Staying Ahead of Risks

 OP RESIDENTIAL copyBy Chris Caddell

Construction project risk management has traditionally been seen as a way to prevent risks rather than create value. But in the current uncertain environment, the limitations of using risk management in a purely defensive - rather than offensive - way are apparent. 

The problem is that the standard approach, with its excessive focus on individual risks and box-ticking mentality, can have a stultifying effect, making the project inflexible and slow to respond to problems. The issues are typically three-fold:

* Many companies practice risk management to address threats, without considering opportunities.

* Risk management is not ingrained in the business’s culture and philosophy, limiting the value of the practice.

* Risk managers focus on individual projects rather than holistically across the capital program.

Organizations need to use risk management as a proactive tool to both neutralize threats and seize opportunities on a capital program. People need to change their perception from risk management being a compliance requirement to providing value through reducing threats and maximising opportunities for the entire organization.

Less Defense, More Offense

Effective risk management is not just dealing with threats. It also means identifying potential opportunities and enabling the company to benefit from them. For example, when there is a market downturn there is often an opportunity to buy materials and services with greater savings than normal. A good risk management program will look for ways to maximise the value that can be achieved from such situations.

Often the response to threats is to try to avoid them, when project teams should really be looking at how to manage them. If a project has an opportunity to do something faster, cheaper, or better but the opportunity entails risk, the team should embrace the risk with the support of additional planning, resources, inspection or other techniques.

Organizations that seek out opportunities and effectively manage threats, rather than just avoid them, can increase the value projects deliver to the business.

An Embedded Culture

Companies that embed a framework and ethos of risk management into the organization’s culture can be nimbler in identifying and responding to risks, resulting in greater value to the company. In uncertain times, having a strong risk management culture allows companies to take on risky ventures with the confidence that threats can be identified and addressed before they impact the outcome. Certain key factors need to be in place to successfully embed this change:

* Risk is everyone’s responsibility. Risk management is not only the responsibility of the risk manager. Everyone in an organization needs to incorporate risk management into their daily activities, moving it from simple compliance to a genuine business responsibility.  Maximizing opportunities and managing threats should be part of every decision.

* Understand the organization’s philosophy for risk. Staff at all levels needs to understand the organization’s objectives, priorities, and risk management philosophy. In today’s fast-paced environment, organizations need to make better decisions faster.  Giving staff this information and empowering them to make decisions, without needing to consult upper management at every stage, will ensure better outcomes. 

* Communicate the importance of risk management from the top-down. Senior management must understand their key role in communicating the importance of risk management throughout the organization, provide training for their team on making risk-aware decisions and demonstrate that risk management is embraced at all levels.

* Target ranges rather than fixed points. Projects should use quantitative risk analysis to establish a range of acceptable cost and schedule outcomes rather than a deterministic number.  Target ranges rather than fixed points provide the team with flexibility in how to best meet the organization’s priorities.

Managing the Program

Planning and managing risks more effectively at the program and organizational level enables companies to better manage issues on each individual project. This holistic overview allows companies to identify risks during project development where those risks might otherwise have emerged after only project delivery began.

Companies have limited capital and need to select projects that add the most value. Companies often prioritise projects based on the estimated return on investment, yet neglect to consider that estimated returns may have significant variability due to risks. By not considering risk impacts, a company may inadvertently select the riskier project when another offers better value to the organization. Using risk-based decisions allows companies to determine the most efficient use of their capital at the program level.

When done right, risk management is ingrained in the fabric of the business and is not a project-based, check-the-box process. Most importantly, it adds real value when risk-based decisions are made based on the benefit to the organization, not just a project. A well-managed approach to risk can result in organizations achieving greater rewards by taking on more risk, but with the confidence and creativity to manage those risks effectively.

Chris Caddell is senior vice president for Turner & Townsend, a global project management firm that supports owners with asset management, including capital programs. Based in Houston, he is responsible for Turner & Townsend’s consulting services group in the United States.

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