Project Risk Management - Case Study Example

of --------- Technology Extended Campus Paper project undertaken in partial fulfillment of the requirements for the Degree in ----------------- CASE STUDY - Project Risk Management BY ----------------- Supervisor: ---------------- Project unit: -------------- November 2009 Plagiarism Declaration I confirm that the enclosed written work on CASE STUDY - Project Risk Management , is entirely my own except where explicitly stated otherwise. I declare that wherever I used copying, paraphrasing, summarizations or other appropriate mechanism related to the use of another authors work it has been properly acknowledged in accordance with normal scholarly conventions. I understand that wherever 6 or more consecutive words are extracted from a source they must be acknowledged and 10 consecutive words that are unacknowledged will be regarded as proof of plagiarism. Signed __________________________________ Date ___________ Acknowledgments Special thanks and gratitude is given to ---- who helped me with his valuable guidance. My thanks will be extended also to my family including Dad, Mom and -----, my youngest brother for their kind and invaluable support during the whole project. Table of Contents INTRODUCTION 5 1.1.0 Survey of the Terminal 5 Construction Project 5 1.1.1 Evaluating T5 Risk Management 5 1.1.2 Risk Management 6 CASE STUDY: PROJEC RISK MANAGEMENT APPROACH FOR TERMINAL 5 6 2.1 T5 Agreement 6 2.2 Identification of the risks 7 2.3 Risk control strategies 8 DISCUSSION 8 3.1 CRITICAL ASSESMENT 8 3.1.1 PRAM Framework 9 14 5.0 Conclusions 14 5.2 Recommendations 14 APPENDIX 15 REFERENCES 15 Case Study - Project Risk Management INTRODUCTION 1.1.0 Survey of the Terminal 5 Construction Project The London Heathrow Terminal 5 has emerged to be the largest airport and the most complex construction projects undertaken in the airline industry. The aim of the project was to augment the capacity by 50% along with offering the visitors an impressive gateway into the city and the United Kingdom. With a budget of over £4.3bn, the airport facility includes a an airport terminus, a building housing a satellite, underground tunnels, diversions on the river and a road connecting the airport to M25 (Sharon, 2008).This paper attempts to study and evaluate the Risk Management strategy and theories involved in the construction of London Heathrow Airport’s Terminal 5, (Sharon, 2008) and critic these theories. 1.1.1 Evaluating T5 Risk Management The approach used to mitigate risks for the t5 of the Heathrow Airport was based on the principles of team construction and had to incorporate many changes until project completion, (Sharon, 2008). BAA had anticipated a high level of design progress and development at all stages of the ambitious project which could easily squeeze modern technical solutions and modifications in safety, space requirements or amenities. It would have been unrealistic to freeze the complete design solution of the project during the design phase (Latham, 1994). BAA decided absorb all risks. This helped BAA manage the activities with the help of partners who worked as integrated teams along with the contractors. This was implemented under the T5 Agreement, (Ferroussat, 2005). 1.1.2 Risk Management The procedure to try and identify risks that are present within a project is known as management of risks. The risks that are posing challenges during the implementation of a project are effectively managed, (Mind Tools, 2009). Risk Management activity is mainly concerned with a proper analysis of the different operations, identification of the prospective threats to the system, occurrence of the ill effects and finally taking suitable actions mitigate and manage the risks( David and Roland, 2006). CASE STUDY: PROJEC RISK MANAGEMENT APPROACH FOR TERMINAL 5 2.1 T5 Agreement Terminal 5 was a big project costing £ 4.3 billion. Managing this project required a lot of careful planning. This lend to the formation of the T5 Agreement, (Mind Tools, 2009). All the first tier suppliers signed a modified contractual understanding called the T5 Agreement. With this agreement, the BAA was responsible for the entire risk of the £4.3bn project (Colantonio, 2009). In order to offer an inclusive, reliable, and incorporated risk management agenda, the project team for the Terminal 5 evolved a risk management plan as follows, (Meulbroek, 2001). a) The executive committee set up a risk management committee, which was entirely responsible for the development of a risk management plan. b) Setting up of goals that match the project execution structure, creation of an efficient management approach for the system and assigning responsibility to the various departments for risk management. c) Establishment of a co-ordination plan that helped the mangers to establish a formal activity plan which assisted them to coordinate with the other departments in situations of risk and at the same time assign a committee or board of third party experts to assess and evaluate risks. Their task were to independently categorize and investigate the risk involved and build up a risk management strategy in coordination with the project team, (Ferroussat, 2005). 2.2 Identification of the risks The first committee set up 1996 identified and assessed all the risks accrued to the T5 project. Major competences were allocated towards risk management of the terminus. Another meeting was held in 2002. The main sources of risks were; (Meulbroek, 2001; Lane and Woodward, 2000). 1. Late decisions- causing delays and also altering the initial project design and implementation procedures. 2. Accidents. 3. Resource Loss – Risk management committee also discussed and evaluated issues that would lead to financial, economic and other loses during the T5 project implementation. 4. Customer care practices – They include baggage, safety, health, and environment. 5. Legal requirements and risks – Risk management committee needed to take up issues related to misuse of laws and regulations laid by the governing body of the business organization. 6. Vandalism and stealing goods and materials. 7. Inflation and changes in costs of the construction commodities 8. Public complaints- the general public could refute some proposed changes e.g. river diversion, cutting of tress etc 9. Team sprit-lack of cooperation among the team members. 10. Poor weather condition hampering the construction of the project as well as causing delays. 2.3 Risk control strategies The next step for the risk management committee was to select the appropriate methods to reduce the effects of risks. There are two types of techniques that are available to fight against the risks, (Millar and Lessard, 2001). Risk control and risk financing. Risk control methods avoid or decrease the losses. While on the other hand, risk financing techniques, pay up for those losses or make up for the losses that have already occurred (Nielsen, 2007). Some method used to mitigate risks in T5 includes: 1. Risk Avoidance – Develop means of avoiding risks. 2. Prevention of Risk – Reducing the number of incidents that might cause harmful effects and are indicators of risk. 3. Risk Reduction – Use of methods that are deemed safe and reliable. 4. Separation of Risk– the activities that are risky were separated and different management strategy adopted. 5. Development of policies – employee policies, rules and strategies should be laid out originally to maintain law and order within the system. DISCUSSION 3.1 CRITICAL ASSESMENT 3.1.1 PRAM Framework This is a vital tool for risk management and has been widely used during the risk evaluation and management process. PRAM engrosses two main techniques; these are risk analysis and risk management. Risk analysis can either be qualitative or quantitative (Perry, 2003). During the risk analysis of T5, both qualitative and quantitative methods were used. Qualitative methods involved interviewing the members and brainstorming as well as consulting with the experts on various risks. Quantitative methods involved conducting of sensitivity analysis as well as probabilistic analysis. This method was not effective in the evaluation. First the method failed to consider critical elements that made the project fail in its last stages. It was also impossible to have evaluated the T5 project in terms of Projects in Controlled Environment (PRINCE2) as there were many situations discussed during the initial stages that showed that the project would have some uncontrolled and un-predetermined risks. The PRAM methods failed to define complex situation that may lead to unpredicted crisis. Such risks include Baggage problems, untrained staff, parking concerns, security screening delays, poor check in services and software glitches that were experienced during the opening of the T5(Patrick, 2008). Under the ambit of PRAM, linear risk identification, evaluation and management is the usual procedure for implementing PRAM. This method never worked for T5 as it precludes the analysis and consideration of uncertainties that result from systems and knowledge from human behaviour. PRAM, PRINCE2 and SHAMPOO have no clear definition of how poor communication between the experts, lack of skill integration, contradicting views among stakeholders impact negatively on any project. Better methods of analysis such as the use of a decision matrix can be used for the evaluation of risk (Pfeffer and Salancik, 1978). These matrices help in understanding and solving behavioral influences (anxiety, ethical issues and precautionary bias) and systems interdependency (links between different organization working within a project), Nonaka et al (1998). Unlike PRAM which aids managers in identification and mitigation of risks, better methods allow for the exploitation of the identified risk towards the process of creating profitable opportunities (Roos et al, 1997; Argyris, 1995,). The current risk management strategy does not clearly detail most aspects regarding the contribution of the workforce (employees and managers) towards the development of the project (Ghosal et al, 1999; Glynn, 2000). The knowledge, expectations, skills and behavior of employees affect project risk management. Such competences have been known to affect both the level of risk and the number of risks. It is important that their effects be recognized and factored during the risk analysis (David & Robin, 2003). According to the International Standards Organization (ISO), the major aspects of a risk, its attributes and methods of managing it are stipulated. However, most of the risks have been found immeasurable. This means that even though risk management theory stipulates methods of identifying and managing the risk. A complete risk management strategy without flaws is unlikely. The identification, isolation and devising a remedial solution to a risk may lead to the development of another risk or problem. For example, a response to operator error may lead to increased surveillance to curtail downtime and ensure timely job completion. However, that can trigger more problems such as employee’s dependency on other system as well as increasing the complexity of the production system leading to resource draining and reduced profits. Employee surveillance may correct a deviant activity only to replace the problem somewhere else (Perrow, 1994; Scarborough and Terry, 1998; Forgues, 1997). Human behaviour greatly contributes to the problem of risk management. Behavioural aspects such as lack of trust, daydreaming of employees, absenteeism, production disruptions and labour withdrawal could lead to unprecedented risk escalation (Jacques, 1996). By merely evaluating the causes and effects of risks in the terminal five, many aspects were left behind. By BAA absorbing all the risks, the contractors and the team members were saved from undetermined loses. The theories for managing risks seem not to propose the best ways of reducing and managing risks. Even after long planning, lengthy negotiations, the T5 project still experienced major problems during its completion stages. Though technical and financial aspects are the core determinants of the risks, changes in material and equipments required and client’s anticipation may adversely affect predetermined risk information (Chacko et al, 2001; Elkington and Smallman, 2002). The collapse of the Heathrow airport tunnels during its extensions serves as an illuminating example to the issue of not considering some aspects of risks. After the collapse of the tunnel, a safety report shows that human factors were not considered. (Safety Report (2000). Though there were technical problems with the tunnels thickness, poor interaction between contracting parties is likely to have been the root cause. These factors aren’t defined in the risk management theory and hence the theory is not very effective. Human expectations can also results to unknown risks such as those experienced in the opening of Heathrow T5. Nobody expected the project to fail since it was carefully planned. These expectations resulted to BAA becoming risk ignorant, ignored any warning of failure from staff, and lacked proper planning as well as withholding money for economic reasons. These factors resulted to the opening day mayhem. Most methods of risk management theories use few quantifiable metrics to determine the risk while in reality aspects such as undefined goals may affect the project risks. In the evaluation of Heathrow T5 project late wish from BA was the highest risk (Hoffman, 2000; Alexander and Sheedy, 2005). Most of the risk management methods and theories fail to provide solutions to balance all the stakeholders within a given project. This results to problems. Most of the risk management theories and methods also fail to provide a full documentation of a project. Some risk management theories dwell on a small set of risks. It is important therefore to combine these risks. Unawareness of the existing technology, changes in technology as well as obsolesce of the current technology also has impacts of the risk management. These factors are not usually factored in most of the common risk management strategies. One may start an engineering project based on a given technology which becomes outdated even before the project completion. Such risk should be identified, evaluated and quantified (Jyrki and Basili, 1997). There is not properly documented literature that evaluates the different project risk management techniques with a view of identifying and recommending it for use in effective and accurate project risk management. It follows that most managers are in dilemma on the best method to apply. Thus, the current methods of risk management are faced with many limitations (Myerson, 1996; Williamson, 1994). Lastly most of the known theories don’t define, the uncovered risks neither do they quantify the magnitude and remedy for these uncovered risks. This means that by using one theory, the extent of the uncovered risk is undetermined. Sharon (2008), and Patrick (2008), however argue that Britain and its citizens have something to be proud of. Patrick argues that by comparing the project with Wembley stadium. The Wembley project encountered a heavy loss amounting to £ 150 million due to multiple disputes, the stadium was completed 18 months late and failure to contract the risk lend to a massive loss of another £ 430 million. it was deemed that the project multiplex management had to fight to save time and cost as well lack of flexibility, it opening was however a success. On the other hand T5 attitude was better as BAA absorbed all the construction risks and paid for any builder’s errors and mistakes. The main BAA risk attitude were to confront and manage risks early, rewarding success and not punishing for mistakes and investing in good communication as well as emphasizing for team building aspects. The terminal roof was the major risk so the BA paid £ 2.4 million towards the design of a prototype replicating this roof. Time and cost saving greatly resulted from the construction of the roof. Also during the construction, negative issues were mitigated and construction risks managed, however, the disappointment came during the opening. The BAA had great problems with baggage handling software that is the control systems, also the BAA dint train their staff, dint test peripheral system and they neither had fall back plans and spare staff. These failures were greatly attributed to the fact that nobody expected such a great project would fail at the last minute. 5.0 Conclusions The PRAM method of risk management was not very effective. This lend to last minute problems and risks that cost the company huge loses. Also, the spending on the project was higher than expected. Current risk management theories are not effective in mitigating and managing risks. Better risk management strategies must be formulated. Alternatively a combination of several methods can be adapted towards this end. 5.2 Recommendations Evaluations should be done of each stage of project implementation. This enables unmanaged risks to be re-identified and solutions generated. Rewards should be awarded for successful risk management practices; this stimulates those involved in developing and identifying potential risks as well as formulating solution towards managing them. A combination of techniques should be employed towards effective risk management and analysis process. Monte Carlo simulation can be used to solve small complex risk analysis problems while a solution matrix can aid in evaluating very complex problems (Simmons, 1990). Extensive study needs to be done to identify the best combination of risk management theories and strategies. This will help researcher develop better risk evaluation and management strategies. APPENDIX BAA: British Airport Authority BA: British Airways T5 : Terminal Five REFERENCES Alexander, C &Sheedy, E. 2005. The Professional Risk Managers Handbook: A Comprehensive Guide to Current Theory and Best Practices. PRMIA Publications Argyris, C .1995. 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