3-Project Organisation 2

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CECE 4270 & CEQS 3230

Miss Samira Said Al Esry

DEPARTMENT OF ENGINEERING

ConceptionFeasibility &

Selection

Design &

PlanningDevelopment

CloseoutOperationsDe-

commissioning

Fundamentals: Risk

Payment Methods

Lump Sum / fixed price

Time & materials - Unit Prices

Cost Plus Percentage

Cost Plus Fixed Fee

Guaranteed Maximum Price

Incentive

Involves identifying, analysing and respondingto risks throughout the project life cycle, in thebest interest of meeting project objectives

Can improve project success

Help in project selection, scope determinationand realistic development of schedules and cost

estimates

Schwalbe, 2006

Uncertainty inherent in plans and the possibility

of something happening that can affect the

prospects of achieving business or project goalsBS6079-3:2000

Risk is the likelihood of an event or hazard

impacting the project

In commerce, a ‘high risk venture’ implies a

potential for large gains as well as potential for

large losses

Where there are opportunities there are risks

All projects require risk management, risk

monitoring and risk control

Table 3-1: Potential negative risk conditions associated with each knowledge area

Knowledge Area Risk Conditions

IntegrationInadequate planning; poor resource allocation; poor integration management;

lack of post-project review

Scope Poor definition of scope or work packages; incomplete definition

Errors in estimating time or resource availability; errors in determining the

critical path; poor allocation and management of float; early release of

competitive products

Cost Estimating errors; inadequate productivity, cost, change, or contingency

QualityPoor attitude toward quality; substandard design/materials/workmanship;

inadequate quality assurance program

Human ResourcesPoor conflict management; poor project organisation and definition of

responsibilities; absence of leadership

CommunicationsCarelessness in planning or communicating; lack of consultation with key

stakeholders

Risk Ignoring risk; unclear analysis of risk; poor insurance management

Procurement Unenforceable conditions or contracts clauses; adversarial relations

Source: Wideman, R. Max, “Project and Program Risk Management: A Guide to Managing Project Risks & Opportunities”, Upper Darby,PA: Project Management Institute, 1992, II – 4.

Technical / quality/ performance risks: include risksassociated with unproven technology, complextechnology, changes to technology, unrealisticperformance goals, etc.

Project management risks: includes improperschedule and resource planning, poor project planning,improper project management methodologies.

Organisational risks: include resource conflicts due to

multiple projects; unrealistic scope, time and costobjectives; lack of funding.

External risks: include new laws or regulations, labourissues, weather, changes in ownership, etc.

Records and other sources of historical data

Relevant experience

Reviews of research into project success and

failure

Market testing and research

Application of behavioural, financial, economic,

engineering and/or other relevant modelsUse of specialist and/or external expertise

Medium

Small risk Medium

Big risk

Likelihood/

probability

Severity of impact

Impact can be in terms of cost, time, quality, reputation,

safety

Figure 3-1: Risk classification

based on likelihood of occurrence

and impact on project

Cost(OMR) Delay Quality Reputation

ImpactExtra

100,000s

Several

months

Severe

impairment or loss

of a function

Negative publicity in

major news channels

Loss of public trust

Significant impact onGoodwill

Medium

impact

Extra 10,000s A few

Some impairment

of a major

function

Some impact on

Goodwill

Impact

Extra 1,000s A few

Some impairment

of a minor

function

Minor impact on

Goodwill

Table 3-2: Sample Impact / Effect for risk assessment

Response: Negative risks

Response/ treatment Summary

Accept Continue without altering the project goals or approach

Eliminating or avoiding Changing or abandoning goals specifically associated with

the risk in question, or choosing alternative approaches/processes that make the risk no longer relevant

Risk sharing Sharing risks in part or in full with another stakeholder who

could be involved solely to facilitate risk treatment, e.g. an

insurer

Reducing thelikelihood Changing project approach, identifying causal links betweenthreat and impact, or causes of threats, and intervening to

mitigate occurrence, acting to reduce the threat

Reducing the impacts Developing contingency plans for responding to the threat if

it occurs, even if other steps have been taken to minimize the

Table 3-3: Basic response strategies for risks

Contractors are risk averse

Risks that can be controlled by contractor,contractor will manage them rather than reduce

chargesRisks that cannot be controlled by contractor,contractor will typically reduce charges so

owner assumes themHigh contractor risks: higher price, morechances for delays

Likelihood

Severity

1 Very unlikely 1 No impact or harm

2 Unlikely 2 Low Impact – minor injury – no lost time

3 Likely 3 Medium impact – injury or ill health OVER 3 days lost time

4 Very Likely 4 High impact – major injury or possible loss, including death

5 Probable 5 Very high impact – multiple casualties or loss of more than one

5 10 15 20 25

4 8 12 16 20

3 6 9 12 15

2 4 6 8 10

1 2 3 4 5

MEDIUM

Fundamentals

Payment Methods

Fixed price or Lump Sum

Time and Materials (T&M) -Unit Prices

Cost reimbursableCost Plus Percentage

Cost Plus Fixed FeeGuaranteed Maximum Price

Incentive

Set a specific, firm price for the goods andservices.

Owner and contractor agree on a well-defined

deliverable.Lower owner risks, biggest risk borne by thecontractor.

Typically used with traditional design/bid/build

Typically results in a desire to finish the projectin minimum time, with minimizes cost andquality uncertainty.

Example:

Owner and contractor enter into a Lump Sum

agreement, OMR 20,000. The actual costsincurred by the contractor are OMR 18,500.

Price charged to owner:

Contractor profit:

Fundamentals

Payment Method

Lump SumUnit Prices

Incentive

Time and materials contracts are a crossbetween fixed price and cost-reimbursable.

The full amount of material costs is not knownat the time of contract awarding: the costs willcontinue to grow during the contract’s life.

Unit rates (agreement of charges per unit ofwork) may be used to preset certain portions of

the project.The owner bears the biggest risk.

Fundamentals

Payment Method

Lump Sum

Unit Prices

Cost Plus Fixed Fee

Incentive

Owner pays actual cost plus a percentage fee

Used if price cannot be determined in another

way and for urgency (e.g. ill-defined risky scope)

Maximum flexibility for owner (change orders)

High risk for owner

Little incentives for contractor to improve

efficiencyNo consideration of quality in payment

Permits collaboration at early stages – minimum

negotiation time, fear of commitment21

Example:Your company has entered into a Cost plusPercentage contract with contractor X. At the endof the project the contractor’s actual costs are

OMR10,000. The contract percentage is 2%. Whatis the price charged to the owner? What is thecontractor’s profit?

Price charged:

Contractor profit:

Fundamentals

Payment Method

Lump SumUnit Prices

Incentive

Owner agrees to pay the cost of workplus a fixed fee

Unknown cost up-front

Used if the price cannot be determinedin another manner

Fee is independent of project duration

Little incentive to reduce costHigh incentive to finish early

Example:

Owner and contractor enter into Cost plus fixedfee agreement with the owner agreeing to pay

the contractor his costs plus an additionalOMR500. The actual costs were OMR3000.What is..

The price charged to the owner:Contractor profit:

Lump Sum

Contractor’s risk Owner’s risk

Figure 3-2: Risk sharing meter; comparing between lump sum, CPFF &

FundamentalsPayment Method

Lump Sum

Unit Prices

Cost Plus Fixed Fee

Incentive

Same as Cost Plus Fixed Fee (CPFF), but with a

Guaranteed Maximum Price (GMP)

Contractor assumes any risks of cost goingbeyond GMP

Quality may be sacrificed to remain below GMP

Fundamentals

Payment Method

Lump Sum

Unit Prices

Cost Plus Fixed Fee

Incentive

Owner and contractor agreeing to a ratio forsharing savings and overruns (e.g. 80/20)

If savings of 1000, owner’s cost is reduced by800 and contractor’s profit is increased by 200

If overrun of 1000, owner shoulders 800 andcontractor shoulders 200

Can have limitations on price or profit

Target Estimate contract2% basic markup

70/30 O/C sharing arrangement

Original estimate: 10,000,000 OMROwner’s payment?= Actual cost + [markup*estimate] +

[contractor’s share*(estimate-actual cost)]

Contractors Profit/loss?= Price charged to owner –

Contractor actual cost

Owner’s savings/losses= Estimate + [markup*Estimate] –

owner’s payment

Estimate 10000000Mark-up 2%

Contractor share 30%

Owner Share 70%

Actual cost Owner's PaymentContractor's Gross

Profit

Owner's

Savings/Losses8000000

8500000

9000000

9500000

10000000

10500000

11000000

11500000

12000000

Estimate 10000000Mark-up 2%

Contractor share 30%

Owner Share 70%

Actual cost Owner's PaymentContractor's Gross

Profit

Owner's

Savings/Losses8000000 8800000 800000 1400000

8500000 9150000 650000 1050000

9000000 9500000 500000 700000

9500000 9850000 350000 350000

10000000 10200000 200000 0

10500000 10550000 50000 -350000

11000000 10900000 -100000 -700000

11500000 11250000 -250000 -1050000

12000000 11600000 -400000 -1400000

ReferencesDr. Lee, S. (2007). Presentation to Project Management course in

“Project Management for Construction” by Chris Hendrickson

available at http://pmbook.ce.cmu.edu/

Schwalbe, K., Information Technology Project management, 4th

Edition, 2006, Thomson Course Technology

Harold Kerzner, Ph.D., Project Management A systems approach

to planning, scheduling & controlling, 9th ed., 2006, John Wiley

& Sons, Inc.

Heldman, Kim, PMP: Project Management Professional, Study

Guide, 3rd edition, 2005, Wiley Publishing

Dr. Ammar Al Ojaili

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