Risk management and prevention How professionals render their projects financially weatherproof

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Melvyn Derick Sutton
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1 Six step to deal with potentially costly - project risks Risk management and prevention How professionals render their projects financially weatherproof Many project managers do not think of risks while compiling their cost estimates for the project. They assume that the project will proceed without a hitch. Counting on sunshine for the project means that bad weather will wreak havoc for the budget. That is why professional project managers calculate the risks for their projects and make provisions for them. Project management expert Lukas Hendricks explains six step to get a handle on financial risks. Too expensive! The construction of a logistics warehouse far exceeded the estimated cost. It developed into a financial debacle for the medium-sized business. The demands of fire safety regulations and rising prices for materials led to ballooning costs. One of the suppliers went into insolvency. This forced the project manager to improvise and it proved to be an expensive exercise. Unexpectedly early frost damaged the warehouse structure. All of this led to the budget being exceeded by 30%. Some of the problems caught us unaware, explained the project manager. Most of all the business had estimated the cost of the project making optimistic assumptions and then it had confused this good weather scenario with reality. Every project manager knows that the sun does not always shine on a project. Projects come with risks and these risks can cause exploding costs. Professional project managers keep an eye on uncertainties and take them into account when working on thier project budget.

Counting on sunshine for the project means that bad weather will wreak havoc for the budget.

2 Indicating the possible cost of a project as a cost range rather than a specific number is more appropriate, explains Lukas Hendricks, Senior Consultant with next level consulting. The cost range pegs the worst and best case cost as well as a realistic cost estimate. In this way project managers can include reserves for different eventualities: For example which sum of money should the project sponsor have available in case of an especially hard winter that will require a stop to construction work? However, just sound cost estimates and financial buffers will not be enough to ward off the detrimental effects of risk. Project managers should actively manage factors that carry risks and may trigger additional costs, explains Lukas Hendricks. That would mean for example: Avoid expensive alterations of fire protection measures by working closely with the authorities concerned. Or negotiate a contract that will leave the risk and the consequences of a supplier going into insolvency with the construction company. Maybe even ask the construction company to stand surety. In project management we know of good strategies to skilfully deal with risk, says Hendricks. The following six steps ensure that your project finances will stay under control: Step One: The base line cost estimate Cost estimates and budgets need to be based on a plan. Professionals carve their project up into work packages and then calculate costs for each work package. Past projects can offer valuable information in estimating costs. What costs were anticipated and how did they work out in the end? Experience gained with past projects can also offer valuable hints about actual risks, explains Lukas Hendricks. Step Two: Risk Analysis A lot can go wrong with projects. Some risks have a high probability of being realised, like bad weather during

In this way project managers can include reserves for different eventualities: For example which sum of money should the project sponsor have available in case of an especially hard winter that will

3 construction. Other risks are more unrealistic by comparison but they can seriously impede the project and lead to rocketing costs. That is why expert project managers start by listing all possible risks. Then they sort the risks according to two criteria: their probability of becoming reality and their impact on the project (for example impact on the budget and on the schedule). This analysis quickly makes clear which risks need to be taken seriously and leads the project manager to become aware of real dangers. Step Three: Identify and analyse opportunities Besides risks each project also offers opportunities. For example the logistics warehouse may be structurally completed earlier than planned or fire safety measures may be easier to implement than expected. These are opportunities to save money. It is crucial to identify these opportunities early on and to work towards them in the same way as actively managing risks, says Lukas Hendricks. When preparing cost estimates it pays to look out for such possibilities and to include them in the calculations. This way cost saving possibilities can later be realised through focussed and diligent project management. Step Four: Manage Risks Project experts accept only few risks with a fatalistic stance. They doggedly seek to mitigate risks. To achieve this they employ three strategies. They reduce risks through suitable measures. For example experienced project managers would choose tried and tested technologies for the equipment of the logistics warehouse instead of implementing the newest but less dependable equipment. Their second strategy aims at avoiding risks. Building in summer means not having to worry about frost. The third strategy involves transferring risks for example

Then they sort the risks according to two criteria: their probability of becoming reality and their impact on the project (for example impact on the budget and on the schedule).

4 transferring the risk of a supplier failing to deliver his goods to a construction company or insuring against this risk. The decisive factor here is that the solution makes sense financially and protects the budget, explains Lukas Hendricks. If the solution is too expensive, it might be better to just accept the risk. Another important point is that mitigating risks will change the outcome of the risk analysis (Step Two). Some risks might fall away, some become less probable and others have less impact on the project. That is why project managers like to work through their risk analysis again once they have settled on their risk strategies and measures. Their goal is now to reassess probabilities and the impact of risks on the project. Step Five: Calculating a risk buffer for your budget Risk management does not free the project of its risks. But it makes the project more manageable and predictable. The project manager can now make financial provisions. For each risk he adds a financial reserve, a so-called risk buffer. The formula for this is simple: The probability of frost for the chosen time of year in which the warehouse is to be structurally completed is 20%. The financial damage would amount to In this case the project manager plans a financial reserve of The project manager calculates a reserve for each risk with this formula. All these financial buffers are added up to yield the risk buffer for the entire project. This risk buffer can be quite a high number, but it will reflect a realistic value, explains Lukas Hendricks. Above all the project manager can now explain his estimate when the project sponsor comes asking questions. This risk analysis with its calculations is an excellent source of helpful arguments, says Hendricks.

Another important point is that mitigating risks will change the outcome of the risk analysis (Step Two).

5 Step Six: Stay on the ball Risks change as the project unfolds. Some risks never materialise ( January comes and goes with mild temperatures and no frost! ) Other risks might be further mitigated by the project manager. Project managers should always be vigilant of their project s risks and manage them on an on-going basis in order to reduce project costs, says Lukas Hendricks. He recommends to nominate a member of the project team to be a risk watcher for each important risk. Such a risk watcher keeps an eye on his risk and takes the necessary steps so that this risk will not be realised (if at all possible). The same can work for opportunities. An opportunity sponsor is responsible for making sure that a saving opportunity will be exploited to the benefit of the project. However, be aware that risk management and the management of opportunities must remain on the project manager s list of priorities. Project management experts revisit their risk analysis on a weekly basis and make sure that their project remains financially healthy in any kind of weather. About next level consulting: next level consulting offers consulting services for project and process management, change management as well as for the development of project- and process-oriented organisations. With more than one hundred experts next level consulting is working for companies in diverse sectors, mainly from the IT and telecommunication industry, machinery and plant engineering, industry as well as pharmaceuticals, mobility and logistics, banks and insurance companies. In addition, the business that was founded in Vienna in 2000 is conducting consultancy projects in the health sector, in public administrations as well as NGOs. The business consultancy operates branches in Austria, Germany, Switzerland, Slovakia, Croatia, South Africa and USA Further information regarding next level consulting is available under For direct enquiries please contact Raphaela Bel Tel.: , raphaela.bel@nextlevelconsulting.eu This article may be published free of charge please send us a copy for our information.

Project managers should always be vigilant of their project s risks and manage them on an on-going basis in order to reduce project costs, says Lukas Hendricks.

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