Chemical Engineering December 2014 - 41

Cover Story
Table 3. aace rISk TyPe defInITIonS
Systemic risks
Project-specific
(PS) risks
Item
Risk title or name
Cause
Source
Type
Uncertainties that are an artifact of an industry, company or project system, such as culture,
strategy, complexity, technology or similar over-arching characteristics
Uncertainties related to events, actions and other conditions that are specific to the scope of a
project. The impacts of project-specific risks are more or less unique to that project
Table 4. TyPIcal mInImum rISk regISTer and InformaTIon caPTured
Information captured
What is uncertain? Be specific; avoid general issues and worries
What condition or event results in the uncertainty?
Is it internal or external? Examples may be environmental, regulatory, engineering and so on
For quantification, segregate systemic, project-specific and escalation risks
Probability of occurrence Qualitative ratings (very high, high, moderate, low, very low)
Impact (in this case costs) Qualitative ratings (very high, high, moderate, low, very low)
Risk owner
Mitigation plan
Status
Who leads the planning for this risk?
How will this risk be addressed?
How is the plan going? Is the nature of the risk changing?
left to their own devices will tend to
use an approach based on " historical
norms, " which uses a midpoint
of history or experience (14 h/kg
in this particular example), which
will be biased toward less competitive
outcomes, because it presumes
risks will happen without actually
identifying or quantifying them.
In any case, quantitative validation
gives one an objective read of
the bias, and the subsequent need
for contingency.
Identify the risks
The above discussion covers the
rating of what AACE calls " systemic "
risks, including the level of
scope definition and project system
capabilities. Next, one must begin
to understand risks that are project-specific
(PS). Table 3 provides
AACE International's definitions
for these risks types; they are imVery
high
High
Moderate
Low
Very low
Very low
Low
Moderate
High
Cost impact
FIGURE 3. A typical probability-versus-impact risk matrix allows for quick visualization
of critical risks, and facilitates simpler decision-making
40 ChemiCal engineering www.Chemengonline.Com DeCemBer 2014
Very high
portant to understand because the
recommended methods for quantifying
these risks vary by type. Note
that " escalation " is a third type of
risk, covering price changes driven
by the economy, which should be estimated
separately by methods not
covered in this article.
The risk-management process
starts with identifying the risks on
the project. This is usually done in
a workshop setting with key stakeholders
and members of the project
team. Risk identification can also
be done via interviews or other
means. Often starting with a checklist,
the workshop facilitator guides
the group through a brainstorming
session to identify any threats or
opportunities that may result in the
project not meeting its objectives.
These are captured on a risk register
that records key risk attributes
and risk-management planning elements.
Table 4 shows the minimum
information one will want to capture,
discuss and record in a typical
risk register.
Before quantifying the risks, prioritize
them and focus only on those
that are critical. Critical risks can
create major hurdles to meeting
project objectives, in this case costs.
To evaluate critical risks, the team
agrees to a set of qualitative ratings
(very high, high, moderate, low,
very low) for probability and impact
with associated indicative values.
For example, a " very high " rating
could represent >5% of total cost
and >50% probability. The team
then comes to a consensus on the
probability and impact ratings for
each risk in the risk register. Critical
risks are typically in the top
category of probability and impact.
If risks are well-managed during
scope development, there should
be very few of these. Figure 3 illustrates
a typical five-by-five risk
matrix, where red coloring denotes
critical risks.
Quantify the risks
Having identified the critical risks,
and being at a decision point where
contingency must be set, the next
step is to quantify the risks. Best
practice dictates the use of probabilistic
risk analysis to derive a distribution
of possible project cost outProbability
of
occurrence

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Chemical Engineering December 2014

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