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S U M M A R Y Project cost escalation is a serious problem facing state highway agencies (SHAs). The fail- ure to deliver individual projects and programs within established budgets has a detrimen- tal effect on later programs and causes a loss of faith in the agencyâs ability to wisely use the publicâs money. Highway design and construction projects can be extremely complex and are often fraught with uncertainty. However, engineers, project managers, and cost estima- tors often overlook or fail to recognize project uncertainty early in the project development process. As a result they do not communicate uncertainty and its effect to the stakeholders. A comprehensive risk management approach can help project teams identify, assess, miti- gate, and control project risks. Among the benefits of a comprehensive risk management approach is the ability to generate range estimates early in the project development process and to establish justifiable contingencies that can be resolved throughout the design and construction process. This guidebook presents a systematic process to apply risk analysis tools and management practices to aid SHA management in controlling project cost growth. The Guidebook addresses risk identification, assessment, analysis, mitigation, allocation, and tracking and control in a manner that is systematically integrated into the organizational structure and culture of SHAs. Risk Management Framework The risk management framework described in this Guidebook is based on best practices in design and construction. In the Guidebook, those practices are adapted to the unique needs of highway project development. The iterative risk management framework is described in terms of the project development phases and project complexity. The frame- work is scalable from small and non-complex projects to large and complex projects. There are five imperative steps to managing project risk. 1. Risk identification is the process of determining which risks might affect the project and documenting their characteristics using such tools as brainstorming and checklists. 2. Risk assessment/analysis involves the quantitative or qualitative analysis that assesses impact and probability of a risk. Risk assessment assists in deriving contingency esti- mates. Quantitative and qualitative risk analysis procedures are applied to determine the probability and impact of risks. 3. Risk mitigation and planning involves analyzing risk response options (acceptance, avoid- ance, mitigation, or transference) and deciding how to approach and plan risk manage- ment activities for a project. 4. Risk allocation involves placing responsibility for a risk to a party â typically through a contract. The fundamental tenants of risk allocation include allocating risks to the party Guidebook on Risk Analysis Tools and Management Practices to Control Transportation Project Costs 1
2best able to manage them, allocating risks in alignment with project goals, and allocating risks to promote team alignment with customer-oriented performance goals. 5. Risk monitoring and control is the capture, analysis, and reporting of project performance, usually as compared to the risk management plan. Risk monitoring and control assists in contingency tracking and resolution. Keys to Success Lessons learned from the development of this Guidebook can be summarized in five keys to success for applying risk analysis tools and management practices to control project cost. 1. Employ all steps in the risk management process. 2. Communicate cost uncertainty in project estimates through the use of ranges and/or explicit contingency amounts. 3. Tie risks to cost ranges and contingencies as a means of explaining cost uncertainty to all stakeholders. 4. Develop risk management plans and assign responsibility for resolving each risk. 5. Monitor project threats and opportunities as a means of resolving project contingency.
