Risk Management as a Wide Aspect of Engineering Project Management - Case Study Example

Name : xxxxxx Tutor : xxxxxxx Title : xxxxxxx Institution : xxxxxxx @2009 Abstract Risks refer to the various cost and health related effects that emanate from industrial projects. The engineering processes in use during the design of such projects are always the cause for the prevalence of such risks. With the adoption of Control Technologies, the need to design a number of risk management regulations is being highly considered. Indeed risk management in itself is neither a science nor an art since it calls for the integration of various aspects emanating from various perspectives. Such a skill is not limited to any particular scope of knowledge. With regard to the management of risks in engineering projects, risk management represents a vital sector of the entire profession of engineering. A number of risks tend to focus on the various cost and chronic effects of an industrial project in line with the type of engineering compliance measures implicated in the design of a particular project. In a number of engineering projects, it is assumed that the various risks are effectively quantified such that the total cost of the project is ideally computed in an effort to ensure a type of confidence level. This is geared at ensuring that the overall cost of the entire project is not in any way exceeded. This paper examines the management of risks in engineering projects with regard to a simplified project pointing to two risks that are independent. Introduction Risk management is a wide aspect of the management of engineering project management. This field of project management entails the systematic integration of policies, practices and procedures in an effort to identify, manage, quantify and if need be provide contingencies and further monitor the risk. The Australian Standard AS4360 is a very ideal model of risk management in engineering projects. With regard to capital, engineering risks may point to the costs and the time over runs that may lead in to high costs of service delivery. A number of engineering projects have been reported to point to numerous risks related to both the cost of the project and the diverse effects that emanate from the completion of a project (Morris &Pinto, 2007) . This is greatly attributed to the fact that most of such projects have their practical response to the risk not having an ideal probability of possibly meeting both the cost and the performance of the project. It emerges that for every risk in a project are a wide range of possible outcomes alongside associated probabilities. An algebraic summation of a number of risks would point to an exceeding project cost contingency (Lewis &Wong 2004). The best summation of the risks of any engineering project is usually derived using the Monte Carlo simulation. It emerges that the very best approach to risk management in any engineering project is upholding a wide project contingency alongside the distribution of the risks in line with their specific needs. With regard to risk management in any engineering project, the allocation of the entire project contingency to individual risks is highly feared for resulting in to the failure of the entire project (Morris &Pinto, 2007).This can effectively be simulated with the following simplified project that exhibits two risks. The example While considering a project with two very independent risks, F1 and F2 presented with the assumptions that; a). Both F and F2 are independent of each other and that the outcome of either of the risks does not affect the other in any way . In this regard, the assumption becomes valid if at all the occurrence of such risks is highly associated with subsystems that are individually and differently managed. b).There exists a 30 percent probability that F1 will take place. This is given that when it does occur, there exist a wide distribution of outcomes related to the associated probabilities (Liptak 2002). A triangular distribution of the parameters would point to the following: a maximum risk of $ 70k, a minimum risk of about $10k, and a most likely risk of about $30k. This is with regard to the associated cumulative risk profile. This implies that the overall risk of the project is the sum of the probability of the occurrence of the two risks (Kähkönen 1997). The Analysis of the exemplary project With regard to the above exemplary project, it emerges that the various risk models alongside the subsequent quantification are all very reasonable. The various subsystem managers in this regard requested a contingency of about $42K for the survival of the project. This is with reference to a confidence level of about 90 percent. The manager in charge of the entire project was seen to have found this analysis very appealing and in line with his own estimations. On the subsystem managers held with the assessment of both risk F1 and F2 requesting for the cost of $42, the overall manager had initially thought that the two subsystem managers were merely being risk aversive. On further analysis, he concluded that he was capable of attaining an 80% probability of success at a contingency cost of about $44k. This was attributed to the fact that the two implicated residual risks were quantitatively identical and he thus allocated each of the subsystem managers a total of $22K. This highly pleased the overall project manager especially with the conviction that he had managed to effectively slice the contingency cost of the project in to half. The Implicated Outcome The subsystem managers in this project worked very hard. Since risk F1 did not occur, the responsible subsystem manager went ahead to implement a number of additional features with his budget allocation. Unfortunately for the subsystem manager held with risk F2, the risk did befall and the implicated effects were so high that the budgetary allocation of $22k could not fully cater for the situation. This pushed him to estimate that an extra $15k was needed for the full implementation of his subsystem. The project was later canceled owing to the realization that the project manager did not have any other extra penny to further finance the project (Altemeyer& Lynn 2004). A risk analyst of the project indicated that the type of analysis implicated in this project was misguided. The former was not amused that the implicated cost of the project exceeded the total cost estimates. This was because of the understanding that the project manager was in the very beginning unwittingly lowering the efficacy of the entire project contingency cost and downgrading the probability of the project to succeed. According to the risk analyst consulted in this exemplary project, the outcome of the analysis can be interpreted as follows; a.) A cost of $44k is very sufficient with regard to an 80 percent success probability. This is only possible if at all the amount is readily available to each of the two implicated risks if needed. The type of analysis done in this project implies that contingency usage is basically probabilistic with regard to the level of the project. b.) The allocation to the contingency usage is a representation of the implicated decision making processes adopted in the project. The type of cumulative risk profile implicated in this project is not applicable to a situation where the various contingencies are designated or rather channeled to individual risks. c.) The allocation of a contingency of about $22k to each of the subsystem managers only implies that each one of them only has a probability of about 74 % for meeting the estimated cost of the project. d.) With each of the subsystems only having a 74% success probability, it implies that the overall success of the project is only limited to about 55 percent. This is far much lower than the 80 percent probability of success forecasted by the overall project manager. e.) The algebraic summation of the implicated contingencies may not be valid. This is because the algebraic summation of a confidence level of 80 percent has an equivalent of about $60k. This figure is far much higher that the estimated 80 percent confidence level with a budgetary allocation of $44K. According to this analysis, in the event that a risk befalls, the implicated impact is bound to be more severe such that a relatively small contingency may not adequately provide the success of the project. With regard to the exemplary project, an allocation of $22k stands to only increase the probability of the success of each of the individual subsystems to 74 percent from the initial 70 percent. The Need to Plan for Contingency Engineering projects and various funded facilities need a very adequate supply of services in an effort to effectively meet the commitments of the projects. The adequacy of both services and various funded facilities is regulated by various factors. Among the factors that are bound to govern the adequate supply of both facilities and services in engineering projects include; the intensity of the needed service provision, the number of individuals to be served by that particular service provision, and the availability of alternative means of the same service provision. The type of facilities identified for use in a particular project must be able to deliver all the required infrastructures on a continuous basis. Facilities like water and electricity that are constantly required for the maintenance of effective service delivery should ideally be catered for in the facilities to be adopted in any engineering project. It is necessary to critically assess the available assets in line with their ability to serve the project with the highest efficacy. This needs to be preferably done before the initiation of the project in an effort to establish both the capacity and the integrity of the available facilities to cater for the requirements of the project. The type of asset assessment to be conducted prior to the initiation of the project should be able to include all the contingencies including those pointing both the future demands of the project. Cost Planning in the Management of Risks in Engineering Projects Effective cost planning is geared at ensuring that the value for the money allocated for a particular project is realized at the end of the project. Cost planning in engineering projects would not only point to the finances required for the project but also to the needs of the expected code of practice with regard to the engineering, building and construction industry. Effective cost planning is geared at ensuring that the cost of money invested in any engineering project is utilized and the recurring costs constantly assessed over the life time of the project. Effective cost planning needs to give a comprehensive analysis of the cost benefits or rather the cost effectiveness. This should be conducted in the entire life time of the project in an effort to establish the objectives of the project and the related effectiveness of the particular project. Ideal cost planning can be fostered through the incorporation of experienced consultancy. This would possibly ensure the development and successful design of the plan. An ideal cost planning should be constantly utilized by the managers of the project in exercising financial control over the project. Cost planning is very vital to the successful implementation of any engineering project because a number of aspects in the project are bound to change. Such changes if not well provided for in the plan can greatly affect the entire budget and cost of the project making it relatively hard to deliver with the expected efficacy. For any changes in the course of the implementation of the project, the cost planning should be able provide a rework on the analysis of the project. It is advisable to have all the budget elements modified and constantly assessed on the basis of the individual project. The provision and effective utilization of the available funds allocated to any project can only be realized through effective cost planning. The Context of Risk Management The management of risks in engineering projects is an aspect that is entirely pre-emptive and not in any way reactive. This is basically formulated on the basis that it is a great waste of time to sit back and wait for the occurrence of a risk before appropriate measures can be taken with regard to ensuring that a second occurrence is prevented. The ideal approach to risk management depends on the various levels of experience and the individual methods adopted (Nicholas & Steyn 2008). This tends to spread beyond a particular science or art .Such a type of experience calls for the need to adopt a more reactive approach based on the integration of various scopes of knowledge. The need to highly focus on risks that have initially posed hazards to health should be highly considered. Ideal risk management in a number of engineering projects need to have a decision making tool that can help to ideally identify the various risks and the benefits of the project. This would possibly determine the most appropriate course of action to be taken. Effective risk management in engineering projects need to be designed in a manner that can point to the full integration of both the planning and the execution of any form of routine management. This is contrary to the routine concept of reacting to a risk when it has finally taken root. The need to formulate decisions that can highly consider the management and subsequent assessment of risks is very vital. The assessment of common risks or hazards that are bound to occur with the initiation of certain industrial projects measures how fast appropriate measures can be adopted. The Risk Management Process in Engineering Projects An ideal risk management process should entail the following steps with each being very vital to the success of the project at hand. 1. The identification of the implicated hazard Hazards refer to any potential condition that is bound to result in to the degradation of property or life. Effective prevention of such an occurrence is not vested in the science or art of engineering but rather in the type of experience and the understanding of the various analytical tools that can be held in the identification of the risks implicated. 2. Assessment of the risk While assessing the risk, it is important that both quantitative and qualitative measures are used in order to establish the magnitude of the risk linked to a certain type of hazard. The assessment of the risk makes it possible to define the implicated probability of the risk and the level of severity in the event that the risk does takes place. Assessing the implicated severity of the risk makes it possible to ascertain the type of hazards that are bound to befall the human population if at all the risk occurs. 3. Analyzing the risk control measures When analyzing the type of control measures to be adopted in the management of risks, it is vital to investigate the various strategies that can be used to mitigate or possibly reduce the probability of the risk occurring. It is important to bear in mind the understanding that all the risks common to engineering projects normally have three features. The three components common to risks implicated in engineering projects include the probability of the occurrence of the risk, the severity of the occurrence of the risk, the danger posed to the people and the surrounding environment. The implementation of ideal control measures greatly helps in the reduction of a number of such components of the risk. A good risk analysis is supposed to take in to consideration the implicated costs and benefits of any remedial actions taken and subsequently provide alternative solutions if possible (Alexander & Sheedy 2005). 4. Making Control Decisions It is advisable to identify and utilize ideal decision making tools. The people held with the decision making responsibility must be able to identify the best control policies to be adopted. Ideal policies to be incorporated in the management of risks should be based on the type of analysis conducted in the third step. 5. Implementation of risk control measures It is vital for the type of risk management procedures to be adopted in any engineering project to formulate a plan that points to the application of various control measures. Such control measure should be the type that can be selected for the management of risks that are common to the engineering project. This would then be followed by the provision of the required facilities and time for the implementation of the measures. 6. Supervision of the Review On ensuring that all the required controls are strategically laid in place, it becomes necessary to constantly evaluate the implicated efficacy of the project. All the managers and the various personnel are needed to fully implement the various responsibilities that they are held with. This would possibly help in ensuring that the adopted controls are successfully maintained with time. The process of managing the risks in any engineering project is supposed to be continued throughout the life time of the project. The Principles That Need To Govern the Management of Risks in Engineering Projects There are four major principles that govern the management of risks in engineering projects. These four principles are applicable before the start of the project, during the project and after the project has been concluded. Risks in engineering projects are highly connected to cost with regard to the safety, the health, the project itself and the environment (IRM/AIRMIC/ALARM 2002). There need to be structures within civil engineering that can analyze and subsequently respond to any risks that can possibly affect the overall success of the entire investment opportunity or rather the project. Risks to the investment opportunity may point to the damage to the equipment in use, the loss of the out put not forgetting contractual penalties and delays that can emerge as a result of other related cost related problems. Such risks are highly related to the cost of the project and will tend to highly determine the amount of money and time spend when mitigating the risks. The four major principles of risk management entail the following; The acceptance of no or alternatively a negligible Unnecessary risk As previously indicated, these are risks that may possibly bear no commensurate return on the entire project. It emerges a number of projects are basically formulated on the basis of taking risks. It is advisable to opt for logical choices that would possibly meet all the related needs of the engineering project without necessarily accepting any risk. The concept behind such a hypothesis is geared at the acceptance of only a number of risks that may be considered as very necessary (Moteff 2005). Fostering ideal decision making at the most appropriate level of the project Since risk management in engineering projects like it s to any other field is not an art or a science, any individual common to the project implementation can make a decision in the event of a risk. It however emerges that only an individual with the ability to successfully allocate the various available resources in an effort to reduce the possibility of the occurrence of the risk is the most appropriate decision maker. It is recommended that with a number of engineering projects, the decision making process should be held with an individual that is capable of accepting the various levels of the risks as authorized by the operations common to the entire project (Gorrod 2004). The operations common to a number of engineering projects are bound to exhibit risks related to the loss of the effectiveness of the entire operation and the wear and tear of material commonly used for the facilitation of the engineering project. The type of decisions to be made need to be effectively elevated to the next rank of management. This is basically fostered upon determining the type of controls at the disposal of the decision making process in an effort to reduce the implicated risks to a relatively acceptable level. The ability to positively accept the risk especially in the event that the implicated Benefits exceed the costs. In all forms of risk management in engineering, it is advisable to compare the benefits that the project is bound to deliver against the identified costs. A number of very high risk endeavors can possibly be taken when there exists a likelihood that the benefits bound to be realized are far much greater than the whole cost of the project. The process of balancing the implicated costs and benefits is very subjective. This implies that such as balance can only be appropriately figured out by an effective decision maker. The integration of risk management in to the entire planning It is advisable to assess and manage all risks alongside all the planning stages common to the operations of a particular engineering project. Any changes that may come along the way can be effectively accommodated in the process of planning for the execution of the project operation. This however makes the entire project more expensive and at the same time costly with regard to time. This explains why contingency planning should be highly considered as part and parcel of any engineering project. Like it is common to the principles of all forms of risk management, ideal risk management procedures need to create the value of the project. The best risk management plan should be the type that can possibly be effectively tailored. Risk management procedures that can take in to consideration a number of human related aspects are considered to be very ideal (Standards Association of Australia 1999).The types of principles governing the process of risk management in an engineering project need to allow room for continued improvement and subsequent enhancement of the adopted mitigation measures. This would enable the risk management plan to work with the highest efficacy if utilized in the event of mitigating any risk. With regard to the type of structures that should be put in place for the management of risks in civil engineering, the Environmental Agency has the following recommendations with regard to the risk management of engineering projects. The recommendations provided are in line with budgetary risk management and assessment. The recommendations listed beneath are with reference to a number of financial contingencies common to engineering projects like the exemplary project examined above. a).If at all the implicated risk is small; it becomes appropriate to foster a 10 percent contingency. It is equally necessary to develop a level of confidence in the type of contingency adopted. b). All risks need to be ideally assessed with regard to the numerical probability of its likelihood of occurrence alongside the effects of its occurrence. This needs to be applied to all the implicated risks. c) A simple analysis of the probability should be derived from the product of the values reflecting all the implicated risks in an effort to provide an estimate of the implicated risks. It then becomes ideal to proceed and consider the implicated cost with regard to the value of the entire project. d.) If at all it emerges that the estimated cost is not more than 12.5 percent of the entire value of the project, then a 10 percent contingency becomes appropriate. However if the estimated cost of the project is rated between 12.5 percent and 20 percent, then the overall percentage needs to be highly considered for contingency. The Critical Assessment of the Risk The risk assessment process is vital to the confirmation of the implicated perspective from which a number of risk analysis procedures can be conducted. The manager held with the responsibility of ensuring the survival of the risk management process needs to be properly identified and led in to the coordination of the process. The very first responsibility that such a manager is held with is to ensure that a risk management plan is successfully designed. This needs to be followed by a briefing to the entire engineering team so that an agreement can be arrived at. This should be done with the sole purpose of sourcing for any reviews and further defining the management strategies to be adopted in the implementation of the objectives of the plan. The ideal assessment and management of the risk as indicated in the plan should be able identify the goals and objectives of the management of the risk. This needs to be done in line with the quick identification of the likely causes of each of the risks (Goldratt 1997).This makes it possible to establish the type of interrelationship common among the various risks in an effort to identify mechanisms of effectively categorizing them for evaluation. For the effective management of each of the identified risks common to a project, the following alternatives are highly considered for helping in their subsequent mitigation: The reduction of the likelihood of the occurrence of the risk The possibility of transferring the risk The cost of getting an insurance cover for the risk The ability to completely prevent the risk from occurring The ability to possibly absorb the risk The urgency with which ideal information can be derived in an effort to reduce the implicated uncertainty of the risk To effectively manage the implementation of the risk management process, each of the risks common to any engineering process need to be ideally documented in a kind of register. Such documentation would then act as a reference guide pointing to the various procedures to be upheld in the event that the risk is bound to take root. With such documentation, each of the risks that are bound to occur in any engineering project would have their appropriate prevention and mitigation measures well stated. This would then make it relatively easy to reduce the probability of the occurrence of the risk. After the documentation of the most likely risks and their respective mitigation procedures, an ideal action plan can then be formulated to help in the implementation of each and every aspect identified in the risk itself. This would then point to the design and subsequent adoption of a very ideal mitigation strategy. The mitigation strategy to be adopted should point to the type of actions to be taken alongside an account of the risks. The account of the implicated risks that are most likely to occur should be such that points to the costs and benefits with regard to the utilization of the mitigation measures identified (Shooman 1968). On calculating the cost of probably utilizing the identified mitigation measures, the derived results can then be utilized in a review process in an effort to identify if there exists any measures that can be used with a cost that is friendlier to the budget allocations of the project. This would then make it possible to quickly identify alternatives measures that can be able to serve with the same efficacy. This review process should thus be geared at identifying the beneficial effect of each of the measures to be utilized in the risk mitigation process (Nahin 2000). In the assessment of risks common to a number of engineering projects, it is equally important to examine the likely residual risks on completion of the projects. These are risks that are related to the chronic effects of the industrial processes designed through engineering. The analysis of residual risks in any engineering project revolves around the assessment of the various residual risks (Shapira 1995).This needs to be done in line with the implicated results of the various mitigation measures that would have been successfully verified for adoption in to the risk management plan. This should also foster an understanding of the various secondary risks that are very likely to occur and the overall cost of the adoption of the identified mitigation measures. There need to be a procedure that can possibly identify the various residual risks and possibly sort them in order of their implicated significance. The Monte Carlo model of risk simulation can be ideally resolved to in an effort to foster the judgement of the significance of the documentation of such risk management procedures (Paté-Cornell & Dillon 2001). The contingency allowance allocated to risk management can then be used in calculating a number of project investment parameters (Whitmore 2008).This would make it possible for the risk analysts in the project to effectively analyze the various assumptions and estimates of the entire project. The results of the kind of analysis that would be accrued from such an assessment are very vital when considered with regard to the volatility of the implicated risks. On summing up all the likely residual risks that may be common to the successfully completion of any engineering project, it then becomes necessary to conduct another review. This later review is geared at determining the implicated worthy of the project investment. It then becomes vital to consider any other possible alternative investment projects with possibly lower costs and leaser risk volatility (Kindinger 1999). If at all there are possible engineering projects with possibly a lesser cost and lower risk volatility, then it becomes necessary to consider the alternative. Guidelines In To the Management of a Number of Risks Common to Engineering Projects All forms of human related activity that are utilized in the implementation of a number of technical engineering procedures involve some form of risk that should not be ignored. All the hazards common to most engineering procedures can be effectively controlled and there need not to be any form of panic. The judgement of the implicated votality of any risk need to be formulated on the basis of the type of knowledge, mission requirements and the experience of an individual. This is based on the fact that risk management in itself is a reactive process not related to a particular scope of knowledge. The good judgement that can be resolved to in the event that a risk is more likely to occur can not be replaced by the analysis of the implicated hazard and the subsequent assessment of the risk (Markowitz 1991). It is not very possible to ensure complete safety. This implies that for every Engineering project, the responsible experts should be able to identify mitigation measures that can subsequently reduce the probability of the risk occurring. Conclusion Risk management needs to provide a systematic and logical approach of controlling the occurrence of risks. Risk management is such a very complex process which requires the support and the subsequent implementation of various principles. Ideal risk management should provide a very powerful tool that can increase the effectiveness of risk reduction. 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