What Is Risk Management?
Risk Analysis and Risk Management is a process that allows individual risk events and overall risk to be understood and managed proactively, optimizing success by minimizing threats and maximizing opportunities and outcomes. ( APM Body of Knowledge 7th edition )
Risk management: “An organized method for systematically identifying and measuring risk and for selecting and developing options for handling risk” (Blanchard)
THE NEED FOR RISK MANAGEMENT
Murphy’s Law (www.murphy.com) – “If something can go wrong, it will go wrong!”
There is a basic obligation for a company to deliver safe, reliable, readily operable projects in accordance with the approved specifications and AFC drawings within budget and on time. Sound project risk management (PRM), therefore, has a basic requirement to try to prevent things from going wrong or to reduce the impact if they do go wrong and at the same time to look for opportunities because an apparent calamity could provide one.
THE KEY TO SUCCESSFUL PRM
The key to a successful project risk management process is for project risk to be formally discussed, identified, documented, managed, tracked, and reported, by the project team, in a consistent and structured way using a recognized and common language
THE BENEFITS OF RISK MANAGEMENT
Enables better planning, scheduling, and budgeting, increasing the likelihood of a project adhering to its schedules and budgets.
This leads to the use of the most suitable type of contract and allows a more meaningful assessment of contingencies
Discourages the acceptance of financially unsound projects and contributes to the build-up of statistical information for better decision making.
Enables a more objective comparison of alternatives and identifies and allocates responsibility to the best risk owner.
Improves corporate experience and general communication leading to a common understanding and improved team spirit.
Helps distinguish between good and bad management developing the ability of staff to assess risks.
Focuses project management attention on the real and most important risks and facilitates greater risk-taking, thus potentially increasing benefits gained.
CLASSIFICATION OF RISK
1. Known-known risks (Total certainty):
- These include items such as client, type of project, site location, process configuration, equipment piece count, and items where any variability is known and is well understood.
- Known risks are part of the base cost estimate and schedule for the project.
2. Known-unknown risks (Specific uncertainty):
- These include items that relate to accuracy, growth, and design development of the work and elements and conditions which cannot be fully defined or assessed at the time of estimate preparation (i.e., degree of project definition, estimation methodology, escalation, and impact of unusual but foreseeable aspects and circumstances).
3. Known-unknown risks (General uncertainty):
- These risks include those which can be foreseen or are known to exist with varying degrees of credibility and assessed probability of occurrence.
- Examples are out-of-sequence working, delivery slippages, liquidated damages, and remedial work.
- Management judgment, lessons learned, and qualitative/analytical tools are used to assess the impact
- Unknown knowns are covered by a risk allowance (event-driven contingency).
4. Unknown-unknowns (Total uncertainty):
- These risks are those which have never been heard of or are either so rare and unlikely as to be unforeseeable, cannot be predicted, are unquantifiable, and are completely outside the contractor’s control.
- Examples are pandemics, terrorism, threats of economic dislodgement, natural phenomena, piracy, vendor bankruptcy, regional conflicts, lockout, currency devaluations, strikes, social unrest, etc.
- Unknown unknowns are either avoided, insured where possible, or covered by words in the contract.
CLARIFICATION OF RISK
Petrocontracts International’s strength lies in the systematic process of identifying, analyzing, mitigating, and responding to risk Petrocontracts will be pleased to provide a more accurate assessment, additional information about Petrocontracts' specific expertise, experience in handling claims, and available resources. Please contact us at info@petrocontracts.com and one of our senior representative will get in touch with you.