construction market—estimated at over $800 billion USD—projects completed outside of the domestic market, have become an even greater part of the capital investment portfolio of U.S. owners. Historically, U.S. companies have been significant participants in most global markets and U.S.-based contractors have a long tradition of overseas work. The growth and activities of multinational corporations has been a major contributor to the creation of an international construction market (United Nations 2001). Facility construction involves a wide variety of risks. International projects — defined as those in which the investor, owner and/or contractor are from a country different than where the project is physically located — typically involve a wider range of risks than “domestic” projects. In effect, moving outside of one’s usual business jurisdiction interjects many unknowns. Political interference, social unrest, and currency exchange are some of the concerns that add to the complexity of international ventures. Assessing and managing risk is therefore a complex and critical task for international construction projects and has proven to 1 Austin Industries Endowed Teaching Fellow and Professor of Civil Engineering, University of Texas at Austin, 1 University Station, Austin, Texas 78712, phone 512-471-4522, fax 512-471-3191, email egibson@mail.utexas.edu 2 Ph.D. Candidate and Graduate Research Assistant, University of Texas at Austin, 1 University Station, Austin, Texas 78712
be difficult for owners, contractors, and to the growing number of other participants that include investors and Insurance interests Driven by such factors as new markets, domestic competition, and trade liberalization,U.S.owners and contractors have aggressively pursued international business opportunities and projects. International work quires owners to assess a diverse set of political, geographic, economic, environmental, regulatory, security, and cultural risk factors when contemplating an international capital project. In addition, contractors must consider a similar set of risk factors in determining whether to undertake such projects, and how to price and schedule the work if they do. Organizations are more likely to successfully plan and deliver international ventures when they have a more comprehensive understanding of the commercial, political, construction and operations uncertainties and risks with such project. A limited amount of research has been undertaken to address these issues. Current efforts to assess and evaluate the risks associated with international construction re fragmented and often fail to provide adequate assistance to project managers because few management tools or techniques exist to identify, assess, and help manage the risks Most industry analysts agree that international business opportunities will continue to attract U.S foreign investment and the international construction market will attract U.S. contractors. U.S. Owners aggressively pursue international opportunities to seek out new markets or improve cost effectiveness in manufacturing operations. The globalization of international construction markets provides tremendous opportunities for contractors to expand into new foreign markets(Hann and Diekmann 2002). Respondents to a survey on the future of international construction markets for the next 25 years agreed that American firms in specialized construction services possess a competitive advantage, and will continue to export construction services(Bon 2001) The Center for Construction Industry Studies(CCIS), the Construction Industry Institute(CID), and the Design, Procurement and Construction Specific Interest Group of the Project Management Institute(DPC-SIG) funded our research study in 2000 to improve risk assessment procedures for international construction. CCiS is a multi-disciplinary research program studying the construction industry located at the University of Texas at Austin and is part of the Sloan Foundations Industry Centers program. CCIS was created with a grant from the Alfred P. Sloan Foundation and the Construction Industry Institute(Cil) to perform multi-disciplinary, long range studies addressing construction industry challenges in order to complement the traditionally short-term research process employed by Cll and others. This study was sponsored by CCis to focus on it research thrust areas in project execution processes and economics, finance, and dispute resolution. CIl is a research organization whose mission is to improve the competitiveness of the construction industry. It is a consortium of approximately 90 leading owners and contractors who have joined together to find better ways of planning and executing capital construction programs. PMI participation with this research effort was promoted by the interdisciplinary scope of the research, and the desire to continue its efforts to evaluate the changing nature of the project execution process and the implication of these changes on the industry The goal of our collaborative research effort was to develop a risk management process to increase the success of international capital facilities for owners and contractors, with project success defined as budget and schedule achievement, and meeting technical and operational objectives. Principal beneficiaries of the results are project managers in the industrial, building, and infrastructure construction sectors, including both private and public organizations that conduct international operations and activities. The tools and techniques that were developed are relevant to organizations outside of construction given that many project risk issues and factors are generic and systemic Completed in December 2003, our investigation produced the International Project Risk Assessment (PRA) tool(CIl Implementation Resource 181-2 and Cll Research Report 181-11). The tool and supporting documentation provides a systematic method to identify, assess, and determine the relative importance of international-specific risks across the projects life cycle and spectrum of participants to allow for subsequent mitigation. The associated research report describes in detail the research performed including the methodology, data analysis, and value of the research to industry. The IPRa is the first management tool of its kind that allows for the identification and assessment of the life cycle risk issues specific to international construction fo both owners and contractors. Furthermore, the tool is unique because the created Baseline Relative Impact values are based upon empirical data using industry expert inputs reporting on actual projects, and the Ipra identifies the risk factors of highest importance to the project team
2 be difficult for owners, contractors, and to the growing number of other participants that include investors and insurance interests. Driven by such factors as new markets, domestic competition, and trade liberalization, U.S. owners and contractors have aggressively pursued international business opportunities and projects. International work requires owners to assess a diverse set of political, geographic, economic, environmental, regulatory, security, and cultural risk factors when contemplating an international capital project. In addition, contractors must consider a similar set of risk factors in determining whether to undertake such projects, and how to price and schedule the work if they do. Organizations are more likely to successfully plan and deliver international ventures when they have a more comprehensive understanding of the commercial, political, construction and operations uncertainties and risks with such project. A limited amount of research has been undertaken to address these issues. Current efforts to assess and evaluate the risks associated with international construction are fragmented and often fail to provide adequate assistance to project managers because few management tools or techniques exist to identify, assess, and help manage the risks. Most industry analysts agree that international business opportunities will continue to attract U.S. foreign investment and the international construction market will attract U.S. contractors. U.S. Owners aggressively pursue international opportunities to seek out new markets or improve cost effectiveness in manufacturing operations. The globalization of international construction markets provides tremendous opportunities for contractors to expand into new foreign markets (Hann and Diekmann 2002). Respondents to a survey on the future of international construction markets for the next 25 years agreed that American firms in specialized construction services possess a competitive advantage, and will continue to export construction services (Bon 2001). The Center for Construction Industry Studies (CCIS), the Construction Industry Institute (CII), and the Design, Procurement and Construction Specific Interest Group of the Project Management Institute (DPC-SIG) funded our research study in 2000 to improve risk assessment procedures for international construction. CCIS is a multi-disciplinary research program studying the construction industry located at the University of Texas at Austin and is part of the Sloan Foundation’s Industry Centers program.. CCIS was created with a grant from the Alfred P. Sloan Foundation and the Construction Industry Institute (CII) to perform multi-disciplinary, longrange studies addressing construction industry challenges in order to complement the traditionally short-term research process employed by CII and others. This study was sponsored by CCIS to focus on it research thrust areas in project execution processes and economics, finance, and dispute resolution. CII is a research organization whose mission is to improve the competitiveness of the construction industry. It is a consortium of approximately 90 leading owners and contractors who have joined together to find better ways of planning and executing capital construction programs. PMI participation with this research effort was promoted by the interdisciplinary scope of the research, and the desire to continue its efforts to evaluate the changing nature of the project execution process and the implication of these changes on the industry. The goal of our collaborative research effort was to develop a risk management process to increase the success of international capital facilities for owners and contractors, with project success defined as budget and schedule achievement, and meeting technical and operational objectives. Principal beneficiaries of the results are project managers in the industrial, building, and infrastructure construction sectors, including both private and public organizations that conduct international operations and activities. The tools and techniques that were developed are relevant to organizations outside of construction given that many project risk issues and factors are generic and systemic. Completed in December 2003, our investigation produced the International Project Risk Assessment (IPRA) tool (CII Implementation Resource 181-2 and CII Research Report 181-11). The tool and supporting documentation provides a systematic method to identify, assess, and determine the relative importance of international-specific risks across the project’s life cycle and spectrum of participants to allow for subsequent mitigation. The associated research report describes in detail the research performed including the methodology, data analysis, and value of the research to industry. The IPRA is the first management tool of its kind that allows for the identification and assessment of the life cycle risk issues specific to international construction for both owners and contractors. Furthermore, the tool is unique because the created Baseline Relative Impact values are based upon empirical data using industry expert inputs reporting on actual projects, and the IPRA identifies the risk factors of highest importance to the project team
This paper provides an overview of risk management, IPRA tool development and research findings and a brief explanation on how the tool is used. Also included are recommendations to practitioners who are pursuing international projects as well as areas for future research. Our research investigation has shown that the tools and techniques developed can assist in improving the overall success of international capital projects oject teams performing risk management activities are rewarded. Those that" go it blindly "do so at their own Risk management A myriad of risk and risk-related definitions are applied to construction projects, and no standard definitions or procedures exist for what constitutes a risk assessment. In the construction industry, risk is often referred to as the presence of potential or actual treats or opportunities that influence the objectives of a project during construction, commissioning, or at time of use(RAMP 1998). Risk is also defined as the exposure to the chance of occurrences of events adversely or favorably affecting project objectives as a consequence of uncertainty(Al-Bahar 1990). Dias and loannou(1995) concluded that there are two types of risk: 1)pure risk when there is the possibility of financial loss but no possibility of financial gain, and 2)speculative risk that involves the possibility of both gains and losses. CIls definitive work on construction risks(Cll 1988)uses lassic operations research literature to distinguish the concepts of risk, certainty, and uncertainty, and is consistent with the literature(ASCE 1979: CIRA 1994; Kangari 1995: Hastak and Shaked 2000; PMI 2000; Smith 2001)on what is considered as the sequential procedures for construction risk management: 1) identification, 2)assessment, 3)analysis of impact, and 4 )management response Increased concerns about project risk have given rise to various attempts to develop risk mana methodologies. An example of such is the Risk Analysis and Management of Projects (RAMP) produced by the Institute of Civil Engineers and the Institute of Actuaries in the United Kingdom(RAMP This method uses a project framework to identify and mitigate risk through the accepted framework of risk identification and project controls by focusing on risks as they occur during the project life cycle. It requires users to follow a rational series of procedures and to undertake this analysis at scheduled intervals during the life cycle of a project. RAMP applies to all types of project but does not focus on international issues Traditional risk assessment for construction has been synonymous with probabilistic analysis(Liftson 1982, Al-Bahar 1990). Such approaches require events to be mutually exclusive, exhaustive, and conditional ndependent. However, construction involves many variables, and it is often difficult to determine causality, dependence and correlations. As a result, subjective analytical methods that rely on historical information and the experiences of individuals and companies have been used to assess the impact of construction risk and uncertainty(Bajaj, Oluwoye, and Lenard 1997) Although contracts are the mechanism to allocate liabilities and responsibilities of project participants in construction, contract language alone is insufficient to specify and appoint all the risks(ACEC/AGC, 1992 Rahman and Kumaraswamy 2002). An ideal process would address the individual needs of each organization and each project( Chapman and Ward 1997) The distribution of risk between the client and contractor tends to overshadow effective management strategies and investigations show that contactors and owners give minimal consideration to risks outside the realm of their own concerns(Kim and Bajaj 2000, ENR 2002). Although the owners project team must identify ith the business mission of the company, there are often disconnects. Cll research has shown the failure to align business goals and specific project goals due to poor pre-project planning is a major industry challenge (CII1997) Determination of risk responsibilities and ownership is critical yet can be difficult to allocate for international projects. The Federation Internationale des Ingenieurs Conseils(the International Federation of Consulting Engineers, FIDIC)and the International European Construction Federation(FIEC) publish two well known and widely-accepted forms of conditions of contract for international construction projects(the Red and Yellow Books) that include provisions on the fair and equitable risk sharing between the owner and the contractor as well as risk responsibilities, liabilities, indemnity, and insurance. a discussion on risk sharing is included in an analysis of the FIDIC Red Book(Bunni 1997) that includes a series of flow diagrams of the risks in construction, and their ensuing responsibilities, liabilities and how these are dealt with by the red Book Conditions of Contract for work of Civil Engineering Construction)
3 This paper provides an overview of risk management, IPRA tool development and research findings, and a brief explanation on how the tool is used. Also included are recommendations to practitioners who are pursuing international projects as well as areas for future research. Our research investigation has shown that the tools and techniques developed can assist in improving the overall success of international capital projects. Project teams performing risk management activities are rewarded. Those that “go it blindly” do so at their own folly. Risk Management A myriad of risk and risk-related definitions are applied to construction projects, and no standard definitions or procedures exist for what constitutes a risk assessment. In the construction industry, risk is often referred to as the presence of potential or actual treats or opportunities that influence the objectives of a project during construction, commissioning, or at time of use (RAMP 1998). Risk is also defined as the exposure to the chance of occurrences of events adversely or favorably affecting project objectives as a consequence of uncertainty (Al-Bahar 1990). Dias and Ioannou (1995) concluded that there are two types of risk: 1) pure risk when there is the possibility of financial loss but no possibility of financial gain, and 2) speculative risk that involves the possibility of both gains and losses. CII’s definitive work on construction risks (CII 1988) uses classic operations research literature to distinguish the concepts of risk, certainty, and uncertainty, and is consistent with the literature (ASCE 1979; CIRA 1994; Kangari 1995; Hastak and Shaked 2000; PMI 2000; Smith 2001) on what is considered as the sequential procedures for construction risk management: 1) identification, 2) assessment, 3) analysis of impact, and 4) management response. Increased concerns about project risk have given rise to various attempts to develop risk management methodologies. An example of such is the Risk Analysis and Management of Projects (RAMP) method produced by the Institute of Civil Engineers and the Institute of Actuaries in the United Kingdom (RAMP 1998). This method uses a project framework to identify and mitigate risk through the accepted framework of risk identification and project controls by focusing on risks as they occur during the project life cycle. It requires users to follow a rational series of procedures and to undertake this analysis at scheduled intervals during the life cycle of a project. RAMP applies to all types of project but does not focus on international issues. Traditional risk assessment for construction has been synonymous with probabilistic analysis (Liftson 1982, Al-Bahar 1990). Such approaches require events to be mutually exclusive, exhaustive, and conditionally independent. However, construction involves many variables, and it is often difficult to determine causality, dependence and correlations. As a result, subjective analytical methods that rely on historical information and the experiences of individuals and companies have been used to assess the impact of construction risk and uncertainty (Bajaj, Oluwoye, and Lenard 1997). Although contracts are the mechanism to allocate liabilities and responsibilities of project participants in construction, contract language alone is insufficient to specify and appoint all the risks (ACEC/AGC, 1992, Rahman and Kumaraswamy 2002). An ideal process would address the individual needs of each organization and each project (Chapman and Ward 1997). The distribution of risk between the client and contractor tends to overshadow effective management strategies and investigations show that contactors and owners give minimal consideration to risks outside the realm of their own concerns (Kim and Bajaj 2000, ENR 2002). Although the owners project team must identify with the business mission of the company, there are often disconnects. CII research has shown the failure to align business goals and specific project goals due to poor pre-project planning is a major industry challenge (CII 1997). Determination of risk responsibilities and ownership is critical yet can be difficult to allocate for international projects. The Fédération Internationale des Ingénieurs Conseils (the International Federation of Consulting Engineers, FIDIC) and the International European Construction Federation (FIEC) publish two wellknown and widely-accepted forms of conditions of contract for international construction projects (the Red and Yellow Books) that include provisions on the fair and equitable risk sharing between the owner and the contractor as well as risk responsibilities, liabilities, indemnity, and insurance. A discussion on risk sharing is included in an analysis of the FIDIC Red Book (Bunni 1997) that includes a series of flow diagrams of the risks in construction, and their ensuing responsibilities, liabilities and how these are dealt with by the Red Book (Conditions of Contract for work of Civil Engineering Construction)
Understanding the relationship between risk management and project phases for capital projects can be a difficult task. International projects are often first- or one-time efforts where project progress and phasing decisions can be isolated from risk management. For most international projects, different participants are responsible for and control the various phases of a projects life cycle. In most cases, the project owner is largely responsible for program analysis, a third-party is often hired to manage and control design and who turns the results over to the owner for operations or production contractor is hired to construct the project, Structuring projects with distinct phases and responsibilities can increase risk by isolating the project articipants in such a manner that minimal attention is given to overarching project concerns. Individual project participants become concerned with only their own project risks and either willingly or unwillingly try to transfer these risks to other project participants(Kim and Bajaj 2000) Mitigating risk by lessening their impact is a critical component of risk management. Implemented correctly, a successful risk mitigation strategy should reduce adverse impacts. In essence a well planned and properly administered risk mitigation strategy is a replacement of uncertain and volatile events with a more predictable or controlled response( Chapman and Ward 2002) he uncertainty of a risk event as well as the probability of occurrence or potential impact should decrease by selecting the appropriate risk mitigation strategy. Four mitigation strategy categories commonly used are Avoidance- when a risk is not accepted and other lower risk choices are available from several alternatives Retention/Acceptance- when a conscious decision is made to accept the consequences should the vent occur Control/ Reduction- when a process of continually monitoring and correcting the condition on the project is used. This process involves the development of a risk reduction plan and then tracking the plan. This mitigation strategy is the most common risk management and handling technique ransfer/Deflect- when the risk is shared with others Forms of sharing the risk with others include contractual shifting, performance incentives, insurance, warranties, bonds, etc Successful project management requires the identification of the factors impacting project scope definition, cost, schedule, contracting strategy and work execution plan. However, much of the research related to risk identification, assessment and management for constructed facilities is focused on specific issues such as location, categories of risks aspects, or types of projects, For example, lists of relevant construction project risks ave been developed(Kangari 1995, RAMP 1998, Smith 1999, Hastak and Shaked 2000, Han and Diekmann 2001)as well as political risk are available(ashley and Bonner 1987, Howell 2001) The value of systematic risk management of project activity is not fully recognized by the construction dustry (Walewski, Gibson, and Vines 2002). Since no common view of risk exists, owners, investors, designers, and constructors have differing objectives and adverse relationships between the parties are common Attempts at coordinating risk analysis management between all of the project participants have not been traditionally formalized and this is especially true between contractors and owners International project risks are sometimes overlooked or assessed haphazardly. Such risks include war civil war, terrorism, expropriation, inability to transfer currency across borders, and trade credit defaults by foreign or domestic customers(Wells and Gleason 1995, Hastings 1999). Although risks such as civil unrest and economic stability are typically outside the scope of normal business, understanding and dealing with these risks are critical for companies working internationally. A 2001 study by Aon Trade Credit discovered that, in the Fortune 1000, only about 26 percent of companies had in place systematic and consistent methodologies to assess political risks(Aon 2003). Working in an international setting often requires a much wider view of the projects context than with domestic projects(Miller and Lessard, 2000; Mawhinney 2001 In summary, the purpose of risk management is to mitigate risks by planning for factors that can be detrimental to project objectives and deliverables. Although risk management is a relatively known and practiced process, few organizations have conquered its successful implementation. Much of what is practiced is based on intuition or personal judgment. The need to manage risks is important to all project stakeholders and critical for project success, especially in the international project arena
4 Understanding the relationship between risk management and project phases for capital projects can be a difficult task. International projects are often first- or one-time efforts where project progress and phasing decisions can be isolated from risk management. For most international projects, different participants are responsible for and control the various phases of a project’s life cycle. In most cases, the project owner is largely responsible for program analysis, a third-party is often hired to manage and control design and engineering to meet the initial constraints set by the owner, and a contractor is hired to construct the project, who turns the results over to the owner for operations or production. Structuring projects with distinct phases and responsibilities can increase risk by isolating the project participants in such a manner that minimal attention is given to overarching project concerns. Individual project participants become concerned with only their own project risks and either willingly or unwillingly try to transfer these risks to other project participants (Kim and Bajaj 2000). Mitigating risk by lessening their impact is a critical component of risk management. Implemented correctly, a successful risk mitigation strategy should reduce adverse impacts. In essence a well planned and properly administered risk mitigation strategy is a replacement of uncertain and volatile events with a more predictable or controlled response (Chapman and Ward 2002). The uncertainty of a risk event as well as the probability of occurrence or potential impact should decrease by selecting the appropriate risk mitigation strategy. Four mitigation strategy categories commonly used are: • Avoidance – when a risk is not accepted and other lower risk choices are available from several alternatives • Retention/Acceptance – when a conscious decision is made to accept the consequences should the event occur. • Control/Reduction – when a process of continually monitoring and correcting the condition on the project is used. This process involves the development of a risk reduction plan and then tracking the plan. This mitigation strategy is the most common risk management and handling technique. • Transfer/Deflect – when the risk is shared with others. Forms of sharing the risk with others include contractual shifting, performance incentives, insurance, warranties, bonds, etc. Successful project management requires the identification of the factors impacting project scope definition, cost, schedule, contracting strategy and work execution plan. However, much of the research related to risk identification, assessment and management for constructed facilities is focused on specific issues such as location, categories of risks aspects, or types of projects. For example, lists of relevant construction project risks have been developed (Kangari 1995, RAMP 1998, Smith 1999, Hastak and Shaked 2000, Han and Diekmann 2001) as well as political risk are available (Ashley and Bonner 1987, Howell 2001). The value of systematic risk management of project activity is not fully recognized by the construction industry (Walewski, Gibson, and Vines 2002). Since no common view of risk exists, owners, investors, designers, and constructors have differing objectives and adverse relationships between the parties are common. Attempts at coordinating risk analysis management between all of the project participants have not been traditionally formalized and this is especially true between contractors and owners. International project risks are sometimes overlooked or assessed haphazardly. Such risks include war, civil war, terrorism, expropriation, inability to transfer currency across borders, and trade credit defaults by foreign or domestic customers (Wells and Gleason 1995, Hastings 1999). Although risks such as civil unrest and economic stability are typically outside the scope of normal business, understanding and dealing with these risks are critical for companies working internationally. A 2001 study by Aon Trade Credit discovered that, in the Fortune 1000, only about 26 percent of companies had in place systematic and consistent methodologies to assess political risks (Aon 2003). Working in an international setting often requires a much wider view of the project’s context than with domestic projects (Miller and Lessard, 2000; Mawhinney 2001). In summary, the purpose of risk management is to mitigate risks by planning for factors that can be detrimental to project objectives and deliverables. Although risk management is a relatively known and practiced process, few organizations have conquered its successful implementation. Much of what is practiced is based on intuition or personal judgment. The need to manage risks is important to all project stakeholders and critical for project success, especially in the international project arena
The International Project Risk Assessment (IPRA)Tool Background Investigation Our research project was guided by an industry research team composed of twelve individuals. This team met periodically to guide our efforts and to provide input into our development activities. Our nvestigation began with an extensive literature review on the topics of risk identification, assessment, and management, as well as issues related to international construction. Information was also gleaned from industry practices for assessing international project risks and CIls periodic globalization forums to gain additional insight on these issues To further evaluate the approaches that organizations use to manage the risks incurred on international projects, we conducted 26 structured interviews with mid-to upper-level management personnel, including eight each from contractor and owner organizations, and the remainder distributed among legal, professional service financial, and insurance experts. Construction industry experience of interviewees ranged from 20 to over 50 years, and all participants had at least 10 years of working experience with international projects of various types and sizes(Walewski and Gibson 2003) Both the literature review and these interviews showed that a variety of techniques and practices exist to identify and assess risks that occur on international projects, but there was no standard technique or practice specifically targeted for such projects(Cll 1989, Walewski et al. 2002). We found that decisions on country specific risks are often made by top management and separated from other business, technical and operational risks of the project. Few project participants have a complete understanding of the portfolio of risks that happen on such projects, and a life cycle view of the risks is uncommon. As such, compartmentalization of the risk occurs, and international projects are often organized and managed in ways that create information and communication disconnects Development of the Tool To address a structured management approach, we developed a detailed list of the risk elements that impact the projects life cycle(planning, design, construction, and operations) of international facilities- effectively this is the"risk identification"portion of the risk management process. We used help from five primary sources for this list: the expertise of the research team, literature review the structured interviews, input from 10 Cll Globalization Committee members, and further w by industry representatives. Initial topic categories were gathered from previous research and the str interviews and screened using the research team's expertise. The final list of international risks was further refined and an agreement reached regarding exact terms and nomenclature of element definitions. Once this completed, separate reviews were performed by Globalization Committee members and vetted participants during a series of workshops The final list consists of 82 Elements grouped into 14 Categories and further grouped into four main Sections that reflect the projects life cycle. This list, which forms the basis of the IPRa tool, is presented in Figure 1. This list can be considered very comprehensive for pursuing capital projects outside of one's home jurisdiction. Each Section, Category, and Element of the IPRa has a corresponding detailed description to assist project participants in gaining an understanding of the issues related to that component of the risk being considered. An example element description is given in Appendix A. The IPRA Assessment Sheets and Element Descriptions are used in concert by a project manager and project team members to identify and assess specific risk factors, including the likelihood of occurrence and relative impact for each element We hypothesized that all elements are not equally important with respect to their relative impact on overall project success. These issues are different depending on the project type and location as well.Our dustry sponsors believed there would be significant benefit if a standard baseline(impact)risk value could be determined for each element. This guidance value of a risk's effect on the project would be of assistance when the risk is unknown by project participants, and could also provide a framework to rank order risk elements project for subsequent mitigation
5 The International Project Risk Assessment (IPRA) Tool Background Investigation Our research project was guided by an industry research team composed of twelve individuals. This team met periodically to guide our efforts and to provide input into our development activities. Our investigation began with an extensive literature review on the topics of risk identification, assessment, and management, as well as issues related to international construction. Information was also gleaned from industry practices for assessing international project risks and CII’s periodic globalization forums to gain additional insight on these issues. To further evaluate the approaches that organizations use to manage the risks incurred on international projects, we conducted 26 structured interviews with mid- to upper-level management personnel, including eight each from contractor and owner organizations, and the remainder distributed among legal, professional service, financial, and insurance experts. Construction industry experience of interviewees ranged from 20 to over 50 years, and all participants had at least 10 years of working experience with international projects of various types and sizes (Walewski and Gibson 2003). Both the literature review and these interviews showed that a variety of techniques and practices exist to identify and assess risks that occur on international projects, but there was no standard technique or practice specifically targeted for such projects (CII 1989, Walewski et al. 2002). We found that decisions on countryspecific risks are often made by top management and separated from other business, technical and operational risks of the project. Few project participants have a complete understanding of the portfolio of risks that happen on such projects, and a life cycle view of the risks is uncommon. As such, compartmentalization of the risks occurs, and international projects are often organized and managed in ways that create information and communication disconnects. Development of the Tool To address a structured management approach, we developed a detailed list of the risk elements that impact the project’s life cycle (planning, design, construction, and operations) of international facilities— effectively this is the “risk identification” portion of the risk management process. We used help from five primary sources for this list: the expertise of the research team, literature review results, the structured interviews, input from 10 CII Globalization Committee members, and further review by industry representatives. Initial topic categories were gathered from previous research and the structured interviews and screened using the research team’s expertise. The final list of international risks was further refined and an agreement reached regarding exact terms and nomenclature of element definitions. Once this effort was completed, separate reviews were performed by Globalization Committee members and vetted again by participants during a series of workshops. The final list consists of 82 Elements grouped into 14 Categories and further grouped into four main Sections that reflect the project’s life cycle. This list, which forms the basis of the IPRA tool, is presented in Figure 1. This list can be considered very comprehensive for pursuing capital projects outside of one’s home jurisdiction. Each Section, Category, and Element of the IPRA has a corresponding detailed description to assist project participants in gaining an understanding of the issues related to that component of the risk being considered. An example element description is given in Appendix A. The IPRA Assessment Sheets and Element Descriptions are used in concert by a project manager and project team members to identify and assess specific risk factors, including the likelihood of occurrence and relative impact for each element. We hypothesized that all elements are not equally important with respect to their relative impact on overall project success. These issues are different depending on the project type and location as well. Our industry sponsors believed there would be significant benefit if a standard baseline (impact) risk value could be determined for each element. This guidance value of a risk’s effect on the project would be of assistance when the risk is unknown by project participants, and could also provide a framework to rank order risk elements on the project for subsequent mitigation
SECTION I-COMMERCIAL L.A. Business Plan IlL. B Sourcing and suppl LAl. Business case Ill. Bl. Engineered equipment L A2. Economic model/feasibility material/tools LA3 Economic incentives/barriers III B2. Bulk materials L.A4. Market/product IIL B3 Subcontract L.A5. Standards and pra Ill. B4. Importing and customs L.A6. Operations I. B5. Logistics LA7. Tax and tariff IlL. C Design/engineering L B. Finance/funding Ill.C1. Design/engineering process I Bl. Sources form of funding II. C2. Liability III C3. Local design services 1. B3. Estimate uncertainty I. C4. Constructability LB4 Insurance II.D. Construction IIlDI. Workforce availability and skill SECTION II-COUNTRY I. D2. Workforce logistics and support IL.A. Tax/tariff IILD3. Climate LAL. Tariffs/duties Ill.D4. Construction delivery method ILA2. Value added tax Ill.D5. Construction permitting Il.A3. Legal entity establishment Ill. D6. General contractor availability IL.A4. Application of tax laws Ill. D7 Contractor payment IIL D8 Schedule IL.A5. Technology tax I D9. Insurance ILA6. Personal income tax Ill.DIO. Safety during construction Il A7. Corporate income tax IILDIL Communication and data transfer ILA8. Miscellaneous taxes Il DI2 Quality I.B. Political Ill. E. Start-up Il. Bl. Expropriation and nationalism Il B2. Political stability IILE2 turnover II. B3. Social unrest/violence Il.E3. Feedstock and utilities reliability 1. B5. Government participation and SECTION IV- PRODUCTION/OPERATIONS IV.A. Peopl IL. B6 IV Al. Operational safety B7. Intellectual property IV A2. Security IL C. Culture IVA3. Language IlCI. Traditions and business practices A4. Hiring/training/retaining IL. C2. Public .A5. Localizing operational workforce II.C3. Religious differences IV.B. Legal ILD. Legal B2. Permitt Il.D2. Legal standing nsurance Il. D3 Governing law/contract formalities IV B5. Environmental compliance Il. D4. Contract type and procedures I D5. Environmental permitting IV, C. Technical 1. D6. Corrupt business practices IV CI Logistics and warehousing IV C2. Facilities management and SECTION III-FACILITIES IIL.A Project IV C3 Infrastructure support II. Al Scope development process IVC4. Technical support Ill. A2. Technology C5. Quality assurance and contro Ill. A3. Hazardous material requirements IVC6. Operational shutdowns and startu Il. A4. Environmental, health, and safety Ill.A5. Utilities and basic infrastructure I. A6. Site selection and clear title Ill. A7. Approvals, permits and licensor Figure 1. pra structure
6 SECTION I – COMMERCIAL I.A. Business Plan I.A1. Business case I.A2. Economic model/feasibility I.A3. Economic incentives/barriers I.A4. Market/product I.A5. Standards and practices I.A6. Operations I.A7. Tax and tariff I.B. Finance/funding I.B1. Sources & form of funding I.B2. Currency I.B3. Estimate uncertainty I.B4. Insurance SECTION II – COUNTRY II.A. Tax/tariff II.A1. Tariffs/duties II.A2. Value added tax II.A3. Legal entity establishment II.A4. Application of tax laws and potential changes II.A5. Technology tax II.A6. Personal income tax II.A7. Corporate income tax II.A8. Miscellaneous taxes II.B. Political II.B1. Expropriation and nationalism II.B2. Political stability II.B3. Social unrest/violence II.B4. Repudiation II.B5. Government participation and control II.B6. Relationship with government/owner II.B7. Intellectual property II.C. Culture II.C1. Traditions and business practices II.C2. Public opinion II.C3. Religious differences II.D. Legal II.D1. Legal basis II.D2. Legal standing II.D3. Governing law/contract formalities and language II.D4. Contract type and procedures II.D5. Environmental permitting II.D6. Corrupt business practices SECTION III – FACILITIES III.A. Project scope III.A1. Scope development process III.A2. Technology III.A3. Hazardous material requirements III.A4. Environmental, health, and safety III.A5. Utilities and basic infrastructure III.A6. Site selection and clear title III.A7. Approvals, permits and licensing III.B. Sourcing and supply III.B1. Engineered equipment/ material/tools III.B2. Bulk materials III.B3. Subcontractors III.B4. Importing and customs III.B5. Logistics III.C Design/engineering III.C1. Design/engineering process III.C2. Liability III.C3. Local design services III.C4. Constructability III.D. Construction III.D1. Workforce availability and skill III.D2. Workforce logistics and support III.D3. Climate III.D4. Construction delivery method III.D5. Construction permitting III.D6. General contractor availability III.D7. Contractor payment III.D8. Schedule III.D9. Insurance III.D10. Safety during construction III.D11. Communication and data transfer III.D12. Quality III.E. Start-up III.E1. Trained workforce III.E2. Facility turnover III.E3. Feedstock and utilities reliability SECTION IV – PRODUCTION/OPERATIONS IV.A. People IV.A1. Operational safety IV.A2. Security IV.A3. Language IV.A4. Hiring/training/retaining IV.A5. Localizing operational workforce IV.B. Legal IV.B1. Governing law/operational liability IV.B2. Permitting IV.B3. Insurance IV.B4. Expatriates IV.B5. Environmental compliance IV.C. Technical IV.C1. Logistics and warehousing IV.C2. Facilities management and maintenance IV.C3. Infrastructure support IV.C4. Technical support IV.C5. Quality assurance and control IV.C6. Operational shutdowns and startup Figure 1. IPRA Structure
In practice, the likelihood of occurrence for a particular risk is usually not known with absolute precision because of a lack of information or uncertainty of the situation. As a result, we decided that looking back to the time of contract formation(i. e, the point in time when the facility owner contracted for detailed design and/or construction) on completed projects would be the most useful strategic point to determine the level of risk that existed When taking a retrospective view of risk at a given point in time, uncertainty is no longer an issue because the event has either taken place or not occurred, and the likelihood of occurrence component of risk assessment is no longer an unknown being assessed in a predictive manner. In essence, the retrospective look at risk leads to a determination of relative impact to the project. With adequate input from experts across a multitude of international projects, an aggregate baseline impact factor could be developed for each IPRA element. Then, as a predictive tool, likelihood of occurrence would al ways have to be assessed and the impact component of risk would be either this predetermined aggregate baseline level or a self-determined level by project participants Workshops We decided that the best way to develop reasonable and credible relative impact values for each element was to rely on the expertise of a broad range of construction industry experts. From September 2002 to January 2003, we hosted four risk assessment workshops. Held in various locations in North America, a total of 44 industry executives with extensive international experience reporting results on approximately $23 billion worth of projects from 20 different countries were involved. Participants represented 25 organizations and were made up of 26 contractor and 18 owner representatives. In addition to having an owner/contractor balance, a fairly equitable distribution of project types and locations was achieved Each participant completed a series of documents at the workshops. In addition to personal history, participants were asked to consider and document a typical international project that they had cently completed for the organization they represented. The details regarding the workshops and the projects used for this effort are provided in Cll Research Report 181-11(CII 2003) Workshop participants proceeded in order through the 82 elements with each IPRA element description reviewed in the context of their project. An analysis of the data created a rank-order of the IPRA elements by their relative impact and these were sorted from 1 to 82. Relative Impact designations were developed for the 82 IPRA elements. The overall rankings were broken into five levels of corresponding Relative Impact that were given letter designations ranging from A to E, with A Negligible, B- Minor, C= Moderate, D= Significant, and E= Extreme, corresponding to degrees of impact as defined in Figure 2. The Baseline Relative Impact values of the significant and extreme elements are given in Appendix B of this article. A detailed discussion of this development effort is beyond the scope of this paper; for more information on how these values were developed, please see Cll Research report 181-1l
7 In practice, the likelihood of occurrence for a particular risk is usually not known with absolute precision because of a lack of information or uncertainty of the situation. As a result, we decided that looking back to the time of contract formation (i.e., the point in time when the facility owner contracted for detailed design and/or construction) on completed projects would be the most useful strategic point to determine the level of risk that existed. When taking a retrospective view of risk at a given point in time, uncertainty is no longer an issue because the event has either taken place or not occurred, and the likelihood of occurrence component of risk assessment is no longer an unknown being assessed in a predictive manner. In essence, the retrospective look at risk leads to a determination of relative impact to the project. With adequate input from experts across a multitude of international projects, an aggregate baseline impact factor could be developed for each IPRA element. Then, as a predictive tool, likelihood of occurrence would always have to be assessed and the impact component of risk would be either this predetermined aggregate baseline level or a self-determined level by project participants. Workshops We decided that the best way to develop reasonable and credible relative impact values for each element was to rely on the expertise of a broad range of construction industry experts. From September 2002 to January 2003, we hosted four risk assessment workshops. Held in various locations in North America, a total of 44 industry executives with extensive international experience reporting results on approximately $23 billion worth of projects from 20 different countries were involved. Participants represented 25 organizations and were made up of 26 contractor and 18 owner representatives. In addition to having an owner/contractor balance, a fairly equitable distribution of project types and locations was achieved. Each participant completed a series of documents at the workshops. In addition to personal history, participants were asked to consider and document a typical international project that they had recently completed for the organization they represented. The details regarding the workshops and the projects used for this effort are provided in CII Research Report 181-11 (CII 2003). Workshop participants proceeded in order through the 82 elements with each IPRA element description reviewed in the context of their project. An analysis of the data created a rank-order of the IPRA elements by their relative impact and these were sorted from 1 to 82. Relative Impact designations were developed for the 82 IPRA elements. The overall rankings were broken into five levels of corresponding Relative Impact that were given letter designations ranging from A to E, with A = Negligible, B = Minor, C = Moderate, D = Significant, and E = Extreme, corresponding to degrees of impact as defined in Figure 2. The Baseline Relative Impact values of the significant and extreme elements are given in Appendix B of this article. A detailed discussion of this development effort is beyond the scope of this paper; for more information on how these values were developed, please see CII Research Report 181-11
RELATIVE IMPACT A Negligible consequence that routine procedure would be sufficient to deal with the consequences. b Minor consequence that would threaten an element of the project. Normal control and monitoring neasures are sufficient Moderate consequence would necessitate significant adjustment to the project. Requires dentification and control of all contributing factors by monitoring conditions and reassessment at roject milestones. ignificant consequence that would threaten goals and objectives, requires close management d Could substantially delay the project schedule or significantly affect technical performance or osts, and requires a plan to handle xtreme consequence would stop achievement of project or organizational goals and objectives E Most likely to occur and prevent achievement of objectives, causing unacceptable cost overruns, schedule sli Figure 2. Relative Impact Definitions In summary, responses from the workshops were evaluated and the collective input was used to develop a Baseline Relative Impact value for each IPRA risk element. The Relative Impact value is composed of the element's rank based on its potential impact to the project within its category, section, and the overall IPRA tool. Several statistical tests-described in detail in CIl 181-11-were performed and the Relative Impact values were incorporated into the final version of the IPRA worksheets Likelihood of Occurrence values were also developed by dividing probability that the identified risk will occur into the following five designations (with numerical range from I to 5): 1= Very Low (<10%),2=Low(10%to<35%)3= Mediun(35%to<65%),4=High(65%to<90%) High(90% or greater). These designations are based on the research team's review and assessment of the literature and industry practices in determining and assigning risk probabilities. Figure 3 gives the probability division for the likelihood of Occurrence used in the IPRa Probability NA- Not applicable to this project. Zero 1-Very Low chance of occurrence, rare and occurs only n exceptional circumstances (<10% chance) 2- Low chance and unlikely to occur in most (10% chance of occurrence <35%) Medium chance and possible to occur in most (35% chance of occurrence <65%) 4- High chance of happening and will probably occur in (65% chance of occurrence <90%) 5. Very High chance of occurrence and almost certain and expected in most circumstances (90% or greater chance of occurrence) igure 3. Division for Likelihood of Occurrence in the Ipra As a supplement to the workshops, the October 2002 Cll Emerging Markets Forum in Baltimore Maryland, USA, provided an opportunity for 29 industry representatives to test the mechanics of using the IPRA Tool and Element Descriptions on a case study cement production facility located in Bulgaria Forum participants were also asked to assess and comment on the theory, structure, and usefulness of our work. Introducing the IPRa to the Forum participants and having them participate in this case study evaluation provided value. The case study issues and expectations of Forum participants were well defined during an introduction to the IPRA. These factors combined with an interactive group discussion on assessing the project risks and then reporting the results helped to: 1) create a high level of interest in the IPRA, 2)check the thoroughness of the tool, and 3) provide an excellent opportunity to observe the personal interaction of participants when using the tool. In the concluding discussion session at the
8 RELATIVE IMPACT A Negligible consequence that routine procedure would be sufficient to deal with the consequences. B Minor consequence that would threaten an element of the project. Normal control and monitoring measures are sufficient. C Moderate consequence would necessitate significant adjustment to the project. Requires identification and control of all contributing factors by monitoring conditions and reassessment at project milestones. D Significant consequence that would threaten goals and objectives; requires close management. Could substantially delay the project schedule or significantly affect technical performance or costs, and requires a plan to handle. E Extreme consequence would stop achievement of project or organizational goals and objectives. Most likely to occur and prevent achievement of objectives, causing unacceptable cost overruns, schedule slippage, or project failure. Figure 2. Relative Impact Definitions In summary, responses from the workshops were evaluated and the collective input was used to develop a Baseline Relative Impact value for each IPRA risk element. The Relative Impact value is composed of the element’s rank based on its potential impact to the project within its category, section, and the overall IPRA tool. Several statistical tests—described in detail in CII 181-11—were performed and the Relative Impact values were incorporated into the final version of the IPRA worksheets. Likelihood of Occurrence values were also developed by dividing probability that the identified risk will occur into the following five designations (with numerical range from 1 to 5): 1 = Very Low (<10%), 2 = Low (10% to <35%), 3 = Medium (35% to <65%), 4 = High (65% to <90%), and 5 = Very High (90% or greater). These designations are based on the research team’s review and assessment of the literature and industry practices in determining and assigning risk probabilities. Figure 3 gives the probability division for the Likelihood of Occurrence used in the IPRA. Occurrence Probability NA - Not applicable to this project. Zero 1 - Very Low chance of occurrence, rare and occurs only in exceptional circumstances. (<10% chance) 2 - Low chance and unlikely to occur in most circumstances. (10% chance of occurrence <35%) 3 - Medium chance and possible to occur in most circumstances. (35% chance of occurrence <65%) 4 - High chance of happening and will probably occur in most circumstances. (65% chance of occurrence <90%) 5 - Very High chance of occurrence and almost certain and expected in most circumstances. (90% or greater chance of occurrence) Figure 3. Division for Likelihood of Occurrence in the IPRA As a supplement to the workshops, the October 2002 CII Emerging Markets Forum in Baltimore, Maryland, USA, provided an opportunity for 29 industry representatives to test the mechanics of using the IPRA Tool and Element Descriptions on a case study cement production facility located in Bulgaria. Forum participants were also asked to assess and comment on the theory, structure, and usefulness of our work. Introducing the IPRA to the Forum participants and having them participate in this case study evaluation provided value. The case study issues and expectations of Forum participants were welldefined during an introduction to the IPRA. These factors combined with an interactive group discussion on assessing the project risks and then reporting the results helped to: 1) create a high level of interest in the IPRA, 2) check the thoroughness of the tool, and 3) provide an excellent opportunity to observe the personal interaction of participants when using the tool. In the concluding discussion session at the
Forum, participants made it clear that their preference was for the IPRa tool to provide separate assessment scales for likelihood of occurrence and relative impact for each element Consistency Testing To verify the usefulness and to assess the viability of the Baseline Relative Impact values, we tested the IPRA on completed and ongoing capital projects. Data from 22 projects in 18 countries, representing greater than $4.2 billion in project value, were used to test the efficacy of the IPRA. This sample included a retrospective look at 15 recently completed projects and observation of IPRa use on seven projects that were ongoing at the time of the study. Further details and summary information on the test projects are provided in Cll Research Report 181-11(Cl 2003b) The completed test projects were a convenience sample nominated by research team members and others. On each sample project, historical project data were collected for all 82 project risk elements at the time of contract formation. These data were used to build risk profiles for each of the 82 elements so that a rank ordering for the test projects could be developed and compared to the baseline rankings developed using the workshop data In general, the relative impacts of the 82 risk issues on these test projects were similar to the predicted Baseline Relative Impact values. There were, however, some differences. The test sample consisted mainly of projects from developing nations with experienced owner and contractor involvement. Therefore, some risk elements related to working in a developing country(mostly in Section llI of the IPRA), and those risk elements related to funding and marketing(mostly in Section I of the IPRA)were significantly different than predicted by the Baselines. This assessment underscores the need to tailor the Baseline values to the project at hand and to ensure that experienced individuals are availabl to perform the assessment We asked respondents to identify risk issues not addressed at contract formation that had Seve or Extreme impacts on cost, schedule, and/or business drivers for the sample projects. Figure 4 gives a summary of these IPRA risk elements, listed by frequency of occurrence. We also asked the respondents to identify the unforeseen Severe and Extreme risks that existed at the contract formation phase of their projects, the impacts of those issues to the project's ultimate performance, and mitigation steps taken. A selected sub-sample of these unforeseen issues is given in Figure 5 IPRA Risk elements requency of Occurrence Ill. Al. Scope development process IIL D8 Schedule 27 L B3. Estimate uncertainty IlCl. Traditions and business practice Ill. DIO. Safety during construction IILE1. Trained workforce Figure 4. Frequency of IPRa elements identified during testing, having a significant project impact not addressed at the time of contract formation(N= 15)
9 Forum, participants made it clear that their preference was for the IPRA tool to provide separate assessment scales for likelihood of occurrence and relative impact for each element. Consistency Testing To verify the usefulness and to assess the viability of the Baseline Relative Impact values, we tested the IPRA on completed and ongoing capital projects. Data from 22 projects in 18 countries, representing greater than $4.2 billion in project value, were used to test the efficacy of the IPRA. This sample included a retrospective look at 15 recently completed projects and observation of IPRA use on seven projects that were ongoing at the time of the study. Further details and summary information on the test projects are provided in CII Research Report 181-11 (CII 2003b). The completed test projects were a convenience sample nominated by research team members and others. On each sample project, historical project data were collected for all 82 project risk elements at the time of contract formation. These data were used to build risk profiles for each of the 82 elements so that a rank ordering for the test projects could be developed and compared to the Baseline rankings developed using the workshop data. In general, the relative impacts of the 82 risk issues on these test projects were similar to the predicted Baseline Relative Impact values. There were, however, some differences. The test sample consisted mainly of projects from developing nations with experienced owner and contractor involvement. Therefore, some risk elements related to working in a developing country (mostly in Section III of the IPRA), and those risk elements related to funding and marketing (mostly in Section I of the IPRA) were significantly different than predicted by the Baselines. This assessment underscores the need to tailor the Baseline values to the project at hand and to ensure that experienced individuals are available to perform the assessment. We asked respondents to identify risk issues not addressed at contract formation that had Severe or Extreme impacts on cost, schedule, and/or business drivers for the sample projects. Figure 4 gives a summary of these IPRA risk elements, listed by frequency of occurrence. We also asked the respondents to identify the unforeseen Severe and Extreme risks that existed at the contract formation phase of their projects, the impacts of those issues to the project’s ultimate performance, and mitigation steps taken. A selected sub-sample of these unforeseen issues is given in Figure 5. IPRA Risk Elements Frequency of Occurrence (Percent) III.A1. Scope development process 33 III.A2. Technology 33 III.D8. Schedule 27 I.B3. Estimate uncertainty 20 II.C1. Traditions and business practices 20 III.D10. Safety during construction 20 III.E1. Trained workforce 20 Figure 4. Frequency of IPRA elements identified during testing, having a significant project impact not addressed at the time of contract formation (N = 15)
Sample Risk Element Performance ssues Ill. Al. Scope development The initial agreement to stay within scope was not followed by the owner whe spent $3 million more than budget without increasing the project schedule Ill. D8. Schedule The follow-on schedule compression had severe impacts on the contractor and resulted in increased labor workloads, costs, and availability on other projects ILA2. VAT The government sold the project to private investors and the sale impacted the Il. B6 Relationship with contractors financing, cash flow, and the schedule. To maintain schedule, the overnment ontractor had to use $3 million of its own fund that resulted in vat and IIL D8. Sc other tax issues IlL. C. Local design service The requirement to have a local architect and engineer approve plans and III D8. Schedule specifications was not taken into consideration and project contingency was used to pay for the added cost of additional design services and schedule delays 9 I1.C3. Religious differences The observance of holidays, daily prayer times, an k schedules(local III D8 Schedule work week was Saturday to Thursday) decreased and cultural differences required the contractor to more on-site management than originally planned Ill. A2 Technology The use of experimental technology by process techn IIL D8 Schedule plant capacity and process water system specificati Ill.E2. Facility turnover However there were unforeseen problems with the during start-up and this adversely affected both cost and schedule. The contractors site staff was required to work with the client and technology provider to resolve the problems 12 I1. C1. Traditions and business In-country building practices made it difficult to achieve plans and practices ecifications. As a result the owner required the construction manager to [IL. D12. Quality increase the number of supervisors to monitor project performance Figure 5. Selected Examples of Unforeseen Project Risk Issues Impacting Performance In addition, we developed detailed risk status reports as outputs of the full IPRA assessments for the ongoing projects used in the sample. These assessment sessions took from one to four hours each and proved that the tool was an effective mechanism to identify and evaluate a wide spectrum of risks on real international projects using either a team or an individual project participant. In each case, the IPRa gave project participants a viable platform to discuss project specific issues and helped identify critical risk issues. Members of the research team were involved directly in observing the usage of the tool on most of these projects and used the information to modify the assessment sheet slightly and to help in writing instructions on its application for field use As summarized in Figure 6, we performed a variety of activities and received input from 113 different industry experts in developing and testing the IPRA. Although the consistency test used a relatively small non-random sample of 22 projects, and is susceptible to bias, the collective results from this phase of the research show that the tool is a comprehensive and sound method to identify and assess the relative impact of the majority of risk issues encountered on international capital facilities(Cll 2004)
10 Sample Project Risk Element Performance Issues 1 III.A1. Scope development process III.D8. Schedule The initial agreement to stay within scope was not followed by the owner who spent $3 million more than budget without increasing the project schedule. The follow-on schedule compression had severe impacts on the contractor and resulted in increased labor workloads, costs, and availability on other projects. 2 II.A2. VAT II.B6. Relationship with government III.D8. Schedule The government sold the project to private investors and the sale impacted the contractor’s financing, cash flow, and the schedule. To maintain schedule, the contractor had to use $3 million of its own fund that resulted in VAT and other tax issues. 5 III. C.3 Local design service III.D8. Schedule The requirement to have a local architect and engineer approve plans and specifications was not taken into consideration and project contingency was used to pay for the added cost of additional design services and schedule delays. 9 II.C3. Religious differences III.D8. Schedule The observance of holidays, daily prayer times, and work schedules (local work week was Saturday to Thursday) decreased productivity. The religious and cultural differences required the contractor to provide more on-site management than originally planned. 9 III.A2 Technology III.D8. Schedule III.E2. Facility turnover The use of experimental technology by process technology supplier increased plant capacity and process water system specifications for this remote project. However there were unforeseen problems with the technology that occurred during start-up and this adversely affected both cost and schedule. The contractor’s site staff was required to work with the client and technology provider to resolve the problems. 12 II. C1. Traditions and business practices III.D12. Quality In-country building practices made it difficult to achieve plans and specifications. As a result the owner required the construction manager to increase the number of supervisors to monitor project performance. Figure 5. Selected Examples of Unforeseen Project Risk Issues Impacting Performance In addition, we developed detailed risk status reports as outputs of the full IPRA assessments for the ongoing projects used in the sample. These assessment sessions took from one to four hours each and proved that the tool was an effective mechanism to identify and evaluate a wide spectrum of risks on real international projects using either a team or an individual project participant. In each case, the IPRA gave project participants a viable platform to discuss project specific issues and helped identify critical risk issues. Members of the research team were involved directly in observing the usage of the tool on most of these projects and used the information to modify the assessment sheet slightly and to help in writing instructions on its application for field use. As summarized in Figure 6, we performed a variety of activities and received input from 113 different industry experts in developing and testing the IPRA. Although the consistency test used a relatively small non-random sample of 22 projects, and is susceptible to bias, the collective results from this phase of the research show that the tool is a comprehensive and sound method to identify and assess the relative impact of the majority of risk issues encountered on international capital facilities (CII 2004)
