WHY RISK MANAGEMENT ? Experience and Lessons Learned in Project Risk Management over 30 years Bob Harvey PE 1 Copy Right, Robert N. Harvey THE CHALLENGE -- Cost/Schedule Growth of Large Capital Projects 0% REF: E M D E D I Los Angeles Cathedral Denver International Airport Central Artery-Tunnel Project 50% Hoover Dam Visitor Center 96% 96 % El Toro “Y” Fwy Modification 202% % 196% 202 196% 178% % 165% 165 % 178 149% 149 % Getty Center Los Angeles City Hall Retrofit Ronald Reagan Bldg. & Int’l Airport Chek Lap Kok Airport Rail Link (HK) Coor’s Field (Denver) (Wash, DC) DC) World Bank Headquarters (Wash, Channel Tunnel L.A. Convention Center Addition Seattle Light Rail Project (Seattle) Staples Center Arena (Los Angeles) Central Artery / Tunnel (Boston) No. Outfall Sewer (San Fernando Valley) 30% % 25% 25 % 30 50% 50 % 262% 262 % 244% 244 % L.A. Coliseum Repair 12% % 14 14% % 11% 11 % 12 40% 40 % 81% 76% %81% 75% % 76 69% 69 % 75 67% 67 % 61% 61 % 244% Disney Concert Hall 50% S.F BART Extension to S.F Int’l Airport 100% L.A. Central Public Library Renovations 150% (Segments 1,2&3 No. Hollywood) 200% L.A. Metro Red Line 250% Eastside Reservoir Project (MWD of So. Calif.) 300% E L A E E X U L L L L E O U E L ARTICLE DATE 1/11/1999 7/1/1998 9/6/1994 3/1/1999 9/6/1994 4/3/98 10/25/99 10/18/93 10/12/93 1/3/94 4/10/95 5/1/92 2/14/96 1/25/98 12/8/99 12/16/94 12/1/97 4/24/95 6/7/91 2/26/00 1/11/99 ORG. EST. $M $1,970.0 $4,006.7 $109.4 $1,200.0 $19.30 $8,000.0 $250.0 $310.0 $9,210.0 $186.0 $123.0 $1,560.0 $362.0 $153.0 $110.0 $35.0 $360.0 $41.6 $55.0 $5,000.0 $1,500.0 $45.0 CUR. EST. $M $2,190.0 $4,501.8 $124.8 $1,500.0 $25.00 $11,200.0 $375.0 $500.0 $15,350.0 $314.0 $215.0 $2,750.0 $656.0 $300.0 $274.0 $92.7 $1,000.0 $123.0 $166.0 $12,200.0 $5,000.0 $163.0 REFERENCES:: 3/5/98 A Associated Press, D Daily News, E Engineering News-Related, I U.S. DOT Inspector General L Los Angeles Times, M LACMTA, N New Times, O Orange County Times, U USA Today, X Miscellaneous Copy Right, Robert N. Harvey 2 THE CHALLENGE – Continue and Increases in $ Billion Cost Growth on 21 Large Construction Projects Actual Cost $46.7 Billion 50 45 40 35 30 25 20 15 10 5 0 Original Cost Estimate $29.8 Billion Average Over Original Cost 56.7% 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Projects NOTES :  Projects consisted of a sample of airports, light & heavy rail, sports centers and buildings that were completed in the 1990s.  Of the 21 projects, 9 were privately financed and the remaining 12 were publicly financed.  Six of the projects are mega projects -- originally estimated to cost $1 billion or more.  The percent over original estimate for private projects averaged 72% while public projects were over by an average of 48%.  The costs at completion ranged from 11% over the original estimate to 262% over.  Not all projects experience cost growth of this magnitude, but no project is immune. Project Delivery Institute 1999 Project Cost Overruns (%) Sydney Opera House Suez Canal Concorde Brooklyn Bridge 1,400 1,900 1,100 100 Flyvbjerg, Mega Project and Risk (Cambridge 2001) Copy Right Robert N. Harvey 2011 3 What Motivates Me Paul Teicholz, Ph.D. Professor (Research) Emeritus, Dept. of Civil and Environmental Engineering, Stanford University Copy Right, Robert N. Harvey 4 Time Lines: Risk Management Tools and Oversight Tools EXXON MIT 1970 1980 Lower Manhattan Construction Command Center Port Authority of NY & NJ 1995 URS 2011 FUTURE 5 Copy Right, Robert N. Harvey RESIDENTIAL #: COMMERCIAL #: HOTEL #: RETAIL #: INSTITUTIONAL #: INFRASTRUCTURE #: PARK #: 174 95 32 174 27 24 48 *SOME ARE MULTIPLE USE. HOTEL KEYS: 6,707 RESIDENTIAL UNITS: 28,869 Lower Manhattan: Envisioning the Future 30% 17% 7% 31% 4% 2% 9% COMPLETED: PLANNING: UNDER CONSTRUCTION: STALLED: TOTAL: 57,263,514 SQFT 9,367,328 SQFT 23,198,215 SQFT 4,826,837 SQFT 94,655,89 SQFT 60.5% 9.9% 24.5% 5.1% TOTAL LANE MILES IN LOWER MANHATTAN (SOUTH OF CANAL STREET) 109MI APPROXIMATE LANES MILES OF STREET PROJECTS COMPLETED 49MI September 2011 Value Planning/Risk Analysis Model Selected Value Planning/Value Engineering/Risk Mgt studies I directed lead and managed. These studies all used Model for “Date/Cost Certain Program Planning and Management.” 1. 2010 WORLD TRADE CENTER TOTAL PROGRAM RECONCILIATION LED THE DEVELOPED THE NEW SCHEDULE AND BUDGET THAT THE PROGRAM THAT IS CURRENTLY USING KNOW AS THE “ROAD MAP”($15B) (P3) 2. MOYNIHAN STATION REDEVELOPMENT WORKSHOP (P3) 3. WTC PUBLIC SPACE MASTER PLAN/DEVELOPMENT (ULTIMATELY LED TO PRIVATIZATION OF THE WORLD TRADE CENTER AND ITS MALL CONCOURSE) (P3) 4. JFK IAB REDEVELOPMENT (SCHIPHOL P3) 5. PROGRAM DEVELOPMENT STANDARDS/GUIDELINES 6 . FINANCIAL RISK ANALYSIS GUIDELINES 7. AIRPORT ACCESS PROJECT P3 FINANCIAL FEASIBILITY 8. EAST SIDE ACCESS PROGRAM ($5 BILLION) EAST SIDE ACCESS - STATION CONFIGURATION, OPERATIONS AND FIRE LIFE SAFETY - CONCEPT VALUE PLANNING EAST SIDE ACCESS - GRAND CENTRAL TERMINAL, ARCHITECTURAL, STRUCTURAL, AND HVAC - VALUE PLANNING 9 . EAST SIDE ACCESS - YARDS AND SHOP LINCOLN TUNNEL TOLL PLAZA REDEVELOPMENT PROGRAM 10. HOLLAND TUNNEL TOLL PLAZA REDEVELOPMENT PROGRAM 11. REGION-WIDE EZ PASS ELECTRIC TOLLS COLLECTION PROGRAM DEVELOPMENT 12. WTC OPERATION CONTROL CENTER 13. MULTIPLE SECURITY RELATED WORKSHOPS FOR NEW YORK CITY LOCATED FACILITIES SUCH AS, UNDERWATER TUNNEL, GRAND CENTRAL TERMINAL, PENN STATION, ETC. 13. WTC PERMANENT SECURITY 14. WTC BLAST RECOVERY 15. WTC EMERGENCY POWER 16. PABT BUS RAMP REHABILITATION 17. PATH CONSOLIDATED MAINTENANCE FACILITY 18. ALL AIRPORT SECURITY SYSTEM 19. AIRPORT ACCESS SEGMENTATION ANALYSIS 20. AIRPORT ACCESS TECHNICAL ANALYSIS 21. AIRPORT ACCESS PROJECT FINANCIAL FEASIBILITY 22. JFK MASTER PLAN 23. JFK ROADWAYS REDEVELOPMENT 24. JFK POLICY FACILITY 25. JFK RESTRICTED SERVICE ROADS 26. EWR FEDERAL INSPECTION SERVICES 27. EWR LANDSIDE ROADWAY DEVELOPMENT PROGRAM 28. EWR PARKING STRUCTURE 29. LGA GARAGE IMPROVEMENTS 30. LGA TERMINAL MODERNIZATION 31. NEW YORK PASSENGER SHIP TERMINAL REDEVELOPMENT 32. PORT FACILITY SIGNAGE 33. PORT FACILITY ROOF SOLAR INSTALLATIONS 34. PATH MAINTENANCE FACILITY 35, LONG-SPAN BRIDGE REPLACEMENT PROGRAM 36. WTC MEGA HIGH-RISE FIRE PROTECTION 37. WTC MEGA HIGH-RISE ELEVATOR CONTROLS 38. WTC MEGA HIGH-RISE ELECTRICAL UPGRADE 39 NEW STATEN ISLAND/NJ BRIDGE DESIGN AND DEVEL. PROGRAM 40.OUTERBRIDGE CROSSING REBUILDING PROGRAM 41. HOLLAND TUNNEL NEW VENTILATION SYSTEM PROGRAM Copy Right, Robert N. Harvey 7 Risk Allocation Continuum Why is Risk Mgt. More Important Than Ever? • Traditional Project Delivery • CM/Build • Design-BidBuild • Holds Contracts for Owner – Shares Risks • Construction Mgt at Risk (CM@Risk) • Target Price • Guaranteed Maximum Price (GMP) After Partial Plans/Quotes • Risks Mitigated • Design-Build (Turnkey) • EPC • Performance Spec • DBOM (SuperTurnkey) • Performance Spec • Operate and Maintain • Financed • Dept / Equity Participation Copy Right, Robert N. Harvey 8 Benefits of Risk Management • Relative quality measures show that large projects without risk management as part of professional program management on average: – Result in the lowest possibility of meeting the owner/developer’s expectations – Take longer to deliver – Have higher unit cost Copy Right, Robert N. Harvey 9 Challenges of Successfully Implementing Risk Mgt. • Political timing/legacies • Ends justifying the means • Anchoring and Tunneling • “Big is Bad” (scalability) • The Ripple Effect: “Law of Unintended Copy Right, Robert N. Harvey 10 Challenges to the Acceptance of Risk Mgt. • The answer driven from the top, Political Agendas • The need to believe (Dan Gilbert) • Narrative Fallacy: The overall desire to follow narratives • Confirmation Bias • The Construction Industry is slow to evolve • The Black Swan (Driven by our increasingly recursive environment) 11 Integration of Risk Management into Value Management • The use of the “probability wheel” and other exercises to other exercises to reduce anchoring, bias and tunneling • Because the Qualitative Risk Assessment (development of a risk register) establishes the basis level of risk for the project team it should be the first thing done before VP or VE • 4D analysis further informs the entire process. Copy Right, Robert N. Harvey 12 Risk Management • Manage project risk – – – – – Scope Budget Schedule Political /public Environmental • Communicate project risks to the owner and delivery organization • Facilitate development of alternatives and mitigations • Provide alternative measures to owner/team before the risks manifest Copy Right, Robert N. Harvey 13 Value Management Without VP Without VECP Without VE POTENTIAL PROJECT COST GROWTH VE CP Early Value Planning/ Value Planning VP Value VE Engineering Ideal Final Project Cost Copy Right, Robert N. Harvey Concept Development Preliminary Design Final Design Construction DURATION OF PROJECT Copy Right, Robert N. Harvey 14 Risk Management Cumulative Probability 1.0 0.8 Contingency / Higher Level of Confidence 0.6 0.4 Baseline 0.2 0.0 Increasing Total Project Cost/Schedule 15 Risk Analysis 50%/80%/90%/95% WB1840 - WTC Transportation Hub Complete : F – Risk Analysis Methodology 90% 19/Aug/13 85% 08/Aug/13 C 80% 30/Jul/13 M C ( M C ( 75% 22/Jul/13 96 70% 15/Jul/13 65% 08/Jul/13 60% 01/Jul/13 72 55% 24/Jun/13 50% 13/Jun/13 45% 05/Jun/13 40% 28/May/13 48 35% 20/May/13 • Major Key drivers – 1 Line Box (and space below) – PATH Hall structure (Box Girders and Ribs) – VSC Construction/ Commissioning S I 95% 02/Sep/13 120 Date P robability – Results A 100% 11/Oct/13 Hits • Monte Carlo Simulation; random generation of activity durations. • Calculate schedule with each randomization • 1000 iterations • Probability distribution Curves for Entire schedule and for each activity/ milestone 30% 08/May/13 S M M M M M S 25% 26/Apr/13 S 9 D P 20% 16/Apr/13 24 15% 02/Apr/13 10% 14/Mar/13 5% 25/Feb/13 0 06/Nov/12 12/Jan/13 20/Mar/13 26/May/13 01/Aug/13 07/Oct/13 Distribution (start of interval) LMCCC Copy Right, Robert N. Harvey 16 3D and 4D Tools Enhance Risk Mgt • More than 15 years of 3D design experience on all kinds of projects from $50 million to more than $1 billion • 4D used in managing $15 billion World Trade Center redevelopment Copy Right, Robert N. Harvey 17 Metrics on Value Management Including Risk Mgt and BIM • Port Authority of NY & NJ Value Mgt Program with Risk Mgt saved 13+% • BIM/4D Benefit Exceed: – 40% elimination of unbudgeted change (4 - 8% of project cost) – Improve cost estimate accuracy to within +/-3% – Bids within +/- 2.5% – 60% less RFIs – 80% reduction in time to generate cost estimate – Overall savings: 10% of contract sum through clash detection alone – 7% schedule reduction • Combined 10X to 60X+ Return of Investment (ROI) Stanford University Center For Integrated Facility Engineering (CIFE) Statistics for Building Information Modeling Value (Based on 32 major projects constructed using integrated PM techniques & a NIST study of 700 projects) Audited Data from the Port Authority of NY&NJ on the Value Management Program Copy Right, Robert N. Harvey 18 Construction Coordination Room (CCR) Value Planning Process Value Planning/Risk Assessment/Regional Cost Benefit for the World Trade Center Program April 9, 2007 Inter Government/States Agencies Meeting Copy Right, Robert N. Harvey 19 Construction Coordination Room (CCR) Value Planning Process Former Survivor Stairs 1 Line SubwayTower 2 Memorial Tower 1 Pavilion Tower 3 Subgrade Roadway WTC Tower & Escalators Escalators Cortlandt Station Foundation Foundation Foundation Tridents Dey Street Connector Tower 4 Foundation 9A Underpass Exposed Original Slurry Vehicle Security Center Wall South Pedestrian Bridge Liberty Street Park 20 3 Freedom Tower Tower 2 Temp. North Access Fulton St. (West) PATH Station Tower 3 Memorial & Museum Tower 4 Trestle 12/26/2011 21 21 4 Value Planning / Risk Mgt. Process • LMCCC brought in world-class experts with experience in mega-project construction • Created schedule adjusted for risk and identified potential breaks in construction logic • The Team analyzed the schedule and modeled the construction activities using the latest 4D techniques • Developed a regional cost/benefit analysis to prioritize acceleration of site components 12/26/2011 Copy Right, Robert N. Harvey 22 CCR Process Organization Phase 1 Issue Identification LMCCC Consultant (LiRo & PMA) Phase 2 Issue Mitigation Recommendations Bob Harvey Project Leader LMCCC Executives Project Sponsors CCR Active Expert Planning Team Constructability CM/PM Geotech / Structural Transit High / Rise Support Team Experts Experts Experts Experts Cost Estimators Schedulers Risk Analysts Workshop Experts B. Voorsanger Architectural / Planning / Intangibles Voorsanger & Assoc Arch Review / PA Projects Bill Faschan Structural Interface Improvement LERA Shanghai WFC/ WTC Bud Griffis Mega Prog. / Waterside Support Expert Dean Poly Tech. Univ. Army Corps Eng. Reg. Com Douglas Sahrbeck Security Issues SAIC LMCAT Gary Jentzen Contracts/ Dispute Resolution PMA Central Artery Hugh Lacy Geotechnical Interface Improvements. Mueser Rutledge East Side Access Jack Lemley Mega Programs Organizational Expert Lemley Assoc, British Channel Tunnel Mark Blumkin Cost Analysis / Regional Cost Benefit Deloitte Construction Advisory Board Peter Turton NYC Construction Expert WGI Air Train Jack Wright Mega Programs Mass Transit Central Artery Philip Craig Rail Operations Constructability PMA PATH, Athens Metro Robert Flieger Cost Analysis Deloitte NYC Construction Cost Steve Chamberlain Construction Planning WGI Calatrava Milwaukee Art Museum Douglas McKean Station Architecture and Planning Design Constructs Grand Central Terminal Restoration Steve Smith Master Planning Terry Farrell & Partners Kowloon Station 12/26/2011 Copy Right, Robert N. Harvey 24 Goal - Develop a Decision Framework Preliminary Interface Assessment (CCR) Schedule and Cost Risk Analysis Mitigations, Workarounds and Trade-offs Regional CostBenefits and Intangible Benefits Model Interdependencies Decision Framework Schedule Likelihoods Week One Workshop Model Mitigation Revised Schedule—Cost (Zero Based) Likelihoods, RCB, Intangibles Week Two Workshop Risk Management (CCR & Sponsors) Copy Right, Robert N. Harvey Risk Management Timeline Feb 23rd 1St Week Workshop March 2nd, 15th 2nd Week Workshop April 12th Post Workshop May 9th Through Construction Manage Decide & Implement Mitigate Quantify Identify Review Copy Right, Robert N. Harvey Recommendations • The Team recommended modifications to the Governance structure of the project • Develop a risk based schedule and cost and recommended risk mitigations, workarounds and cost reductions • Provided a regional cost benefit analysis based on the risk analyzed schedule, costs and revenues • Port Authority agreed to continue to participate with LMCCC to implement a risk management approach Copy Right, Robert N. Harvey 27 INITIAL GOVERNANCE LMCCC STRUCTURE PANYNJ NYSDOT 9A MEMORIALS Coord. All NYCDEP WATER SEWER ConEd Verizon, etc. FDNY PAPD NYPD NYCDOT SPI MTA MEMORIAL PATH VSC T1,T5 CHILLER Dey St Cortlandt 1,E,R/W Station PATH MEMORIAL T1 T2 T3 T4 HUB PA CHILLER 1, E, R/W T4 T3 T2 VSC T1 9A Copy Right, Robert N. Harvey Recommended Organization Chart for WTC Recovery Corporation P.A. Executive Director WTC Construction Delivery Partner Executive Director General Counsel Briefs on Sites Permits Site Construction Manager Plan’s Design Manager Site 3,4,5 Transportation Hub Silverstein Towers NYCT 1 Line Security City Streets Administrative Officer Communication Business Officer International Threats Health & Safety Priority Greenwich Environmental Policy Compliance Community Liaison Copy Right, Robert N. Harvey 29 Risk Management Supported Acceleration of the Memorial Plaza PA WTC Schedule Trending - Memorial & Museum 9/11/11 comparison 12/26/2011 30 30 4D Construction Clash Analysis 12/26/2011 QUESTIONS 32