Comparison of Coal-bed Methane to Other Energy Resources

Comparison of Coal-bed Methane to Other Energy Resources

By Jurie Steyn

Introduction

Our team has been working on a coal-bed methane (CBM) to power project in Botswana for many months.  The other day, a colleague asked me just how clean an energy source CBM really is.  A simple enough question, but perhaps not so easy to answer.

The only way to do this, is to compare the environmental and social impacts of CBM to that of other, non-renewable, energy resources.  Even then, one must keep in mind that every energy project is unique in terms of scope, location and impact.  Any direct comparison of energy resources will thus depend on some level of generalisation.

Although there are many different energy resources, I’ve decided to limit my comparison to the following five:

  • Coal and coal mining;
  • Oil extraction from reservoirs;
  • Coal-bed methane (CBM) from coal seams;
  • Shale gas (SG) from shale formations; and
  • Conventional gas (CG).

In this article, I’ll describe each of these resources briefly, consider some energy predictions, give an overview of the approach followed for the comparison, and present the findings.  Having spent 40 years in the petrochemical and energy industries, I feel confident that I have the experience to attempt a comparison of this nature.

Energy predictions

Global economic growth is partly supported by population growth, but is primarily driven by increasing prosperity in developing economies, led by China and India (BP plc, 2019).  BP plc (2019), in their latest Energy Outlook, predicts a steady growth in primary energy consumption to fuel this growth over the next 20 years, in what they refer to as the Evolving Transition scenario, as shown in Figure 1.

Note: 1 toe = 1 ton oil equivalent = 1 metric ton of oil = 1.4 metric tons of coal = 1270 m3of natural gas = 11.63 megawatt-hour (MWh) = 41.868 gigajoules (GJ).

Figure 1:  Primary energy consumption by fuel (BP plc, 2019)

Coal consumption is expected to decline by 0.1% per annum over the period, with its importance in the global energy system declining to its lowest level since before the industrial revolution.  This is supported by the fact that it is extremely difficult to obtain finance for energy projects based on coal.

BP plc (2019) estimates that renewables and natural gas will account for almost 85% of the growth in primary energy.  Renewable energy is expected to grow at 7.1% per annum and is the fastest growing source of energy.  Natural gas, at 1.7% growth per annum, grows much faster than either oil or coal, and overtakes coal to be the second largest source of global energy by 2040.  Oil consumption is expected to increase at 0.3% per annum over the next 10 to 15 years, before plateauing in the 2030s.

Calculating the percentage, or share, contribution of each or the energy sources of the total energy demand, allows one to generate Figure 2. Figure 2 more clearly shows the actual and anticipated decline in the share of total primary energy of coal and oil. Figure 2 also shows the actual and anticipated rise in the shares of natural gas and renewable energy.  The natural gas share represents the total of conventional gas, coal-bed methane and shale gas.

Figure 2: Shares of total primary energy (BP plc, 2019)

Description of energy resources

Coal and coal mining

Coal is a solid fossil fuel that was formed in several stages as the buried remains of land plants that lived 300 to 400 million years ago were subjected to intense heat and pressure over many millions of years. Coal is mostly carbon (C) but contains small amounts of sulphur (S), which are released into the air as sulphur dioxide (SO2) when the coal burns. Burning coal also releases large amounts of the greenhouse gas carbon dioxide and trace amounts of mercury and radioactive materials.

Coal can be mined from underground mines using a bord and pillar approach, where pillars of coal are left standing to support the roof structure, or with a continuous miner, where all the coal in the seam is extracted and the roof is permitted to collapse behind the mined-out area.  Coal can also be mined from open-cast mines where the covering layers of topsoil and rock are removed by drag-lines to expose the coal seams for blasting and collection.  An alternative to the latter approach is strip mining, where the coal is sequentially exposed in narrow bands, to reduce the environmental impact.Geological conditions determine the most cost-effective method of mining. 

Mining is one of the most dangerous jobs in the world. Coal miners are exposed to noise and dust and face the dangers of cave-ins and explosions at work.  Note that in this comparison, only the environmental and social impacts of the mining, preparation and storage of coal are considered, not including the downstream impacts of coal utilisation.

Oil extraction from reservoirs

Crude oil is found in underground pockets called reservoirs. Oil slowly seeps out from where it was formed millions of years ago and migrates toward the Earth’s surface. It continues this upward movement until it encounters a layer of rock that is impermeable. The oil then collects in reservoirs, which can be several thousand meters below the surface of the Earth.  Crude oil is frequently found in reservoirs along with natural gas. In the past, natural gas was either burned or allowed to escape into the atmosphere.

Drilling for oil, both on land and at sea, is disruptive to the environment and can destroy natural habitats. Drilling muds are used for the lubrication and cooling of the drill bit and pipe. The muds also remove the cuttings that come from the bottom of the oil well and help prevent blowouts by acting as a sealant. There are different types of drilling muds used in oil drilling operations, but all release toxic chemicals that can affect land and marine life.  Additionally, pipes to gather oil, roads and stations, and other accessory structures necessary for extracting oil compromise even larger portions of habitats. Oil platforms can cause enormous environmental disasters. Problems with the drilling equipment can cause the oil to leak out of the well and into the ocean. Repairing the well hundreds of meters below the ocean is extremely difficult, expensive, and slow. Millions of barrels of oil can spill into the ocean before the well is plugged.

Sulphur is the most common undesirable contaminant of crude oils, because its combustion generates sulphur dioxide, a leading precursor of acid rain. ‘Sour’ oils have more than 2% of sulphur, while ‘sweet’ crude oils have less than 0.5%, with some of them (especially oils from Nigeria, Australia and Indonesia) having less than 0.05% S.

Most oil spills are the result of accidents at oil wells or on the pipelines, ships, trains, and trucks that move oil from wells to refineries. Oil spills contaminate soil and water and may cause devastating explosions and fires. Many governments and industry are developing standards, regulations, and procedures to reduce the potential for accidents and spills and to clean up spills when they occur.

CBM from coal seams

Methane recovered from coal beds is referred to as CBM and is a type of natural gas that is trapped in coal seams. CBM is formed by microbial activity during coalification and early burial of organic rich sediments (biogenic process) and by thermal generation at higher temperatures with increasing depth of burial (thermogenic process). Methane is held in the coal seam by adsorption to the coal, combined with hydrostatic pressure of water in the coal cleats (cleats are natural fractures in coal). Production is accomplished by reducing the water pressure, allowing methane to be released from the cleat faces and micro-pores in the coal.

Coals have moderate intrinsic porosity, yet they can store up to six times more gas than an equivalent volume of sandstone at a similar pressure. Gas-storage capacity is determined primarily by a coal’s rank. Higher-rank coals, bituminous and anthracite, have the greatest potential for methane storage. CBM is extracted by drilling wells into the coal bed of coal seams of up to 500 m deep, that are not economical to mine.

Concerns over CBM production stem from the need to withdraw large volumes of groundwater to decrease coal seam hydrostatic pressure, allowing release of methane gas.  This water may contain high levels of dissolved salts and must be treated. In some cases, the coal seam is stimulated by limited hydraulic fracturing in order to improve methane movement to the well. Surface disturbances, in the form of roads, drilling pads, pipelines and production facilities impact regions where CBM extraction is being developed.  Subsurface effects from typical CBM extraction practices must also be considered. Because of the shallow depth of many CBM basins, the potential exists that well stimulation may result in fractures growing out of the coal seam and affecting freshwater aquifers.

Proper environmental management practices can minimise the effects of CBM production and make it more socially acceptable.  Innovative drilling technologies reduce damage to the surface. Better understanding of the surrounding rock properties improves stimulation practices. These options, plus responsible management of produced water, will lessen the impact of CBM extraction on existing ecosystems.

SG from shale formations

Shale gas (SG) is a form of natural gas found in sedimentary rock, called shale, which is composed of many tiny layers or laminations. Gas yield per well is low compared to conventional gas wells and many more wells are typically required for the same volume of gas production. 

SG is extracted from shale formations of between 1 and 4 km below the earth’s surface.  Because of the low permeability of shale rock, SG wells are drilled horizontally along the shale beds and hydraulic fracturing (fracking) of the shale is always required to liberate the gas and create channels for it to flow through.  Fracking involves the injection of fracking fluid (water, sand, gel, enzyme breakers, surfactants, bactericides, scale inhibitors and other chemicals) at high pressure down and across the horizontally drilled wells.  The pressurised mixture causes the shale to crack.  The fissures so created, are held open by the sand in the fracking fluid. 

Fracking of shale rock requires much larger volumes and chemical loading than the hydraulic stimulation of CBM seams.  The vertical growth of fissures can be up to 100m, compared to 4 to 10m for CBM. However, SG is typically extracted significantly deeper than CBM and, provided the geology and hydrogeology of the region is understood and considered in the fracking process, this need not have any detrimental effects on the surface or the potable water aquifers.

Surface disturbances in the form of roads, drilling pads, pipelines and production facilities, impact regions where SG extraction is being developed. The expected life of an SG well is much shorter than that of a CBM well.

Conventional gas

Natural gas obtained by drilling into gas reserves, is referred to as conventional gas (CG), to distinguish it from CBM or SG (unconventional gases). CG is trapped in porous and permeable geological formations such as sandstone, siltstone, and carbonates beneath impermeable rock. Natural gas was not formed in the rock formations, but has migrated and accumulated there. Conventional natural gas extraction does not require specialized technology and can be accessed from a single vertical well.  It is relatively easy and cheap to produce, as the natural gas flows to the surface unaided by pumps or compressors.

Natural gas deposits are often found near oil deposits, or with oil deposits in the same reservoir. Deeper deposits, formed at higher temperatures and under more pressure, have more natural gas than oil. The deepest deposits can be made up of pure natural gas. Natural gas is primarily methane, but it almost always contains traces of heavier hydrocarbon molecules like ethane, propane, butane and benzene. The non-methane hydrocarbons are generally referred to as ‘natural gas liquids’ (NGL), even though some of them remain gases at room temperature. NGL are valuable commodities and must be extracted, along with other impurities, before the gas is considered ‘pipeline quality.’

The benefit of CG is that it is cleaner burning than other fossil fuels. The combustion of natural gas produces negligible amounts of sulphur, mercury, and particulates. Burning natural gas does produce nitrogen oxides (NOx), which are precursors to smog, but at lower levels than fuels used for motor vehicles.

Approach followed for comparison

Parameters for comparison

The different energy resources were compared using 12 different parameters divided into two categories.  The first category consists of environmental parameters, as follows:

  • Air Pollution: This covers dust generation, greenhouse gas emissions during production and contribution to acid rain;
  • Water pollution: This considers the potential impact of the operation on surface waters and the effect on water users;
  • Groundwater impacts:The potential for cross contamination of water aquifers and the depletion of groundwater sources and its impact on current users;
  • Soil pollution: Potential impact of the operations on soil quality and use.  Does it impact the ability of the soil to be used for irrigation and livestock farming;
  • Visual impacts: This considers the overall size, longevity, lighting and dust impact of the operation on passers-by;
  • Biodiversity: The potential impact of the operation on the surrounding ecosystems, flora and fauna.

The second category consists of social, and socio-economic parameters, as follows:

  • Health risks: Are health risks to the workers and community due to the impacts the operation, identified and properly understood, and can these be mitigated;
  • Noise impact: Is noise from the operation expected to be a nuisance to the surrounding communities
  • Worker safety: What is the safety performance of similar operations elsewhere in terms of worker fatalities and disabling injuries;
  • Cultural impacts: What is the potential of the operation to impact on areas of high cultural significance to indigenous people;
  • Infrastructure: What infrastructure (roads, schools, clinics, fire station, etc.) is required to support the operation and what will it contribute to the community; and
  • Job creation: How many direct and indirect jobs will result from the operation and how sustainable is it.  In this case, more is better.

Forced ranking

An approach of forced ranking was used, whereby the different energy sources were ranked from best to worst for each of the 12 parameters described above. The best performer for each parameter was given a score of one and the worst performer a score of five.  Those in between, were given scores of two, three and four, depending on their rank.

In exceptional cases, where the impact of two, or more, of the sources were considered to have comparable impacts, the individual scores in question were totalised and averaged.  In other words, if energy sources ranked in positions two and three were considered to have almost identical impacts, each would be allocated a score of 2,5.

Elimination of bias

In any comparison, the elimination of bias is essential.  One way to reduce bias is to evaluate the different options against many parameters, as was done with the 12 parameters described above. 

Another way is to use several assessors, say four to six, when doing the evaluation, and reaching consensus on the ranking.  However, in this case it was not done and therefore I’m the only one to blame if my findings do not correspond with your opinions.  I have tried to be as fair as possible in ranking the energy sources.

Discussion of findings

The results of the evaluation of the energy sources against the environmental parameters are presented in Figure 3 as a 3-D column chart.  Remember that the impacts are not given absolute values, but results based on the ranking process.

Figure 3: Environmental impact assessment for various energy sources

From Figure 3, it is obvious that coal and oil score badly in terms of impact on the environment.  This is followed by natural gas from different sources, with conventional gas assessed as having the least impact.  CBM has a lower environmental impact for most parameters than SG, but because it is accompanied by high yields of mostly saline water from relatively shallow wells, the impact on the water and soil could be greater.

The results of the evaluation of the energy sources against the social and socio-economic parameters are presented in Figure 4. From Figure 4, the picture is not so clear.  Coal and oil again score the highest for most of the parameters considered.  However, in terms of number of jobs created and associated infrastructure requirements, they score the lowest, which means they require more personnel (a positive) and infrastructure.  CG is considered more dangerous than CBM and SG, because of the higher operating pressure and the known cases of blowouts.

The cumulative impacts of the energy sources are presented in Figure 5. In this case, the total score for the six environmental parameters for each of the energy sources was calculated and plotted. Similarly, for the six social parameters.  Lastly, the total score as shown by the grey column in Figure 5 reflect the totals for the environmental impacts’ score plus the social impacts’ score.  Coal is shown to be the least desirable source, followed by oil, SG, CBM, and CG.

Figure 4: Social impact comparison for various energy resources

Figure 5: Cumulative impacts of energy sources

Concluding remarks

Natural gas remains the energy source with the lowest negative social and environmental impacts.  Therefore, natural gas, is estimated to grow at 1.7% per annum, i.e. much faster than either oil or coal, and overtakes coal to be the second largest source of global energy by 2040 (BP plc, 2019).  Natural gas is a combination of CG, CBM and SG.  CG recovery is the overall winner in this comparison with the lowest social and environmental impacts.  In the second position we have CBM, followed by SG.  Even though SG is normally recovered at greater depths than CBM, the extent of fracking required to release the methane in shale is significantly more extensive.

Next in line is oil recovery from geological reservoirs. This is understandable when one considers the oil-related environmental disasters we have witnessed.  Associated gas is also continuously flared from drilling operations.  However, low yielding (i.e. nearly emptied) oil reservoirs can be used as a suitable geological formation for storage of carbon dioxide.  The action of injecting carbon dioxide into a low yielding well will temporarily boost oil production from such a reservoir.

It comes as no surprise that coal is the energy source with the greatest negative impact on the environment.  In terms of negative social impact, it also rates the highest, but by a very small margin.  This result helps us understand the current furore over coal and the difficulty to obtain finance for coal-based projects.

References

BP plc, 2019, BP energy outlook, 2019 edition.  Electronic document available from https://www.bp.com/en/global/corporate/news-and-insights/reports-and-publications.html.Downloaded on 10 April 2019.

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The Elusive Project Sponsor

The Elusive Project Sponsor

By Jurie Steyn

Introduction

All projects are risky ventures: the larger and more complex the project, the higher the risk of an unsuccessful outcome.  It is generally accepted that a critical success factor for any megaproject (projects > $1 billion) is the presence and participation of an effective project sponsor (Barshop, 2016).  In fact, the Project Management Institute reports that the top driver of projects meeting their original business goals is an actively engaged executive sponsor (PMI, 2018).

According to the Association for Project Management (APM, 2006), the project sponsor is the primary risk taker and owner of the project’s business case.  The sponsor is tasked with ensuring that all benefits of a project are realised by the organisation’s top management.   The sponsor chairs the project steering committee, ensures that risks are properly managed, that obstacles faced by the project are dealt with, and is the person to whom the project manager is accountable. The project sponsor focuses on project effectiveness, while the project manager focuses on project efficiency (APM, 2006).

An average of 38% of projects do not have active executive sponsorship, which highlights the need and opportunity for executive leaders to be more involved in the realisation of strategy (PMI, 2018).  Barshop (2016) maintains that the main reason why companies lacked strong project sponsorship was that senior management of these companies did not understand the project sponsor’s role in project governance.

In this article, we consider several scenarios for the executive sponsorship of projects and suggest ways to deal with problematic or absent sponsors.

Four scenarios

Several books (Englund & Bucero, 2006; West, 2010), and many more articles (Christenson & Christenson, 2010; Schibi & Lee, 2016), have been published on project sponsorship which describe personality traits, required training, as well as the role and responsibilities of project sponsors.  Whilst it is true that an effective sponsor is essential for project success, it is also true that not all sponsors are equally effective.

Four scenarios regarding the effectiveness and availability of project sponsors are described, with ways to deal with potential problem. The scenarios are described in some detail in Figure 1.

Figure 1:  Four sponsor scenarios

The four sponsor scenarios are:

  • Effective sponsor: The effective sponsor knows what to do and has the executive power and resources to do it;
  • Ineffective sponsor: The ineffective sponsor can have gaps in his training and/or may be at a too low level in the organisation;
  • Missing sponsor: The missing sponsor has either left the project for other responsibilities or has not been appointed yet; and
  • Reluctant sponsor: The reluctant sponsor may meet all the requirements, but doesn’t want to accept the responsibility.

Each of these scenarios is discussed in more detail in the following sections. 

The effective sponsor

According to West (2015), the value of an effective project sponsor is the product of the value of the project to the organisation, and the role that the project sponsor plays in a successful project.  He states that above all else, it is the effectiveness of the project sponsor that is critical to a successful project.

Truly effective sponsors are hard to find and should be nurtured by their owner organisations and appreciated by the project manager and project team.  The effective sponsor will be of appropriate seniority in the organisation, work closely with and mentor the project manager, understand the basics of project management, negotiate support and resources for the project, and be able to make decisions based on facts. Depending on the size and complexity of the projects, the effective project sponsor may be able to sponsor more than one project. In most organisations the project sponsor will have other responsibilities which may lead to time constraints. The effective sponsor will be able to manage his/her time properly and obtain assistance when required.

An effective sponsor has some key requirements that must be met by the project management team.  They have a need to feel involved in the project process, require a constant stream of timely information, must be able to trust the project manager (and vice versa!), need help with managing their project commitments, and assistance with the preparation for meetings with stakeholders.

An effective sponsor will also be able to stop a project when there is no real justification to proceed, in other words when the intended business objectives are no longer achievable.  Stopping a project in the front-end loading phase, when there is no longer any justification to proceed, does not constitute a failure, but rather shows strength of character and a keen business sense on the part of the sponsor and his project management team.

The ineffective sponsor

As mentioned before, an effective sponsor is essential for successfully completing a megaproject.  The direct corollary is that an ineffective sponsor greatly increases the probability of an unsuccessful project in the form of schedule and cost overruns, and not delivering on the organisation’s strategic objectives.

Project sponsors may be ineffective for several reasons, some of which are listed below:

  • Uncertainty on the actual role of the project sponsor on a project;
  • Insufficient training in, or experience with, project sponsorship;
  • The sponsor may be unwilling/unable to make decisions;
  • The sponsor is at too low a level in the organisation to be effective;
  • Too busy with other management obligations and not available to project team;
  • Deliberately wasting time on less important matters to avoid sponsor responsibilities;
  • Preoccupation with personal matters which takes focus off the project; and
  • The sponsor may be reluctant to take on the role of sponsor (more later).

Some of these causes are relatively simple to overcome.  For instance, a sponsor who is insufficiently trained on the ‘why’ and the ‘how’ of sponsorship, and is willing to learn, can be trained.  Training can involve formal courses, or on-the-job training by other experienced sponsors.  Very experienced project managers can also lead and assist the ‘inexperienced’ sponsor, as illustrated in Figure 2.

Figure 2:  Assisting the ineffective sponsor (Adapted from van Heerden et al, 2015)

Sponsors who are unwilling to make decisions, may also be too low in the management hierarchy.  The project manager can attempt to deal with the problem by using a formal scope management procedure and taking the inexperienced sponsor through the motivation in detail.  If this does not deliver the desired results, or the sponsor is at too low a level to have an impact, the project manager will have to approach a trusted member of the organisation’s management team to discuss the concern and the potential negative consequences on the project.

Sponsors with insufficient time to deal with the project related matters can be addressed by discussions between sponsor and project manager.  If the reason is that the sponsor wants to remain in his/her comfort zone, training may be the answer.  If not, the project manager can offer to temporarily take on some of the sponsor responsibilities while the sponsor delegates some of the other responsibilities.  Sponsors who are preoccupied with personal problems can transfer some of the sponsorship responsibilities to the project manager or other subordinates. 

Lastly, sponsors who are reluctant to take on the role of sponsor will be discussed under a separate heading.

The missing sponsor

‘Missing’ sponsors are unavailable to meet project responsibilities (sometimes right from the start, or at some later point in the project) because nobody has been appointed to the position or they are otherwise occupied.  Sponsors can be ‘missing’ from the sponsorship function for any of the following reasons:

  • No sponsor has yet been appointed for the project;
  • An existing sponsor was moved or promoted to another function;
  • An ineffective or reluctant sponsor was removed from the position;
  • Top management does not consider it necessary to appoint a sponsor;
  • Medical or family emergencies, resulting in time away from the office; and
  • The sponsor may be overloaded with other projects and/or responsibilities.

There are ways to overcome the gap left by a ‘missing’ sponsor, although it places an additional burden on the owner project management team.  Several members of the project management team can act as project sponsor, as shown in Figure 3.

Figure 3:  Filling the gap of a missing sponsor (Adapted from van Heerden et al, 2015)

There are typically four key players in the project management team of any megaproject, namely the project manager, the business manager, the operations manager and the engineering manager.  Any one of these should be able to act as project sponsor.  When the sponsor post is expected to remain vacant for an extended period, the sponsor responsibilities can be divided up amongst the different managers.  Alternatively, each of the managers in the project team can rotate to the position of acting project sponsor for a specific period, say a month at a time.  Keep in mind that an acting sponsor in the place of a ‘missing’ sponsor can keep the project moving along, but can never be as effective as a dedicated and committed sponsor.

The structure for a programme is depicted in Figure 4, with similar acting arrangements as before.  Programmes are typically larger, more complex and subject to more uncertainty than projects, which implies that the need for a full-time sponsor is even greater if a successful programme is desired.

Figure 4:  The elusive sponsor of a programme (Adapted from van Heerden et al, 2015)

The reluctant sponsor

A reluctant sponsor, as the name implies, is a person who does not want to be in that position of responsibility.  Perkins (2015) refers to them as resistant sponsors, and states that resistant sponsors may be blatant or passive-aggressive in their efforts to block progress: indeed, a very dangerous situation.  In my opinion, having a reluctant project sponsor on board is far worse than having an ineffective or ‘missing’ sponsor.

Sponsors can be referred to as ‘reluctant’ for any of the following reasons:

  • They consider the project to be a career-limiting disaster;
  • They don’t wish to be tied down for the multi-year lifespan of the project;
  • They anticipate that the project will diminish their current responsibilities;
  • The project proposal was not their preferred option; and
  • They want to fulfil their prophecy that the project will be unsuccessful.

Reluctant sponsors can have very negative effects on project success and can demoralise project management teams (Perkins, 2015). This can lead to project team members leaving the project, rather than work in a toxic environment.

When dealing with a reluctant sponsor, the following approaches can be considered (Perkins, 2015):

  • Remain professional: Don’t resort to personal attacks on a reluctant sponsor. Rather blame the work processes and seek or offer solutions;
  • Keep the reluctant sponsor informed: Discuss matters requiring difficult decisions with the reluctant sponsor prior to formal meetings to avoid time being wasted during project steering committee meetings;
  • Document thoroughly: Project management practice requires the team to document agreements, motivate change requests, keep a risk register, list and follow up on action items, etc. Ensure that all documentation is timely and thorough with a reluctant sponsor;
  • Call in supporters: Ask high-level supporters of the project in the organisation to highlight the project’s value. Stubborn reluctant sponsors will find it hard to continue destructive behaviour in the face of continuous enterprise-wide support;
  • Informal engagement: Ask a senior member of the organisation’s management team, respected by the reluctant sponsor, to discuss the project with him/her. If the discussion is penetrating enough, reluctant sponsors may modify their destructive behaviour; and
  • Auto-ignition: Let reluctant sponsors destroy themselves through their actions. This is a risky, last-ditch effort, based on the hope that the rest of the organisation will recognise the reluctant sponsors’ poor decisions, and remove them from the sponsorship responsibilities.

Concluding remarks

Ashkenas (2016) states that the project sponsor should be the first appointment to be made when steps are taken to implement corporate strategy.  Before launching a new project, the sponsor and the project leader should meet to set, clarify, and align expectations. This is particularly important if the sponsor was not actively involved in the project initiation phase, and may not understand the background and risks.

Several authors have expressed the concern that due to the growing number of megaprojects in the world, good project sponsors are becoming increasingly difficult to find in the open market or inside the organisation (Merrow, 2011; Barshop, 2016).  Organisations are encouraged to train their executives for future roles as project sponsors.  If your company has a need for project sponsorship training, do not hesitate to contact us at OTC.

References

APM (Association for Project Management), 2006, APM Body of knowledge, 5th edition. Association for Project Management, High Wycombe, Buckinghamshire.

Ashkenas, R., 2016, Before starting a project, get your sponsor on board. Available from https://www.forbes.com/sites/ronashkenas/2016/05/09/before-starting-a-project-get-your-sponsor-on-board/#127c26f779c9. Accessed18 February 2019.

Barshop, P., 2016, Capital projects: what every executive needs to know to avoid costly mistakes and make major investments pay off. John Wiley & Sons, Inc., Hoboken, New Jersey.

Christenson, D. & Christenson, J. 2010, Fundamentals of project sponsorship. Paper presented at PMI® Global Congress 2010, in Washington, DC. Project Management Institute.

Englund, R.L. & Bucero, A., 2006, Project sponsorship: achieving management commitment for project success., Jossey-Bass, San Francisco, CA.

Merrow, E.W., 2011, Industrial megaprojects: concepts, strategies, and practices for success., John Wiley & Sons, Inc., Hoboken, New Jersey.

Perkins, B., 2015, 6 ways to cope with a resistant sponsor.  Available from https://www.computerworld.com/article/2883748/6-ways-to-cope-with-a-resistant-sponsor.html. Accessed on 14 February 2019.

PMI (Project Management Institute), 2018, 2018 Pulse of the profession. Project Management Institute, Philadelphia, PA.

Schibi, O. & Lee, C., 2015, Project sponsorship: senior management’s role in the successful outcome of projects. Paper presented at PMI® Global Congress 2015, EMEA, London, England. Project Management Institute.

van Heerden, F.J., Steyn, J.W. & van der Walt, D., 2015, Programme management for owner teams: a practical guide to what you need to know., OTC Publications, Vaalpark, RSA. Available from Amazon.

West, D., 2010, Project sponsorship: an essential guide for those sponsoring projects within their organizations., Gower Publishing Limited, Farnham, Surrey.

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The Widening Trust Gap in Projects

The Widening Trust Gap in Projects

By Jurie Steyn

Introduction

This article was triggered by four recent events, which caused me to reflect on what the future holds for projects.  These events are:

  • A thought-provoking Insight Article on the future of project controls (Mattheys, 2018);
  • The Insight Article on the role and responsibilities of a project management office (PMO) (Taljaard, 2018);
  • Cenpower Generation’s recent termination of its contract with the construction company, Group Five, to complete the $410m Kpone power station in Tema, Ghana (Claassen, 2018); and
  • A second down-scaling in a period of four years of the engineering and project management departments at a petrochemicals company where I spent most of my working career.

Literature is freely available on future trends in project management and what would be expected from future project managers (Alexander, 2018; Evamy, 2017; Jordan, 2017; Schoper, Gemünden & Nguyen, 2016).  However, discussions on the widening of the trust gap and its impact on project success is extremely limited.

Keep in mind that I’m based in South Africa, and my observations might be unique to Africa and third world countries.

The trust gap

Independent Project Analysis (IPA) have been analysing megaprojects for over 30 years to determine the requirements for project success and to help their customers create and use capital assets more efficiently.  They’ve highlighted the crucial role that a strong, fully staffed, owner project management team, with the appropriate work and governance processes in place, plays in delivering successful projects (Merrow, 2011). It is the owner project management team that typically leads the front-end loading phase of projects.  Merrow (2011) emphasises the extraordinary degree of trust, cooperation and communication required between the owner organisation, as represented by the project sponsor, and the owner project management team.

van Heerden, Steyn and van der Walt (2015) build on these principles and propose a preferred structure for theowner project management team, as shown in Figure 1.  The owner project management team is shown as a collection of four blue triangles, representing business management, project management, engineering and operations, arranged in a larger triangle.  Below this, and shown as a red box, we have contracted in functional services, technology suppliers, and engineering and project management contractors.

 

Figure 1:  Trust gap between owner PMT and contractors(Adapted from van Heerden, et al, 2015)

I refer to the interface between the owner project management team and contractors, suppliers and service providers, i.e. the gap between the blue triangles and the red box in Figure 1, as the trust gap.  Obviously, the working relationship between these parties, responsibilities and deliverables must be described in numerous carefully worded contracts, but significant trust is essential for project success.

Before getting to the factors that contribute to a widening trust gap, let us first consider the different roles and perspectives of the owner organisation and the owner project management team on the one hand, and the contractors on the other.

Different roles and perspectives for owners and contractors

Owner organisations, and specifically the owner project team, have a different role and perspective than the contractors in projects.  This difference stems from the fact that owner organisations implement projects to achieve strategic business objectives, whereas contractors only focus on delivering projects which meet the agreed performance standards, on time and within budget.  A summary of the different objectives, roles and perspectives of owners and contractors is given in Figure 2.

 

Figure 2: Different perspectives for owners and contractors

Project scope changes can lead to cost overruns and schedule slip and should be diligently managed to that which can result in significant, demonstrated improvement to the project, or that which is essential to achieve safety and compliance objectives.  However, from the point of view of an engineering contractor, scope changes could mean thousands of extra, recoverable, engineering hours.  Scope changes can also be used as an easy excuse for schedule slip by contractors.

Current trends at owner organisations

Owner organisations can be public companies, private companies and state-owned enterprises (SOE). Owner organisations typically own and operate the production facilities and/or infrastructure delivered by projects.

Over the past number of years, we’ve seen a gradual eating away at the numbers and experience base of primarily the engineering and project management departments in owner organisations.  Reasons for this are plentiful, and range from the inability to raise capital for projects, to poor strategic vision for the company.  Restructuring of top management and personnel cuts in the operations department also result in fewer individuals in these areas being available to focus on capital projects. Business and operations management are important stakeholders in any project, and play a significant role in the commissioning of facilities and the running of a sustainable business.  This situation is reflected in Figure 3 as mice eating away at the underbelly of primarily the engineering and project management departments, and so widening the trust gap.

 

Figure 3:  Widening of the trust gap (Adapted from van Heerden, et al, 2015)

In SOE, most top positions are political appointments.  In South Africa and in the Gupta state-capture era, important project and tender decisions were often made by individuals with little or no project management or engineering background.  The primary focus seemed to be self-enrichment, and not project success. There are many instances where SOE’s ignored their own tender regulations when awarding contracts, for example, South African railways officials imported brand new locomotives from Europe worth hundreds of millions of rand, despite explicit warnings that the trains are not suited for local rail lines (Myburgh, 2015). 

In South Africa, we have the additional burden of complying with Broad-Based Black Economic Empowerment (BBBEE) requirements, with the implication that individuals with extensive experience are made redundant, or are replaced with candidates with limited experience.  Project management and engineering departments thus not only become smaller, but tend to be staffed with less experienced personnel.

Trends at engineering and PM companies

Referring to Figure 3, it is obvious that the widening of the trust gap is not only as a result of personnel cutbacks, loss of project and engineering experience, and greed from the side of the owner organisation.

The trust gap can also open from the side of contractors, suppliers and service providers, as illustrated by the erosion of the red box in Figure 3.  Some of the factors that can contribute to this erosion of trust are listed below:

  • Financial standing:Construction companies in South Africa are in a difficult situation at present and personnel cutbacks are frequent.  Companies are downsizing and/or put up for sale;
  • Bribery: Attempts at bribery of technology suppliers, service providers and contractors by personnel from state or owner organisations prior to the signing of a contract or during the execution thereof can lead to strained relationships and would impact the chance of project success;
  • Communication:Unclear project objectives and charter, from an immature or understaffed owner project management team, combined with ad hoc and incomplete communication will erode trust;
  • Interface management: Insufficient effort or resources for proper client liaison by contractors and service providers, most likely due to in-house cost cutting at the contractors and service providers;
  • Relationships: Soured relationships following a history of schedule and cost overruns on previous projects for same owner organisation.  This can also be a concern based on underperforming end-products from previous projects and outstanding claims;
  • Coordination:No experienced managing contractor to keep a project on track, despite poor decision-making from the owner project management team.  This is a certain recipe for disaster; and
  • Incompetence:Disregard of owner company tender procedures may lead to the selection of incompetent contractors and service providers, often with catastrophic results.

Impact of a widening trust gap

IPA measure five dimensions of project effectiveness in their assessments to determine whether a project is a success, or not (Merrow, 2011). If a project surpasses the threshold limit for failure on any one of these dimensions, the project is considered a failure.  The five dimensions are cost overruns (>25%), cost competitiveness (>25%), schedule slip (>25%), schedule competitiveness (>50%) and production vs. plan in year 2 of operation.  Project success is defined as a lack of failure.

As the trust gap widens, the probability of remaining below the threshold limit for failure on any of these dimensions decreases, i.e. the wider the trust gap, the larger the likelihood of an unsuccessful project. 

Closing the trust gap

Given the state of the South African economy and political uncertainties, the question is whether the trust gap can be reduced to improve the likelihood of project success.  Two options immediately spring to mind:

  • Eliminate corruption: Elimination of corruption in specifically SOE should receive attention at the highest level and proper governance should be instituted to ensure that tender procedures are always followed.  The decision of which contractor to employ should always be made by a team of professionals with the necessary experience and knowledge, and using a predetermined decision matrix; and
  • Use external resources: The southern African market is awash with highly competent engineers and project managers, many of whom were put on early retirement due to the factors described in previous sections.  Many of them are available as consultants to fill critical vacancies on owner project teams, especially during the early project stages. These are people who understand the business requirements and can translate strategic business objectives into clear project objectives.

The future of the Project Management Office (PMO)

Taljaard (2018) describes the roles and responsibilities of the PMO very clearly in his recent article.  Based on the trends described above, it is obvious that owner organisations must make a fundamental mind-shift where it involves project implementation.  Although all the PMO functions remain relevant, I forecast a downscaling of some of the functions, and a possible sharing of some of the PMO roles, like project portfolio management and optimisation by other senior business leaders.

I forecast a growth in the number and utilisation of owner project team support professionals.  Lastly, the role of the owner project sponsor will become increasingly important.  For large and complex projects, the project sponsor is seen as an executive, full-time position by competent individuals who have been trained as sponsors, understand the business objectives and can make decisions based on facts

Figure 4 is summary of my view of the future of the PMO and the project sponsor.

 

Figure 4:  The future of the PMO

Closing remarks

The widening of the trust gap is very visible in southern Africa and may be applicable in most third world countries.  The wider the trust gap, the lower the probability of project success… Fortunately, the widening can be curtailed by improved governance and the elimination of corruption, as well as the use of freelance project management and engineering professionals.

OTC, and other consulting groups like us, should see an increase in the demand for our services, once owner organisations make a mind-shift in their approach to projects.

References

Alexander, M., 2018, 5 Project management trends to watch in 2018. Available from https://www.techrepublic.com/article/5-project-management-trends-to-watch-in-2018/.  Accessed on 28 December 2018.

Claassen, L., 2018, Ghanaian power firm ends troubled contract with Group Five.  Published in BusinessDay of 2 December 2018. Available from https://www.businesslive.co.za/bd/companies/energy/2018-12-02-ghanaian-power-company-ends-troubled-contract-with-group-five/. Accessed on 28 December 2018.

Evamy, M. (ed),2017, Future of project management., Publication by the Association of Project Management, Arup and The Bartlett School of Construction and Project Management at UCL.

Jordan, A., 2017, The technology-driven future of project management: capitalizing on the potential changes and opportunities.Publication by Oracle, projectmanagement.com and Project Management Institute.

Mattheys, K., 2018, Insight Article 052: Disrupting project controls – fast forward 20 years.  Available from http://www.ownerteamconsult.com/publications/  Accessed on 14 December 2018.

Merrow, E.W.,2011, Industrial megaprojects: concepts, strategies, and practices for success., John Wiley & Sons, Inc., Hoboken, New Jersey.

Myburgh, P-L., 2015, SA’s R600 million train blunder.Available from https://www.news24.com/SouthAfrica/News/SAs-R600-million-train-blunder-20150704.  Accessed on 28 December 2018.

Schoper, Y-G., Gemünden, H-G. & Nguyen, N.M., 2016, Fifteen future trends for Project Management in 2025.Published in the Proceedings of the International Expert Seminar in Zurich in February 2016 on Future Trends in Project, Programme and Portfolio Management.

Taljaard, J.J., 2018, Insight Article 054: The project management office (PMO).  Available from http://www.ownerteamconsult.com/publications/  Accessed on 14 December 2018.

van Heerden, F.J., Steyn, J.W. & van der Walt, D.,2015, Programme management for owner teams: a practical guide to what you need to know., OTC Publications, Vaalpark, RSA. Available from Amazon.

 

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Quantitative Risk Analysis for Projects

Quantitative Risk Analysis for Projects

By Jurie Steyn

This article is a continuation of a two-part series of articles on the basics of project risk management as published previously.  The two parts are as follows:

  • Part 1: Planning for project risk management (Steyn, 2018a); and
  • Part 2: Identify, analyse, action and monitor project risks (Steyn, 2018b).

In this article we delve deeper into the intricacies of quantitative analysis of the high risks to a project as identified though qualitative risk assessment.

Introduction

Project risk management covers all the activities and processes of planning for risk management, identification and analysis of project risks, response planning and implementation, and risk monitoring on a project.  There are seven project risk management steps as discussed in the two articles referred to above, namely:

  • Step 1 – Plan Risk Management;
  • Step 2 – Identify risks and opportunities;
  • Step 3 – Perform qualitative risk analysis;
  • Step 4 – Perform quantitative risk analysis;
  • Step 5 – Plan risk responses;
  • Step 6 – Implement risk responses; and
  • Step 7 – Monitor risks.

In this article, the focus will be on Step 4: perform quantitative risk analysis.  We will see that quantitative risk analysis is a way of numerically estimating the probability that a project will meet its cost and time objectives. Quantitative analysis is based on a simultaneous evaluation of the impact of all identified and quantified risks, both prior to and after taking mitigating actions.

The nature of project risks

Most of our readers would be familiar with the project management triangle; a triangle with scope, cost and schedule at the three apexes, and quality in the body of the triangle.  In our opinion, quality is a function of appropriate design specifications and prudent design to meet the business objectives. The scope of a project can be diligently managed and project risks should not have an impact, unless it can be shown that changes are required to address safety concerns.

Unmanaged risks may result in problems such as schedule and/or cost overruns, performance shortfall, or loss of reputation.  Performance shortfalls can be addressed by redesign and improved equipment and technology, all of which require additional time and money.  Reputation damage may also prove to be very costly and time consuming to overcome.  Opportunities that are exploited can lead to benefits such as schedule and/or cost reductions, improved overall project performance, or reputation enhancement.

The bottom-line is that all project risks and opportunities can be expressed in terms of their impact on project schedule and project cost.  Some risks will only impact cost, some only schedule, and some will directly impact both cost and schedule.  However, impacts on project schedule can also be expressed in terms of monetary value, based on the extended period that contractors and construction personnel will be required and delays in beneficial operation of the facility.

Risks and opportunities can therefore have a direct bearing on the overall project schedule and project cost.  By following steps 1 to 3 of the risk management process, we can identify the high priority risks and opportunities for inclusion in the quantitative risk assessment.

The nature of cost/schedule estimates

Project uncertainty changes over time. As the definition of a project advances through the project life-cycle, the level of uncertainty diminishes. This is reflected in the OTC Stage-Gate Model and gate criteria for moving from one gate to the next. The project stages provide a convenient way to characterise the state of planning and design, as well as other information about a project.

Projects in the prefeasibility stage have more unknowns than projects in the feasibility and/or planning stage. Projects moving through the implementation stage (final design and construction), in contrast, would be expected to have a comprehensive set of engineering drawings, operating assumptions, and cost detail. There could still be substantial uncertainty about certain aspects of a project well advanced in design, but most high-cost characteristics of the project will have been finalised.

Project risks and opportunities similarly change. The number of risks faced by a project would be expected to decrease as design detail advances to eliminate or avoid potential problems. Risks are also reduced as national authorities issue environmental permits and finalise other matters like tax dispensations and project subsidies.

If a project’s estimated total cost is thought of not in terms of a single dollar value, but as a potential range in costs that reflects the effects of risks and opportunities, the potential range in costs would be expected to narrow over time and converge upon a most likely value. The narrowing in cost range is shown in Figure 1. This narrowing in range is also expected for project schedule as the project moves through the stages.  Note that the only time in the project life-cycle when the schedule and final cost are known with certainty, is when the facility is handed over to the end-user and the costs have been reconciliated.

Figure 1:  Project cost varies with uncertainty and time (Adapted from Parsons Transportation Group, 2004)

Methodologies for quantified risk analysis

Different methods have been developed to provide realistic cost and schedule estimates over the years. Traditionally, project owners have accounted for the possible impacts of risks in a deterministic way by establishing contingencies, or add-ons, to a base project cost or base project schedule. Contingencies typically are single-value allowances and set using simple rules of thumb.

Methodologies for incorporating risk in the cost and schedule estimates include one, or more, of the following:

  • Gantt Charts: Provides a graphical summary of the progress of several project segments by listing each segment vertically on a sheet of paper, representing the start and duration of each task by a horizontal line along a time scale, and then representing the current time by a vertical line moving from left to right. It is then easy to see where each task should be, and to show its status. A serious drawback is that it does not easily show the interrelationship of tasks;
  • Program Evaluation Review Technique, or PERT: The basis of PERT was a detailed diagram of all anticipated tasks in a project, organised into a network, which represented the dependence of each task on the ones that needed to precede it.  In addition, planners would estimate or elicit a probability distribution for the time each task would take from expert engineers.
  • Critical Path Method, or CPM: CPM also uses a network representation, but initially did not try to estimate probability distributions for task durations. The deterministic nature of the network allowed for easier calculation. It facilitated the determination of the critical path, the set of tasks that drove the final project length. CPM can be used in conjunction with Monte Carlo simulation;
  • Expected Monetary Value, or EMV: EMV is used in conjunction with Decision Tree Analysis (DTA).   DTA allows the organisation to structure the costs and benefits of decisions when the results are determined in part by uncertainty and risk.  Solution of the decision tree helps select the decision that provides the highest weighted average Expected Monetary Value or expected utility to the organisation;
  • Fault Tree Analysis: A Fault Tree Analysis is the analysis of a structured diagram which identifies elements that can cause system failure.  The effective application of this technique requires a detailed description of the area being discussed.  The undesired outcome is first identified and then all possible conditions/failures which lead to that event are identified. This reveals potentially dangerous elements at each phase of the project.
  • Sensitivity Analysis: Considered the simplest form of risk analysis and determines the effect on the whole project of changing one of its risk variables, e.g. delays in design or cost of materials.  It often highlights how the effect of a single change in one risk variable can produce a marked difference in the project outcome:
  • Monte Carlo simulation: Used primarily for project schedule and cost risk analysis in strategic decisions.  It specifies a probabilistic distribution for each risk and then considers the effect of risks in combination.   Calculates quantitative estimates of overall project risk and reflects the reality that several risks may occur together on the project.

In the further discussions, only the probabilistic approach of Monte Carlo simulation will be considered.

Monte Carlo simulation

Structure of QRA process

One first needs to understand the overall structure of the quantitative risk analysis process before getting to the detail of Monte Carlo simulation.  The process illustrated in Figure 2 is aligned with the PMI standards for project management, namely the PMBOK Guide, 6th edition (PMI, 2017) and project risk management (PMI, 2009).

Figure 2:  Structure of the quantitative risk analysis process (Adapted from PMI, 2017)

The process starts with the identification of significant and high risks though qualitative analysis. These risks must be examined for duplication, similarity of triggers, cost and/or schedule impacts and other interrelationships.  Common root cause risks likely to occur together are addressed by correlating the risks that are related.  The collection of high-quality data about risks can be difficult, because it’s not available in any historic database and should be gathered by interviews, workshops, and other means using expert judgment.

Next, an appropriate model of the project is required as the basis for quantitative risk analysis. Project models most frequently used in quantitative risk analysis include the project schedule (for time) and line-item cost estimates (for cost). Quantitative risk analysis is especially sensitive to the completeness and correctness of the model of the project that is used.  This is followed by the application of the Monte Carlo process to simulate the probabilistic cost and/or schedule for the project.

Process

In a Monte Carlo analysis, deterministic cost and schedule values in the project models are replaced by probability distributions reflecting the possible range of outcomes for each of these variables.  A random number generator is used to calculate a value for each of the probability distributions to produce a cost/schedule value. The same model is run repeatedly, hundreds or thousands of times. Each time it runs, the value is recorded and presented as a probability distribution. When the simulation is complete, we can look at statistics from the simulation to understand the project risk as represented in the model.

The pertinent issue is how to convert a cost/schedule range for each of the significant and high risks into a probability distribution.  Risk impacts are expressed as discrete or continuous probable outcomes within a specified range, for example, with lower and upper limits for costs and/or time. The distributions are often simplified, due to the limited data points available from objective or subjective information or to be consistent with the level of accuracy that can be expected in the risk quantification effort.  Probability distributions are a convenient way to represent this detail, and they lend themselves to statistical analysis.

The type of probability distribution should be chosen (e.g. by the lead analyst) to best reflect the perceived range of impacts of a risk event. Some common distributions used to characterise risks are shown in Figure 3.

Figure 3:  Probability distributions for quantifying risk impacts (Parsons Transportation Group, 2004)

More accurate cost estimates

When analysing the potential effects of risk and uncertainty on project cost a project is divided into two parts.  The first element is the project base cost, which is the cost excluding add-on contingencies to cover unknowns, or risks.  The second element of the project includes the uncertainties and opportunities that could add to (or, in turn, subtract from) the cost of the project.  This is the element of project risk.

Figure 4 shows this relationship from the perspective of project costs. Base costs tend to be large and relatively well defined. Risk costs tend to be smaller than base costs and can vary considerably. Total cost is simply the sum of these two cost elements. Base costs and risk costs are shown as distributions since, in risk assessment, both elements are uncertain. Even base costs of a project include some level of uncertainty; no two individuals would likely agree on an exact dollar number even if all assumptions were held in common.

Figure 4:  Base cost, plus risk cost, gives total project cost probability spread (Parsons Transportation Group, 2004)

Common cost risk assessment outputs include a probability density function of expected total cost, a cumulative S-curve of project cost, as well as a tornado diagram of primary risk drivers or events that have the most influence on the project.

More accurate project schedules

Risk assessment of a project requires three steps; first create the CPM schedule, then gather risk information such as optimistic, most likely, and pessimistic durations and probability distributions, and finally, simulate the network using a Monte Carlo approach. The greatest amount of effort and judgment goes into developing the three-point activity duration estimates to use in a schedule risk analysis.

The results of a schedule risk analysis are typically displayed as a histogram (an approximation to a probability density function) providing the frequency of schedule outcomes (dates) and an S-Curve (a cumulative distribution function) providing the cumulative probability of achieving dates associated with given milestones or overall project completion.  Results for a hypothetical example are shown in Figure 5.

Other types of outputs include descriptive statistics, a probabilistic critical path, and a probabilistic sensitivity analysis. All these results should be evaluated for indicators of schedule risk.

Figure 5:  Example of schedule histogram and S curve (Hulett, 2017)

Integrated cost/schedule analysis

Depending upon the nature of risks and the desired outcomes of the analysis, risk cost and schedule impacts can be evaluated independently as discussed in the preceding paragraphs, or together, in an integrated manner. The disadvantage of independent evaluation is that the interrelationship of cost and schedule cannot be determined. Integrated analysis converts duration impacts to cost impacts through escalation. It is more difficult technically, however, to evaluate cost and schedule together and may not be necessary in all cases, depending on the nature of the significant risks to a project.  Analytical tools are available to assist in integrated analysis.

Pre/post risk mitigation

Using information from risk assessment, a project owner can evaluate measures to mitigate cost and schedule risks. Effective risk management will reduce impacts and make it more likely the project will be on time and within budget without the owner having to make additional contingency allowances.  Effective risk mitigation will improve a project’s probable cost, as shown in Figure 6. Proposed risk mitigation is documented in a risk management plan. This becomes the project owner’s action plan for effectively minimising risk impacts to a project.

Figure 6:  Comparison of project cost estimates before and after risk mitigation (Parsons Transportation Group, 2004)

Software

To determine probabilistic project costs, software such as MS Excel with @RISK™, RiskAMP™, CrystalBall™, ModelRisk™ or Deltek Acumen Risk™ can be used with any estimating method.

For schedules, software such as MS Project with @RISK™ or Risk+™, Primavera Risk Analysis software with Monte Carlo™ or Deltek Acumen Risk™ can be used. Alternatively, if a critical path schedule model can be developed in a spreadsheet, MS Excel with @RISK™, RiskAMP™, CrystalBall™ or ModelRisk™ can be used to simulate risks directly.

The result is a probability distribution of the project’s cost and completion date based on the identified risks in the project.

Concluding remarks

Proper project risk management is an integral part of any project.  It is an iterative process which continues throughout the project cycle. Quantitative risk analysis is a logical next step after qualitative risk analysis and should be performed at key stages of the project life-cycle.  It is a way of numerically estimating the probability that a project will meet its cost and time objectives.

Monte Carlo simulation is becoming the project manager’s best weapon for quantitatively analysing project risks. It is an extremely powerful tool that allows project managers to incorporate uncertainty and risk in their project plans and set reasonable expectations regarding cost and schedule on their projects. The results of simulation are quantified, allowing project managers to better communicate their arguments when management is pushing for unrealistic project expectations.  However, Monte Carlo simulation is still not very popular in current project management practice, primarily due to its statistical nature.

For those of you looking for more information on quantitative risk analysis, I recommend the books by Cooper et al (2014), Hulett (2009) and Vose (2008).

References

Cooper, D., Bosnich, P., Grey, S., Purdy, G., Raymond, G., Walker, P. & Wood, M., 2014, Project risk management guidelines; managing risk with ISO31000 and IEC 62198, 2nd ed. John Wiley & Sons, Ltd. Chichester, West Sussex.

Hulett, D.T., 2009, Practical schedule risk analysis.  Gower Publishing Limited, Farnham, Surrey.

Hulett, D.T., 2017, Modern Methods of Schedule Risk Analysis using Monte Carlo Simulations. In Proceedings of the 2017 Large Facilities Workshop, held in Baton Rouge, LA.

Parsons Transportation Group, in association with Touran, A., 2004, Risk analysis methodologies and procedures. US Dept. of Transportation, Federal Transit Administration.

PMI (Project Management Institute, Inc.), 2017, A guide to the project management body of knowledge (PMBOK Guide), 6th ed. PMI Book Service Center, Atlanta.

PMI (Project Management Institute, Inc.), 2009, Practice standard for project risk management. PMI Book Service Center, Atlanta.

Steyn, J.W., 2018a, Introduction to Project Risk Management: Part 1 – Planning for risk management.  Available from http://www.ownerteamconsult.com/publications/  Accessed during May 2018.

Steyn, J.W., 2018b, Introduction to Project Risk Management: Part 2 – Identify, analyse, action and monitor project risks.  Available from http://www.ownerteamconsult.com/publications/  Accessed during May 2018.

Vose, D., 2008, Risk analysis – a quantitative guide, 3rd ed.  John Wiley & Sons, Ltd. Chichester, West Sussex.

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Intro to Project Risk Management – Part 2 – Identify, action and monitor project risks

Intro to Project Risk Management – Part 2 – Identify, action and monitor project risks

By Jurie Steyn

This article is the second of a two-part series of articles on the basics of project risk management.  The two parts are as follows:

  • Part 1: Planning for project risk management; and
  • Part 2: Identify, analyse, action and monitor project risks.

Part 1 dealt with planning of the project risk management process and described what should be included in a project risk management plan.  This article deals with the implementation of the project risk management plan.

Introduction

As an introduction to this article, we revisit the overview of project risk management as presented in the first of this series of articles.

Project risk management covers all the activities and processes of planning for risk management, identification and analysis of project risks, response planning and implementation, and risk monitoring on a project.  There are seven project risk management steps, as follows:

  • Step 1 – Plan Risk Management: Refer to the Part 1 article for an overview of this step (Steyn, 2018);
  • Step 2 – Identify risks and opportunities: The identification of individual project risks and opportunities in a manner which makes analysis possible;
  • Step 3 – Perform qualitative risk analysis: Assess and prioritise individual project risks and opportunities for further analysis or action, based on their probability of occurrence and potential consequences;
  • Step 4 – Perform quantitative risk analysis: The process of performing numerical analysis to determine the most likely outcome of identified high priority risks and opportunities;
  • Step 5 – Plan risk responses: The development of risk reduction options, strategy selection, and agreement on preventive and contingency actions to reduce overall project risk exposure;
  • Step 6 – Implement risk responses: The process of implementing agreed-upon risk response plans by the risk owner, according to the agreed upon timeline; and
  • Step 7 – Monitor risks: Monitor the progress with the implementation of agreed-upon risk response plans, identify and analyse new risks, and evaluate risk process effectiveness.

Unmanaged risks may result in problems such as schedule and/or cost overruns, performance shortfall, or loss of reputation.  Opportunities that are exploited can lead to benefits such as schedule and/or cost reductions, improved overall project performance, or reputation enhancement.

This article focuses on steps 2 to 7 of the project risk management process.  We also reiterate that this introduction to project risk management is aligned with the PMI Global Standard for project management, namely the PMBOK Guide, 6th edition, which incorporates ANSI/PMI 99-001-2017 (PMI, 2017).

Step 2:  Identify project risks

Opening comments

This involves the identification and documentation of project risks and opportunities. This process takes place throughout the project life-cycle.  Risk identification is the responsibility of all project stakeholders.

Techniques for identifying risks

Tools and techniques for identifying risks and opportunities include:

  • Expert judgement: Expertise should be obtained from individuals or groups, using reports or individual interviews, with appropriate knowledge of similar projects or business areas;
  • Brainstorming: Perform a brainstorming exercise to obtain a comprehensive list of individual risks and opportunities, as well as sources of overall project risks;
  • Checklists: Checklists are lists of items, actions, or points to be considered when identifying risks and opportunities.   The nine risk categories we use helps ensure that all risks are covered;
  • SWOT analysis: It is always beneficial to start with a SWOT analysis of the project to identify potential risks and opportunities.  Weaknesses and Threats give rise to risks and Strengths and Opportunities lead to opportunities for achieving the objectives; and
  • Data analysis tools: Other data analysis tools include root cause analysis and assumption and constraint analysis.    Analysis of project documentation may also highlight risks and opportunities.

Risk statements

Risk statements need to be structured descriptions of the risks which separate cause, risk and consequence.  For example: Because of (1) an existing condition, an (2) uncertain event may occur, which would lead to (3) an effect on the project objectives.  In this case, the numbering refers to:

  1. The Cause;
  2. The Risk or uncertain event, and;
  3. The Consequence.

Writing risk statements in this manner makes the risk assessment process much simpler.  To force the writing of risk statements in this format, use a table with three columns entitled Cause, Risk and Consequence.

Risk statements, covering identified risks and opportunities, are recorded in the project risk register.

Risk register

The output of the project risk identification process is a risk register.  At this stage the risk register should contain:

  • Lists of risks and opportunities: Risks and opportunities, each with a unique identifier, and grouped according to the chosen risk breakdown structure. We use the STEEPCOIL risk categories;
  • Potential risk owners: Potential risk owners for risks and opportunities are listed in the risk register. This will be confirmed during the qualitative risk analysis process step (Step 3); and
  • Potential risk responses: Any potential risk responses, as identified during the risk identification, are recorded in the risk register. This will be confirmed during the plan risk responses process (Step 5).

Step 3:  Qualitative risk analysis

Opening comments

The qualitative risk assessment process is performed to assess and prioritise the individual project risks and opportunities, as listed in the risk register, for further analysis or action, based on their probability of occurrence and potential consequences.  Qualitative risk analysis also ensures that each high-priority risk has an owner who will take responsibility for planning an appropriate risk response and ensuring that it is implemented.

Probabilities and potential consequences

Qualitative risk analysis is best performed by a group of project management and risk management professionals.  It is performed by considering probability and potential consequences of each of the risks in the risk register, based on the definitions of probability and impact for the project as specified in the risk management plan.  Probabilities and consequences must be carefully assessed and regularly reviewed and updated throughout the project life-cycle. In reviewing completed projects, it has been found that issues causing poor project performance, were often captured in the risk register, but not addressed because of low perceived impact.

Results are then mapped on the risk matrix, an example of which is shown in Figure 1.  This enables the prioritisation of risks for further (quantitative) analysis and planning of risk responses.

Project Risk Management 2 Fig 1

Figure 1:  Risk matrix with risks qualitatively assessed and mapped

Typically, risks falling in the red and orange squares necessitate further action, whether it is in the form of planning risk responses or performing quantitative risk analysis, if this process is required in the project risk management plan.

Step 4:  Quantitative risk analysis

Opening comments

Quantitative risk analysis is not required for all projects.  A robust quantitative analysis depends on the availability of high-quality data about individual project risks and other sources of uncertainty, as well as a sound underlying project baseline for scope, schedule, and cost.  A quantitative risk analysis provides a monetary value in probabilistic terms for the overall project risk.

It usually requires specialised risk assessment software and expertise in the development and interpretation of risk models and can prove costly in terms of time and money. It also consumes additional time and cost. The need for and use of quantitative risk analysis for a project will be specified in the project’s risk management plan.

Data analysis

A selection of data analysis techniques can be used for quantitative risk analysis, including:

  • Simulation: Simulations are typically performed using Monte Carlo analysis.  Computer software is used to iterate the quantitative model several thousand times. The input values (e.g., cost estimates or duration estimates) are chosen at random for each iteration. The output is a predicted S-curve of predicted total project cost;
  • Sensitivity analysis: Sensitivity analysis helps to determine which project risks have the most potential impact on project outcomes. It correlates variations in project outcomes with variations in elements of the quantitative risk analysis model; and
  • Decision tree analysis: Decision trees are used to support selection of the best of several alternative courses of action. The end-points of branches in the decision tree represent the outcome from following that path.

Outputs

The project risk report must be updated to reflect the results and findings of the of the quantitative risk analysis.  The project risk report would, in general, show the monetary value of the unmitigated risk profile, the mitigated risk profile, as well as the expected cost to implement the risk management plan.  The cost of implementation can then be compared with the expected risk reduction quantum to judge the effectiveness of the plan.

Step 5:  Plan risk responses

Opening comments

Once risks have been identified and assessed, the next step is to decide on the appropriate action to take based on the risk information available.  Step 5, the planning of risk responses, involves developing options, selecting strategies, and agreeing on actions to address overall project risk exposure, as well as how best to address individual project risks and opportunities.  This section is divided into strategies to deal with risks, or threats, and those to deal with opportunities.

Strategies for risks/threats

Five typical response strategies for risks/threats are to:

  • Escalate: Escalation is appropriate when the project team agrees that a threat is outside the scope of the project, or that the proposed response would exceed the project manager’s authority.  Threats are then escalated to appropriate and higher levels in the organisation. Escalated risks should remain on the risk register for follow-up;
  • Avoid:  Use this strategy to eliminate uncertainty by reducing scope, changing to more proven technologies and methods, and designing in redundancy, thereby reducing the probability of the risk impacting the project to zero;
  • Transfer:  Use this strategy to transfer the liability or ownership of the risk to others by renegotiating contracts, using risk sharing or taking out appropriate insurance. It often involves payment of a risk premium to the party taking on the threat;
  • Reduce:  This strategy aims to reduce a risk to acceptable levels by reducing the probability of an occurrence through preventive actions, and/or reducing the severity of impacts when things go wrong through contingency actions; and
  • Accept:  Accept the risk as is and be willing to live with the consequences. This may be appropriate for low priority risks or where it may not be possible or cost-effective to address a threat.

The above strategies serve the purpose of lessening the risks, i.e. moving out of the red, or orange, zone and into a lower risk area.  When action is taken to reduce the probability of an occurrence, it is called preventive action.  Where action is taken to minimise the severity or consequences of an impact, it is called a contingency action.

Avoidance and reduction of risks are normally the most effective as the work remains within the project team.  Escalation often leads to inaction by the higher party, unless the follow-up is effective.  Contractual risk transfer is mostly ineffective.  Be aware that risk acceptance may be based on inaccurate assessment of potential consequences, leading to serious problems later.

Strategies for opportunities

Similar to the above, there are also five response categories for dealing with project opportunities, as follows:

  • Escalate: Escalation is appropriate when the project team agrees that an opportunity is outside the scope of the project, or that the proposed response would exceed the project manager’s authority.  Opportunities are then escalated to appropriate and higher levels in the organisation;
  • Exploit:  Use this strategy for high priority opportunities where the project team wants to ensure that the opportunity is realised. Take actions to achieve identified benefits by increasing probability of the occurrence to 100%;
  • Share:  Transfer ownership of an opportunity to a third party so that it shares some of the benefit if the opportunity occurs. Sharing opportunities can be achieved by special-purpose companies or joint ventures;
  • Enhance:  This strategy aims to improve the probability of an occurrence, or potential benefits of an opportunity. Taking steps to improve the probability of an occurrence by focusing on its causes is normally more effective than attempting to improve benefits; and
  • Accept:  Accept the opportunity as is, without taking any proactive action. This strategy is appropriate for low-level opportunities, or where it may not be possible or cost-effective to intervene.

Step 6:  Implement risk responses

Opening comments

This step is the process of implementing agreed-upon risk response plans.  The key benefit of this process is that it ensures that agreed-upon risk responses are executed as planned, to minimize individual project threats, and maximize individual project opportunities.

Monitor actions and progress

Risk owners are responsible for implementing the agreed-upon risk response plans.  Progress with actions resulting from the implementation of risk responses must be monitored and managed by the responsible parties, namely the business manager, project sponsor and project manager.  If actions are not taken, as agreed for the high-level risks, the total risk management action will be a waste of time and a failure.  Progress with actions is monitored on, at least, a monthly basis at project review meetings.

Residual risk

Residual risk is the risk that remains after acting on a high-level risk (red or orange zone) on the matrix. Only once the agreed action steps, based on the five risk response strategies, have been completed, can a risk be reassessed, and the residual risk plotted on the risk matrix.

Step 7:  Monitor project risks

Opening comments

Step 7 is the process of monitoring the implementation of agreed-upon risk response plans, tracking identified risks, identifying and analysing new risks, and evaluating the effectiveness of the risk process throughout the project.

Risk review

The project risk register needs to be reviewed on a frequent basis, because new information may come to light, situations may change rapidly which necessitate the reassessment of probabilities and consequences, and new opportunities may arise.  Also, once contingency and preventive actions have been completed, the risk rating should be changed to the residual risk.  It is proposed that the project risk and opportunity register is reviewed on a quarterly basis.

Risk audits

The integrity of the project risk management process is the responsibility of the project manager.  Risk audits can be used to determine if the project’s risk management plan is followed as described, or whether remedial steps need to be taken.  Frequency of risk audits should be as per the project risk plan.

Concluding remarks

Proper project risk management is an integral part of any project.  It is an iterative process which continues throughout the project cycle.  However, the process as described in this series of two articles is relatively simple to implement and follow.

Risk management activities can require significant time and effort.  Provision must be made in the project cost estimate for risk management activities and for the appropriate risk responses.  The inclusion of risk management professionals on the project team is recommended to facilitate the risk management activities.  Risk management professionals should be an integral part of the project team to ensure a good understanding of the project and the environment within which it is being executed.

Effective risk management will certainly improve the probability of success for any project or programme.

References

Steyn, J.W., 2018, Introduction to Project Risk Management: Part 1 – Planning for risk management.  Available from http://www.ownerteamconsult.com/publications/  Accessed during January 2018.

PMI (Project Management Institute, Inc.), 2017, A guide to the project management body of knowledge (PMBOK Guide), 6th ed. PMI Book Service Center, Atlanta.

Contact OTC for assistance with project risk management in your organisation.