The Need for Project Risk Management

As projects move into deeper waters and higher levels of technical sophistication, complexities and, consequently, risks tend to increase as well. Project Risk Management (i.e., managing the risks of cost and schedule overruns during the drilling and facility development phases of the project) has now become an important tool to ensure project success.

With the drilling and development cost of deepwater projects often exceeding $1 billion, owners, partners, and contractors need, more than ever, the ability to:

  • set realistic yet reasonable cost and schedule contingencies;

  • ?know the probability of cost overruns and schedule delays;

  • know the probability that the sanctioned cost and schedule will be achieved;

  • understand the accuracy of a cost estimate or schedule; and

  • ?ensure that project teams identify risks and implement a Risk Mitigation Plan.

In spite of the importance of Project Risk Management, many projects have been frustrated by traditional methods that are time-consuming, confusing and produce questionable results. As a result, decisions to invest in high-risk offshore development projects are still often based on cost estimates and schedules whose accuracy and contingency requirements are little more than "guesstimates."

Risk is a Project Variable just like quality, cost, schedule, safety, health or environmental impact. And risk can be managed using good project management methods, similar to these other variables. This is the essence of Project Risk Management.

However, when Project Risk Management is done ineffectively, or (as is often the case) not at all, we can call this Project Risk Mismanagement.

Characteristics of Project Risk Mismanagement

The 10 key indicators discussed below are characteristics of an organization that suffers from Project Risk Mismanagement. (Use this checklist to evaluate your organization!)

  1. Projects are authorized primarily based on financial criteria such as profitability, with little quantitative consideration of a project's cost and schedule risk relative to other potential projects. The result is decision-making based on incomplete awareness of potential risks.

  2. The corporate culture encourages project "champions" whose perceived priority is to "sell" the project to management. These "champions" are unlikely to recommend killing a project when it is no longer attractive. The result is projects whose unsatisfactory results are only recognized after they are complete.

  3. Management seeks to minimize project cost and time by punishing project managers and teams whose projects overrun the approved budget or schedule. The inevitable result is that estimates of cost and time are "padded" to ensure a low probability of overrun.

  4. Management rejects the concept of cost or schedule "contingency" and either forbids it to be included in estimates and schedules, or will accept it only if it is a small amount. The result is hidden contingencies that drive up cost and impair effective project controls.

  5. Projects are managed and judged individually and not as a portfolio. Therefore, project managers want to be assured their project will not overrun.

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