Capital Projects

Project Risk Management –

Leading Practices

January 2016
Agenda

Introductions
Challenges of Large Capital Projects
Building a Risk Intelligent Enterprise – Best Practices
Appendix – Monte Carlo Simulation Example

© 2016 ZAO Deloitte & Touche CIS 2

Introductions
John Stone, PE, CCP
Deloitte Advisory
1700 Market Street
Philadelphia, PA 19103
Telephone: 215-316-6559
E-mail: jostone@deloitte.com
© 2016 ZAO Deloitte & Touche CIS
John is a Specialist Master in the Capital Projects Consulting practice in the Philadelphia office of Deloitte
Advisory.
He is a registered professional engineer and certified cost professional with over 20 years of dispute
resolution, project advisory, and risk experience spanning a wide range of domestic and international
engineering and construction projects. He has significant experience in construction disputes, estimations,
project management, risk assessments, project controls, procurement, construction cost assessments, on-
site claims management, and construction field experience. Furthermore, he has been involved in the
construction, as well as construction disputes, audits and risk assessments, of industrial and power plants for
projects in Canada, Central Europe, the Caribbean, Brazil, the Middle East, and the United States. John has
also been a subject matter expert and assisted internal audit teams in numerous construction cost
assessments, fraud investigations, control, and risk assessments for a number of domestic and international
clients.
3
Challenges of Large
Capital Projects

© 2016 ZAO Deloitte & Touche CIS 4

Root Causes

Root causes of many breakdowns are within the owner’s control Owner Pays
• Inadequate risk planning and monitoring
• Cost overruns
• Lack of clear governance structure and accountability
• Schedule delays
• Poorly developed project team
• Insufficient resources • Unplanned scope changes

• Limited controls for avoiding cost and schedule overruns • Contract/claims

• Inadequate project reporting • Abandoned projects

• Inadequate contract planning/ • Under-utilized assets
undefined contracting strategies • Quality issues
• Inability to accurately estimate and measure productivity • Lack of stakeholder acceptance
• Late scope changes
• Bad publicity
• Insufficient change and issue management processes
• Poor communication

© 2016 ZAO Deloitte & Touche CIS 5

Polling Question #1

During your experience in executing capital projects, what risk

keeps you up at night?
1. Schedule delay
2. Cost overruns
3. Resources
4. Procurement
5. Other

© 2016 ZAO Deloitte & Touche CIS 6

The Construction Industry Institute Top 107 Project Risks
1. Acquisition of necessary easements 38. Identification of underground site features (utilities, old deliverables)
2. Adequacy of labor force building foundations, etc.) 73. Pay when paid clause
3. Ambiguous acceptance criteria 39. Implied warranties 74. Permitting obligation
4. Archaeological discoveries 40. Incentives/disincentives clauses (safety incentives, rewards in 75. Pollution liability
5. Availability of materials general) 76. Poor subcontractor performance
6. Back charge provisions 41. Indemnity (including gross negligence, sole negligence, and 77. Post-award changes or reinterpretation of laws
7. Bonding capacity willful misconduct) 78. Quality of workmanship
8. Broad transfer of ownership of intellectual property to 42. Inflation 79. Regulatory permitting and mitigations
owner/contractor 43. Insufficient contractor insurance 80. Reliance of subcontractors versus self-performing
9. Cumulative impact of change orders 44. Insufficient owner insurance 81. RFI process
10. Change management 45. Insurance allocation 82. Risk of physical loss or damage to the work as pertains to
11. Civic/community activism 46. Integrated schedule management builder’s risk
12. Consequential damages 47. Interest rate changes 83. Schedule acceleration
13. Constructability/operability/maintainability analysis 48. Labor strike/jurisdictional disputes 84. Scope definition
14. Contracting/Compensation Method: GMP/Lump Sum/ 49. Lack of appropriate involvement of design professional during 85. Shop drawing approval process
Cost Plus/Unit Pricing construction 86. Site layout
15. Contractor skills and experience (type and size) 50. Lack of clearly defined safety guidelines and responsibilities 87. Site security
16. Control of scope growth 51. Lack of coordination/communication program among owner 88. Site selection
17. Coordination with other on-site contractors and design/construction teams 89. Standard of care (engineering and construction)
18. Cost compensation for change orders 52. Lapsed insurance coverage 90. Subcontractor default
19. Cost escalation 53. Latent defects 91. Subcontractor safety training
20. Currency fluctuations 54. Legislative changes 92. Sufficient transportation facilities
21. Delegation/allocation of design responsibility 55. Level of public support 93. Supplier performance
22. Delivery sequence of long lead items 56. Limits of liability 94. Tax regulation change
23. Design responsibility 57. Liquidated damages 95. Termination rights
24. Differing site conditions 58. Local codes and standards 96. Third-party performance/errors litigation risk
25. Dispute provisions 59. Local taxes (subcontractor/supplier performance)
26. Drawings not coordinated 60. Most-favored-customer pricing provisions 97. Time compensation for change orders
27. Economic feasibility analysis (cost/benefit) 61. New or unfamiliar technology 98. Trade coordination
28. Environmental liability 62. No damages for delay 99. Uncertain labor productivity
29. Errors and omissions 63. Notice requirements 100. Unknown conditions
30. Estimating 64. Overlapping insurance coverage 101. Unrealistic performance schedules
31. Express warranties 65. Owner-furnished equipment delivery 102. Unsafe construction site
32. Financial capacity of contractor 66. Owner-furnished equipment performance 103. Using standard trade practices as solutions for design
33. Financial capacity of owner (funding of the project) 67. Owner inspection requirements shortcomings
34. Financial capacity of subcontractor 68. Owner-mandated subcontractors/vendors 104. Waiver of claims
35. Force majeure 69. Owner operations and maintenance 105. Waiver of liens
36. Geo-technical data 70. Owner organizational structure 106. Waiver of subrogation
37. Hazardous materials plan 71. Owner skills and experience 107. Warranty work
72. Payment provisions (percent complete, milestones,

© 2016 ZAO Deloitte & Touche CIS 7

Building a Risk Intelligent
Enterprise
Best Practices

© 2016 ZAO Deloitte & Touche CIS 8

Project Risk Management Framework

Roles & Risk Appetite /

Objective Setting Policies Risk Taxonomy
Responsibilities Threshold
Risk Governance

Risk Oversight

People Culture Knowledge, Skills & Behaviors

Cross-Team Integration

Tools Systems / Tools Data Management Metrics & Reporting

Risk Identification and Assessment

Risk Initiation &
Risk Identification Risk Assessment
Project Risk Planning
Management
Process and Risk Response and Control
Procedures
Risk Response Risk Response Risk Monitoring &
Close Risk
Planning Execution Control

© 2016 ZAO Deloitte & Touche CIS 9

ERM vs. Project Risk

Makes risks more visible to management, stakeholders, and the Board of Directors so that management decisions can be evaluated and
challenged.

Red Yellow Green

Corporate $100+ M $50-100M <$50M
Segment $30+ M $10-30M <$10M
Function $10+ M $3-10M <$3M

Projects mitigate company risks and are therefore, also included in the ERM tool.
.• Monthly reporting: An overall project risk indicator (red, yellow, or green) shall be
reported monthly. The risk indicators will be determined based on the severity of the
risks measured in terms of the potential impact (in a dollar equivalent) from the project
risk register.

© 2016 ZAO Deloitte & Touche CIS 10

Risk Management Program
Bridging the Gap

The Risk Management process is directed toward achieving the following goals:
• Streamline and standardize the identification, analysis and mitigation of significant risks to program success
• Identify risks with the greatest potential to impact project cost, schedule and performance criteria
• Allocate resources efficiently and in a cost-effective manner to mitigate the highest priority risks early in the planning process
• Promote risk management as an ongoing project control imperative that focuses on defining the project risk profile as it evolves throughout
performance
Monte Carlo Analyses
Risk Identification Risk Assessment Risk Response Monitor & Control Power Plant
Entire Plan : Cost
400 100% $8,683,522,034
($962,052,941)
95% $7,937,315,289

• Implement a standardized methodology for • Approach to Risk Assessment 350

90% $7,709,429,450

85% $7,554,296,679

identifying, prioritizing and managing project risks – Qualitative 300

80% $7,457,053,309

75% $7,370,132,426

– Procedures and Guidelines

70% $7,280,051,031

– Quantitative 65% $7,190,807,304

Cumulative Frequency
250
60% $7,097,040,514

– Roles and Responsibilities 55% $7,020,041,206

Hits
200 50% $6,952,468,916

– Risk Tolerances 45% $6,875,964,783

40% $6,803,472,242
150

– Process and Tools 35% $6,740,349,254

30% $6,672,388,872

100 25% $6,591,922,957

20% $6,495,000,369

Risk Evaluation Forms Risk Register Risk Matrix 50

15% $6,377,182,307

10% $6,261,980,162

5% $6,105,079,791
Risk Information Form

RISK IDENTIFICATION INITIAL RISK

RISK REGISTER 0 0% $5,460,309,058
Responsible Organization Example Project
Trades XZY have been impacted and trends
ACME - Example Project Owner:
John Doe
$6,000,000,000 $8,000,000,000
Risk Number EX001 Risk Assumptions
indicate costs may increase by $2.2M. See Date: 8-Sep-08
supporting Labor Availability Analysis for further
Status
Date of Identification
Active
8-Sep-08
details. RISK IDENTIFICATION INITIAL RISK RISK RESPONSE PLAN RESIDUAL RISK
Contingency
Distribution (start of interval)
Risk No. Status Risk Date of Risk Risk Name Likelihood Initial Impact Assessment Max Impact Initial Risk Response Risk Response Action Action Response Residual Residual Residual Risk Risk
Risk Initiator John Doe Likelihood of Occurrence Medium Allowance

Initiator Identification Category Summary Description - Root Causes L:1-5 Cost Schedule Other I:1-5 Score Level (4 T's) Action Plan Owner Due Date Cost Likelihood Impact Score Level Signed Off Cost Schedule
Risk Category Resources (Who is doing the work) Potential Impact
Resources
Most Likely Impact Score Improve training and
EX001 Active John Doe 8-Sep-08 (Who is doing Skilled Trades Labor Availability Medium 2.2 8 Insignificant Moderate 9 Of Concern Mitigate John Doe 20-Sep-08 $0 Medium Minor 6 Of Concern 0 $ 1.2 3.0
Cost ($ millions) $2.2 Moderate recruiting.
the work)
Schedule (days) 8 Moderate
EX002
Risk Name Skilled Trades Labor Availability Other (Quality, Customer Satisfaction, etc.) Insignificant
EX003
EX004
Risk Symptoms Lack of available skilled labor is resulting increased labor Maximum Potential Impact Moderate
costs and may impact productivity. EX005
EX006
EX007
EX008
EX009
EX010
EX011
EX012
Initial Risk Score (= Likelihood x Impact) 9 EX013
Initial Risk Level Of Concern EX014
EX015
EX016
EX017
EX018

RISK RESPONSE RESIDUAL RISK

OPPORTUNITY IDENTIFICATION INITIAL OPPORTUNITY OPPORTUNITY RESPONSE PLAN RESIDUAL OPPORTUNITY
Lack of skilled labor in local areas and increased Opportunity Status Initiator Date of Category Opportunity Name Likelihood Initial Impact Assessment Max Impact Initial Level Response Response Action Action Response Residual Residual Residual Level Signed Off Contingency
Risk Root Cause(s)
completition with other construction projects.
Residual Risk Assessment No. Identification Summary Description L:1-5 Cost Schedule Other I:1-5 Score (4 T's) Action Plan Owner Due Date Cost Likelihood Impact Score Cost Schedule
Likelihood of Occurrence Medium Identify other
Interface with
Risk Response Mitigate Maximum Potential Impact Minor EX-OP001 Active John Doe 8-Sep-08 Accelerate RFP for Equipment High 0 10 Insignificant Moderate 12 High Enhance procurement John Doe 15-Oct-08 $0 High Major 16 High 0 $ - 10.0
Procurement
Residual Risk Score (= Likelihood x Impact) 6 efficiencies
Response Name Improve training and recruiting. Residual Risk Level Of Concern EX-OP001
EX-OP001
Action Plan Details Develop enhaced training program for key trades EX-OP001
requiring additional labor. Implement aggressive EX-OP001
recruiting plan. See Training Strategy and Recruitment
Plan for further details. Contingency allowance provided
Residual cost ($M) $1.2
Residual schedule impact (days) 3

Risk Accepted and Sign Off By

Signature and Date:

Action Details
Action Owner John Doe Comments / Remarks / Attachments
Action Due date 20-Sep-08
Action Cost ($M) $0.1

© 2016 ZAO Deloitte & Touche CIS 11

Path Forward…

Avoidance

• Risk re-assessment

• Risk audits
Transference • Variance and trend analysis

• Earned value analysis

• Status meetings

Mitigation

Acceptance

© 2016 ZAO Deloitte & Touche CIS 12

Bridging the Gap
Clearly defined governance structure with accountability
for all necessary risk classes assigned accordingly
Deloitte POV on Project Risk
Major capital projects tend to have extremely
complex stakeholder structures with multiple
relationships that come into play. Risk intelligent
project officers ensure governance is enabled
through three lines of defense:
• First line: Accountability for risk is secured through
a clearly articulated risk breakdown structure that
outlines all necessary risk classes, individual roles
and specific responsibilities;
• Second line: Risk oversight and tone setting is
provided by a central governing body which
receives timely and accurate risk information upon
which to make informed decisions;
• Third line: Independent and objective reviews are
conducted to validate risk data and controls.
Governance structure must be aligned with the
contracting strategy and organizational structure.
© 2016 ZAO Deloitte & Touche CIS
Portfolio and ERM Integration
Governing bodies (board, steering committee, audit
committee, ERM, etc.) all have appropriate
transparency and insight into the project’s risk
management practices.
• Ensure that appropriate, consistent systems and
processes are in place to manage risk proactively
as well as provide timely risk information that may
be escalated as necessary;
• Examine the current risk structure across the
portfolio. How are risks being managed? Are risk
silos being bridged?
• Ensure risks remain visible to those beyond the
risk owners — the broader stakeholder group
needs to be engaged.
Out of sight means out of mind
13
Stage Gate Approach
Project Critical Decision Process Matrix
CDO
Approve Business
Approve
Case Feasibility
Submission of
Statement Proposal
PHASE INITIATE DEVELOP
Level of Assess Business Develop Conceptual
Development Case Feasibility Design/Bid
Major Capital Projects Major Capital Projects
Governance /
CD Approver
 Board of Directors  Board of Directors
Sustaining Capital Sustaining Capital
 Owners Committee  Critical Decision Approval
Committee
 CD-0 Template CD-1 Template
Package
 Synchronization  PMP (Initial)
Matrix/Decision Support  Project Charter (Initial)
CD
Tool  Design Basis Memorandum
 Synchronization  Contract & Procurement Strategy (Initial)
Matrix/Decision Support  Business Proposal / Bid
Template  Authorization for Expenditure
 Business Case  Project Charter (Initial)
 Preliminary Scope Statement  Refined Scope Statement (Updated)
(Initial)  Decision Support Tool/Synchronization
 Start / Stop Schedule Matrix (Initial)
 Class 5 AACE Estimate  Project Work Breakdown Structure (Initial)
 L1 Milestone Schedule  L2 Project Management/Control
 CD Plan/Phase Plan (Initial) Schedule
 Phase Funding Requirement  Class 4/3 AACE Estimate
 Identification of Consultant/  CD Plan/Phase Plan (Updated)
Vendor/ Engineering  Project Management Plan (Initial)
Contract(s) (if required)  Scope Management Plan (Initial)
 Project Director/Manager  Schedule Management Plan (Initial)
Identified  Costs Management Plan (Initial)
 Quality Management Plan (Initial)
 Engineering Management Plan
(Initial)
 Procurement Management Plan
(Initial)
 Health, Safety, and Environmental
Management Plan (Initial)
 Organization Chart (Initial)
 Staffing Management Plan (Initial)
 Long Lead Items and Contract(s) –
Identified
 Contracts initiated
 Regulatory Requirements (Initial)
 Project Specific Procedures (Initial)
 Lessons Learned Report
 Conceptual Design Report
 Design Basis Memorandum
(Preliminary Engineering)
 Engineering to Support Class 4/3 Estimate
 Preliminary P&IDs
Critical Decision Criteria
 PFDs
 Equipment lists
 Geotechnical
 Preliminary Site Plan
 Process Design Guide
 Preliminary Building layouts
 Preliminary Control Systems
Philosophy
 Process Descriptions
 30% Model Reviews (Large/Mega
projects)
Deliverables
 Phase gate review
 Independent Peer Review (IPR)
Recommendation (If required)
Key
© 2016 ZAO Deloitte & Touche CIS
CD1 CD2 CD3 CD4 CD5 CD6
Approve Approve Approve Approve Approve
Performance Execution Acceptance Transition Final Project
and Turnover
Baseline Readiness Completion Closeout
Activities
DEFINE PREPARE EXECUTE TURNOVER CLOSEOUT
Detailed Design and Execute / Acceptance Completion of
Define Performance Baseline Contractual Obligations
Prepare for Execution Construction Work and Turnover
Major Capital Projects Major Capital Projects Major Capital Projects Major Capital Projects Critical Major Capital Projects
 Board of Directors  Board of Directors Decision Approval Committee Owners Committee
 Critical Decision Approval Board of Directors
Sustaining Capital Sustaining Capital Committee Sustaining Capital
 Critical Decision Approval  Critical Decision Approval  Board ofCapital
Sustaining Directors Sustaining Capital  Critical Decision Approval
Committee Committee
 Critical Decision Approval  Critical Decision Approval Committee
Committee Committee Owners Committee
CD-2 Template  CD-3 Template  CD-4 Template  CD -5 Template 
CD-6 Template
 PMP (Updated ) by Discipline  PMP (Final)  Transition/Closeout Plan (Initial)  Final Operational Acceptance  Project Completion Report
 Performance Baseline  Commissioning Plan (Initial)  Commission Plan (Final)  Close of AFE
 Certificate of Substantial
 Performance Baseline
Completion
 Performance Baseline (Initial)  PMP (Final)
  
 Project Charter (Final)  Schedule Management Plan (Final) 
Transition/Closeout Plan (Final) Project Transition to Operations Preparation & Issue of Project
 PMP (Updated) – by Discipline  Costs Management Plan (Final) Certificate of Substantial

Report

Completion Report
 Scope Management Plan (Final)  Change Management Plan (Final) 
Completion

Final Operational Acceptance

Close of AFE
 Schedule Management Plan (Updated)  Quality Management Plan (Final) 
Commissioning Plan (Final) Transfer of Care, Custody and Settlement of All Outstanding
 Costs Management Plan (Updated)  Staffing Management Plan (Final) 
CD Plan/Phase Plan (Updated) Control
 CD Discussion & Guidance
Financial and Contractual
 Change Management Plan (Updated)  Communications Management Plan (Final) 
CD Discussion & Guidance
Fabrication – Construction  Integrated System
Obligations, Claims, Issues &
 Quality Management Plan (Updated)  Risk Management Plan (Final) 
Disputes
 Staffing Management Plan (Updated)  Procurement Management Plan (Final) 
Substantially Complete Commissioning Complete
 Regulatory Approvals Obtained
Process improvement
 Communications Management Plan (Updated)  Safety Management Plan (Final) 
Compliance Assurance
 Start Up and Performance
(Lessons Learned) Report
 Risk Management Plan (Updated)  Engineering Management Plan (Final) 
Lessons Learned

Issued
 Procurement Management Plan (Updated)  Environmental Management Plan (Final) 
CD Plan/Phase Plan (Updated) Testing
 Lessons Learned
Post Expenditure Review
 Engineering Management Plan (Updated)  Process Improvement Plan (Final) Regulatory Requirements
 Final Project Documentation
 Construction Management Plan (Initial)  Construction Management Plan (Final) 
(Updated)
 CD Plan/Phase Plan (Final)
 Safety Management Plan (Updated)  Turnover Plan (Initial) L4 Activity Schedule for
 Handover Review
 Environmental Management Plan (Updated)  Commissioning Plan (Initial) 
Commissioning
 Process Improvement Plan (Updated)  Performance Baseline (Final) Construction Completion Review
 Project Finance Plan (Final)  Class 2 and/or Class 1 Estimate
 Training Plan (Initial)  Organization Chart (Final)
 L3 Resource Loaded Schedule  Execution Performance Baseline (Final)
 Synchronization Matrix (Final)  L4 Activity Schedule for Construction/Fabrication
 Project WBS (Final) (resource loaded)
 Class 2 Estimate  Construction Work Packages 100% Complete
 L3 Work Package Schedule  Contracts in Place – Signed Contracts
 Organization Chart – Key Positions  Procurement Measure - 100% POs placed
Identified/Filled (Updated)  CD Plan/Phase Plan (Updated)
 Procurement Measure - 100% of long lead item  Regulatory Requirements (Updated)
PO’s; Procurement 20%  Lessons Learned
 CD Plan/Phase Plan (Updated)  Engineering to Support Class 1 Estimate (IFC):
 Regulatory Requirements (Updated)  P&ID’s - IFC
 Lessons Learned  PFD’s - IFC
 Engineering to Support Class 2 Estimate (IFD):  Piping Layouts - IFC
 P&ID’s IFD  Control Systems architecture Legend:
 PFD’s IFD  Line List – IFC
 Basis of Design – Final  Tie-in list – IFC Project
 Piping Layouts  Electrical Single Line – IFC
 Control Systems  Cable layouts and wiring diagrams - IFC
 Line List –IFD  I/O lists – IFC Management
 Tie-in list – IFD  Isometrics - IFC
 Electrical Single Line – IFD  Engineering Work Packages – 100% Complete Deliverables
 Process Descriptions - Final  System Functions & Requirements Document (Final)
 Project Procedures – Final  Independent Peer Review (IPR) Recommendation (If
 Major Equipment Bids evaluated – ready for purchase required) Engineering
 Systems Functions & Requirements Document (Initial)  90% Model Reviews (Large/Mega projects)
 Geotechnical Report – Final  Construction Execution Readiness Review/Phase Gate Deliverables
 Site plan - Final Review
 Engineering Work Packages – 50% Complete  Constructability/Bid-ability/ Modularization Review Reviews
 Value Management/Engineering Report  Operability and Safety (Hazop) Review
 Independent Peer Review (IPR) Recommendation
(If required)
 60% Model Reviews (Large/Mega projects)
 P&ID Review
 Phase Gate Review
 Bid ability/Constructability/Modularization Review
 Operability and Safety Review (Hazop)
14
In a risk intelligent project, stage gate specific project
assurances activities are required in order to determine
whether the project may proceed
Deloitte POV Stage-gate project assurance activities
Top project management teams develop an early • Discipline specific risk studies (e.g. engineering,
view of what risk based activities are required per procurement, construction, etc.)
phase and stage gate in order to provide assurance • Class specific risk studies (e.g. regulatory,
that the project is ready to proceed through each security, political, resources, etc.)
gate.
• Resource, cost and schedule peer reviews
The project assurance plan is used to formulate a
• Contingency analysis
risk-based operational excellence program for the
entire end-to-end project lifecycle. • Vendor qualification analyses
Ineffective stage gate risk assurance and related • Internal control audits
decision making often results in carry over legacy • Independent project assurance
issues which burden the project for the remainder of • Operational readiness reviews
its lifecycle.

© 2016 ZAO Deloitte & Touche CIS 15

In a risk intelligent project, material-risk classes, as well as
all associated controls, are independently tested and
validated
Deloitte POV Stage-gate project assurance activities
In many major capital projects, internal resources are • Timely access to specialized expertise
stretched and struggle to consistently deliver the • Greater integrity and higher quality
necessary performance and control assessments.
• Neutral and un-biased opinions
Project officers may fear they are not getting the full
• Additional resourcing options
story from their project teams and that bad news
may not arrive in time to address the risks. • Broader exposure to industry best practices
Without independent project assurance, project
officers will find themselves in a position where they
are relying on those who manage the risks to report
on the risks.

© 2016 ZAO Deloitte & Touche CIS 16

Appendix

© 2016 ZAO Deloitte & Touche CIS 17

Quantitative (Monte Carlo) Risk Analysis

Quantitative risk analysis enables the client to identify and mitigate

“high impact” risks inherent in traditional cost estimates and schedule
projections
• Traditional cost estimating and CPM scheduling does not account for
risk or uncertainty
• Monte Carlo simulation and scenario analysis accounts for both risk
and uncertainty related to cost estimates and project schedules
‒ Cost and schedule confidence: Monte Carlo simulation and
scenario analysis will help to evaluate the range of expected costs
or schedule completion dates as well as the confidence levels
associated with achieving certain cost or schedule objectives

© 2016 ZAO Deloitte & Touche CIS 18

Risk Assessment Process

Simulation (Monte Carlo) Process

• Establish the model structure
• Define the inputs
‒ Conduct risk workshops and assess relevant support
• Run the simulation
‒ During each iteration, the model selects cost or durations for each
item and risk event based on the probability distributions
established
‒ The simulation model may be run thousands of times while various
statistics are collected
‒ Results will converge to a level of confidence
• Additional simulations will not have a significant impact on the
results already collected
• Key outputs include:
‒ Histograms showing the anticipated costs or schedule completion
dates and their associated confidence levels
‒ Statistics showing key drivers of risk and uncertainty
• Perform scenario analyses as necessary

© 2016 ZAO Deloitte & Touche CIS 19

Risk Uncertainty vs. Risk Events

• Risk uncertainty
‒ Inherent uncertainty
• Risk events
‒ Event may or may not occur (unknown site conditions)
‒ External to cost items and schedule tasks
‒ May impact several cost items or the duration of one or more tasks within a schedule
‒ Modeled using two inputs: Probability of Existence and Impact

© 2016 ZAO Deloitte & Touche CIS 20

Defining Risk Inputs

Choosing the appropriate curves

• Typical distributions for construction activities
‒ Right-skewed distributions: greater tendency (probability) of
extending durations
• Utilize historical data to develop risk inputs
‒ Each project has unique circumstances and challenges
‒ May need to modify or adjust historical data
• Leverage industry knowledge
‒ Educated assumptions

© 2016 ZAO Deloitte & Touche CIS 21

Triangle Distribution

Inputs: minimum, most likely, maximum

© 2016 ZAO Deloitte & Touche CIS 22

Quantitative Risk Analysis – Cost Confidence

Quantitative cost estimate analysis provides the means to quantify and Power Plant
evaluate cost estimate confidence Entire Plan : Cost
400 100% $8,683,522,034
($962,052,941)
95% $7,937,315,289

90% $7,709,429,450
350
85% $7,554,296,679

80% $7,457,053,309

300 75% $7,370,132,426

70% $7,280,051,031

65% $7,190,807,304

Cumulative Frequency
250
60% $7,097,040,514

55% $7,020,041,206

Hits
200 50% $6,952,468,916

45% $6,875,964,783

40% $6,803,472,242
150
35% $6,740,349,254

30% $6,672,388,872

100 25% $6,591,922,957

20% $6,495,000,369

15% $6,377,182,307
50
10% $6,261,980,162

5% $6,105,079,791

0 0% $5,460,309,058
$6,000,000,000 $8,000,000,000
Distribution (start of interval)

Monte Carlo Cost Analysis Histogram

© 2016 ZAO Deloitte & Touche CIS 23

Quantitative Risk Analysis – Cost Sensitivity

Evaluated component costs likely to have the greatest impact on overall project cost and develop mitigation strategies to proactively address risks
• The tornado chart depicts the impact of high risk cost items in relation to the overall cost

1410 - Regulatory Impacts 53%

1400 - Engineering 53%

1450 - Piping Scope Uncertainty 35%

1480 - Rock removal 32%

Cost Sensitivity Tornado Chart
1540 - Testing & Commissioning 26%

1460 - Building Design Uncertainty 26%

1470 - Access Road Improvements 20%

1860 - Electrical Scope Uncertainty 13%

1850 - Labor Availability 9%

1830 - Generator Procurement 4%

© 2016 ZAO Deloitte & Touche CIS 24

Quantitative Risk Analysis – Schedule Confidence

Quantitative schedule analysis provides the means to quantify schedule

confidence

Monte Carlo Schedule Analysis Histogram

© 2016 ZAO Deloitte & Touche CIS 25

Quantitative Risk Analysis – Schedule Criticality

Evaluate probable critical path, assess controlling tasks, and identify any potential logic flaws
• The criticality chart depicts the percentage of time each task appears on the critical path during the simulation analysis

Schedule Criticality Tornado Chart

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Identified Risk Elements

Planning & Design Procurement Construction Project Controls

Project Drivers Procurement Procedures Physical Site Constraints Schedule Controls

Permits
Engineering Labor Productivity Cost Controls
Regulatory Approvals

ROW/Land Acquisition Inventory Control Site Coordination Invoice Processing

Labor Availability
Long-Lead Items Site Staffing Material & Equipment
Governance Structure

Public Relations

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Planning Phase Risks & Mitigation Strategies

Risk Issue Proposed Mitigation Strategies Existing Controls

Project Drivers Project completion by • Engage scheduling engineer to test baseline • Contractor maintains master project schedule
20XX schedule, monitor weekly updates, and • Owner to monitor Contractor performance
conduct trend and forecast analyses against schedule
• Drive management decisions based on
• Owner seeking approval for project controls
progress positions
Permits Identify all permit needs, • Comprehensive master permit list • Contractor has permit risk
timely commence • Division of Responsibility • Schedule reflects permit requirements
application process, and
complete engineering • Monitor on master schedule • Weekly progress meetings with permitting
and engineering teams
Regulatory Obtain CPCN in each state Drive approval process through public relations • Communications plan in place
Approvals or resort to NIETC process and communications efforts • Public relations firm retained
• External Affairs retains local consultants
ROW/Land Conduct acquisition • Integrate with procurement and construction • Acquisition plans are in process and will be
Acquisition activities in timely and part of Execution Plan
• Secure material staging areas early
sequential manner, and • Condemnation may be used when CPCN
with adequate funding • Develop system for commitment & transfer of
issued
controls funds
• Funding process and controls under
development

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Planning Phase Risks and Mitigation Strategies

Risk Issue Proposed Mitigation Strategies Existing Controls

Labor • Quantity and quality of • Labor plan to identify alternate sources of craft • Contractor to conduct craft labor survey and
Availability craft labor labor develop project labor plan
• Overtime and • Incentives for retaining supervisory and • Engineering divided among several firms
productivity engineering staff • Contractor has commitment of contractor with
• Management and sufficient resources
engineering resources • Owner compensation package designed to
retain staff
Governance Designed to drive sound Routine assessment of Owner and Contractor Three control points include Contractor as CM,
Structure management decisions compliance with systems and processes project oversight team (including project
and support prudency controls), and Steering Committees (contractual
reviews and internal).
Public Effect of public opinion on Monitor organized activity • PR firm has been engaged
Relations regulatory approvals, Develop focused media and PR campaigns • Communications plan in place
ROW/land acquisition and
Conduct training • Various training has been completed
route selection, and
construction schedule

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