Risk Management for Organizations

Implementation of Cost and Risk Management Systems in Organizations


Risk and cost management systems are usually reduced to a purely mathematical classification aspect, i.e., which risk characterization methods, qualitative or quantitative, are to be adopted. For successful implementation and, in a broader sense, successful management, it is necessary to choose the most appropriate method and to have a sufficient awareness of the needs of all stakeholders. Expert facilitation through a workshop-based risk characterization process is indispensable.

This Risk Management Process (RMP) and Principles

This Risk Management Process (RMP) provides the basis for an appropriate project cost determination which is necessary for the achievement of project objectives. Under this RMP, an individual cost evaluation of each specific project is required. Successful management of a project depends on a sufficiently precise description of the project’s scope, schedule and context (which establishes the basis for its associated cost estimate) together with a proactive approach to a realistic determination of cost, identification of risk and risk management (RM).

Beside the basic RM Process three fundamental cornerstones are essential and critical for success, in order to ensure that organization's goals can be achieved.

All approaches to project risk management strive to maximize both efficiency and effectiveness. Although the details of risk processes may differ depending on the project, risk management always includes the following important steps:

  • Identification, analysis, action and monitoring.
  • Before a risk can be properly managed, it must first be identified, described, understood, and assessed.
  • Analysis is a necessary step, but not sufficient, it must be followed up by action. A risk process which does not lead to implementation of actions to deal with identified and assessed risks is incomplete and useless. The ultimate goal is to manage risk to a level “as low as reasonably practical (ALARP).

Risk Management can provide a continual learning environment for all personnel involved in projects and sets the stage for a systematic, documented process to assist the team in order to deliver successful projects.

Cost Components

Introducing a clear cost component structure allows for cost transparency and continuous cost control. Cost components that need to be addressed in state of the art estimates are:

  • Base Cost – Costs that will result if “all goes according to plan” without contingencies for risk events, inflation or other potential factors.
  • Risk Cost – Costs of threat and opportunity events that might or might not occur (e.g. probability of occurrence and impact should the risk occur).
  • Escalation Cost – cost resulting from expected inflation.

Cost components, arranged in form of a “waterfall diagram” allow for easy-to-understand visualizations of project cost and sources of additional costs. The Figure below shows the waterfall diagram for the construction phase (all cost components are relevant).

Tools

PRAT is based on Excel VBA, which allows fast and efficient adaptation according to the needs of your organization. After PRAT is implemented, you take full control of the risk management process. No further external interfaces remain.

RIAAT is an advanced integrated management computer program based on the use of probabilistic methods for the management of risk and cost for complex infrastructure projects, based on accepted practice, advanced theory and practical experience from major projects. The program gives the owner, manager, designer and contractor comprehensive data to more effectively and transparently manage their projects.

References

  • State of Vorarlberg, Ministry of Transportation
  • German Federal Ministry of Transportation, Bonn
  • NAGRA (Swiss National Cooperative for the Disposal of Radioactive Waste), Switzerland
  • Supreme Construction Authority of Bavaria, Munich
  • DEGES (German Reunification Cooperatve for Planning and Construction of Federal Freeways), Berlin
  • Energie AG Oberösterreich, Linz
  • Lima Airport Partners (Aeropuerto Internacional Jorge Chávez )
  • Vienna Lines (Public Transit Network Vienna)
  • Land Forces Command, Austrian Armed Forces