02.09.2012 risk management for contractors

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2012 FMI Corporation 0

Risk Management for

ContractorsIt's not

just about Insurance!

February 9, 2012


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Learning Objectives

At the end of this discussion, participants will be able to:

Understand how a risk management process addresses and

mitigates risks Determine the potential business and project risks that exist

Implement proven project management methods for

mitigating project risk

Understand the role of risk management in strategic planning


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New Realities

Competition willing to work for wages

Competition has doubled or tripled for your targeted

customers or projects

Historically strong sectors have disappeared

Its not coming back to the good old days any time soon

Risk is higher than ever


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What is Risk Management?

Risk Management is the structured approach to managing

uncertainty

Identifying potential risks

Analyzing the potential impact of those risks

Responding to risk factors to either mitigate or eliminate those risks


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Company Risk Management Process

1. Identify Potential Risks

2. Analyze Impact of Risks

3. Determine Potential Risk Treatments

4. Create a Risk Management Plan5. Implement Plan

6. Evaluate Plan


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Determining Potential Risk Treatments

Avoidance

Eliminate

Reduction

Mitigate

Transference

Outsource or Insure

Retention

Accept and Budget


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Insurance Costs

Insurance should be a manageable cost

Realistic way to lower insurance:

Reduce frequency of claims

Accident-free is the ultimate objective

Return-To-Work Plan - When accidents do happen, focus on

returning the injured workers to their jobs absolutely as soon

as possible


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How to Lower Insurance Costs

Better maintenance on equipment

Hiring capable employees

Continuous safety training

Efficiently training employees on equipment use

Consider increasing deductible levels to fully realize

improvements in reduced losses


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Risk Management Plan (1 of 2)

Plan should include:

Management Actions to Take Regularly

Responsibility for Risk-Management Oversight

Tools to Use to Govern the Process

Budget for Risk


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Risk Management Plan (2 of 2)

Assign a risk officer

Create anonymous risk-reporting channel

Prepare mitigation plans

Review and monitor performance


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Discussion

Common Types of Risks

Strategic

Design

Financial

Contractual Disputes

Delays

Subcontractor and Vendor

Operational Project Performance


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Discussion

Less Common Types of Risks

Political

Breach of Contract

Regulatory Changes

Transfer Restrictions

Sovereign-Guarantee Breaches

Civil Disturbance

Terrorism

War

Source: Multilateral Investment Guarantee Agency Survey of Investors, 2010


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Reducing Project Risk: Change Management

Can cost and resource-loaded schedules help the

contractor encounter unanticipated changing

conditions on the project site that impact the level of

effort?


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Schedule-Change Management


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Schedule-Change Management

Fewer surprises, resulting in reduction in risk

Increase in overall productivity

Smoother processing of changes resulting in fewer and less

costly claims

Better forecasting of project performance and management

of resources

Most importantly, its the best tool for minimizing the

impact of claims and change issues


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Reducing Project Risk: Collaboration

1. Develop Good Relationships and Communications

2. Set Standards Early in the Process

3. The Work-Breakdown Structure Is the Common Language

4. Communicate Bad News Early


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Set Standards Early in the Process

Requirements for Collaboration to Work

Define standardized processes for communication and

collaboration

Routinely enforce and practice these processes to develop aculture of collaboration

Utilize technology systems where appropriate to codify

standardized processes and ease of collaboration


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Set Standards Early in the Process

Benefits of Successful Collaboration

Standard processes for handling risk link to cost and time on a

project

Issue management and resolution Speed of notification

Ability to view reference documentation

Ability to act proactively in order to mitigate delay

Progress measurement


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The WBS Is the Common Language

Project Team must be the central hub of communication

Must have specific information that clearly shows what must be

done, by whom and with target dates of completion

This information must be communicated to all the appropriatepartners on the project

Must attach consequences for both performance and

nonperformancepersistently and consistently driving

accountability


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Activities Logic 2


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Communicate Bad News Early

Early Warning Indicators:

Accurate reportsAlerts, email notification

Key performance indicators (KPIs)

Communicate corrective action

Early Warning Indicators

Reports

Work Packages

Cost

Critical Path

Changes

Resources

SchedulePlanning and

Scheduling

Executive

Project

Controls

Project

ManagerProject

Engineers

Subs

Client


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Schedule/Cost Management

Our project managers need to do a

better job of forecasting costs and

schedules. The managers also lack

the ability to schedule. I dont mean

put together a schedule, but manage

it as if it were living and breathing.

They cant manage a dynamic

schedule and effectively use it as a

tool.


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Break the Program Into Individual Projects

Establish major milestones and create the Work Breakdown

Structure (WBS) across program

Both large and small projects can be better-defined once the major

milestones have been established

Milestones are generally represented by the completion of adeliverable (something that can be seen, touched or signed)

When everyone knows the major milestones, accountability can be

defined

Helps the project team control scope creep


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Break the Program Into Individual Projects

Most programs can readily be broken into multiple

subprojects. This allows for:

A greater degree of control for the subproject team in its area

Better collaboration within a smaller group of people

Bringing specialist talent to bear for maximum effect

It also enables a WBS for the subproject to:

More precisely define the scope and sequence logic

Can be functional-basedBy discipline Can be phased-basedChronological


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Standardize the Process and Reporting


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Establish Project Performance Indicators

Identify the Key Performance IndicatorsKPIs are essentialshortcuts to understanding the status of the project. They

enable the project team to quickly view a summary of

project performance.

Traditional Lagging Indicators Actual Cost versus Baseline Costs

Actual Schedule Milestones Accomplished

Productivity (rate or units) to date

Cash Flow to date Compared to Budget

Common Leading Indicators

Projected Total Cost to Complete

Projected Completion Date

Projected Cash Flow


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Establish Project Indicators:

KPICost Report & RFI Status


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The End Game:

Effective, Efficient Programs

Project A

Project C

Project E

Project B

Project D

Project F

Schedule,

Cost,Documents

EstimatingSystem

Dashboard

AccountingSystem


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Did You Know

A post-job review meeting is the best way to improve

performance on all projects going forward

You learn what went well, what didnt and why, so youll be more

prepared for the next job. It also provides great feedback to Estimating

about how well it performed.

Postmortem meetings are often the most

underutilized project management tool in the business.


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Key Learning Points

Common types of risks

Reducing project risks

Steps in the Risk-Management Process

Identifying Risks

Analyzing Risks

Potential Risk Treatments

Creating a Risk-Management Plan


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Lee Smither

Managing Director

Lee D. Smither

FMI Corporation

5171 Glenwood Avenue

Suite 200Raleigh, NC 27612

Tel: 919.785.9243

Fax: 919.785.9320

Email: [email protected]

Website: www.fminet.com

As managing director for consulting, Lee Smither helps construction companies and design firms

sharpen their management practices and corporate performance. He specializes in strategic

consulting, developing and implementing organizational initiatives, and designing executive

development programs. Additionally, Lee serves as a speaker for individual clients and many of

the industrys associations. Experience in conducting seminars and speaking nationally makes him

an effective and highly regarded speaker.

As manager for numerous organizational improvement engagements, Lee has overseen clientimplementation efforts ranging in scope from a single project to a corporate division to an entire

company. He has worked with a broad spectrum of industry firms, including many of the nations

largest general contractors, specialty constructors and construction managers. Having worked in

the industry prior to joining FMI, Lee has developed a practical and objective perspective.

Lee has published articles on a wide variety of topics in numerous construction trade journals

such as Transportation Builder, Midwest Contractor, Construction Weekly, Journal of Construction

Accounting and Taxation and Constructor. Lee is a member of the National Association of

Accountants and the Construction Institute of ASCE.

Lee holds an undergraduate degree in economics from North Carolina State University and a

master of business administration degree from East Carolina University. He also serves as a board

member for several industry associations and client firms.


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About FMI

FMI is the largest provider of management consulting, investment

banking and research to the engineering and construction industry.

We work in all segments of the industry providing clients with

value-added business solutions, including:

Strategy Development

Market Research and Business Development

Leadership and Talent Development

Project and Process Improvement Mergers, Acquisitions and Financial Consulting

Compensation Data and Consulting

Founded by Dr. Emol A. Fails in 1953, FMI has professionals in

offices across the U.S. FMI delivers innovative, customized solutions

to contractors; construction materials producers; manufacturers

and suppliers of building materials and equipment; owners and

developers; engineers and architects; utilities; and construction

industry trade associations. FMI is an advisor you can count on to

build and maintain a successful business, from your leadership to

your site managers.

Knowledge Expertise Relationships

Visit us at www.fminet.com