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Value and Risk 2
Introduction
John K. Hollmann, PE CCE CEP
Owner/Consultant, Validation Estimating LLC• I help owner companies improve their Cost
Engineering practices• 30 years experience in engineering, project control,
cost estimating, consulting, benchmarkingAACE International Roles:
• Fellow• Technical Board Director of Recommended Practices• Editor/Lead Author of AACE International’s Total Cost
Management (TCM) Framework• Co-Chair of task force to develop a Decision and Risk
Management Professional (DRMP) Certification
Value and Risk 3
The Challenge of Dealing WithValue and Risk
Value and Risk jargon is multiplying;
Is there a way to make sense of it all?
Value Engineering
Value-at-RiskValue Management
Risk ManagementThreat
Opportunity
Value Improving Practice
RiskAnalysis
Value Analysis
Certified Value Specialist
Certified Risk Manager
Added Value
Value and Risk 4
Addressing the Value and RiskChallenge
How does your project system addressRisks?...Value?....Is it in an integrated way?
This presentation will…
define basic concepts and terms,show parallels between Value and Risk,describe some best practices in industry,show how to integrate the practices
…and ensure a balanced approach
Value and Risk 5
Value(as defined in AACE’s TCM Framework)
Value
...measure of the worth of a thing in terms of usefulness,desirability, importance, money, etc.
Value Management
…what an enterprise does to ensure that its assets andprojects provide or maintain the usefulness (i.e.,value) that the various stakeholders require
Value and Risk 6
Risk(as defined in AACE’s TCM Framework)
Risk
…take your pick:
same as uncertainty (i.e., threats + opportunities), negative impacts of uncertainty (i.e., threats) net impact of uncertainty (i.e., threats – opportunities)
Risk Management
…a process for addressing uncertainty in projectoutcomes in a way that increases the probability thata planned outcome will occur without decreasing thevalue of the asset or project
< hint: pick this one
Value and Risk 7
Value and Risk…Attributes of an Asset or Project
Value (worth) is something we try to increase
…without increasing, and possibly decreasingrisk
Risk (uncertainty) is something we try to reduce
…without decreasing, and possibly increasingvalue
Value and Risk 8
Value and Risk…Both Involve Opportunity and Threat
Value (worth) is something we try to increase
…without increasing, and possibly decreasingrisk
Risk (uncertainty) is something we try to reduce
…without decreasing, and possibly increasingvalue
Opportunity
Opportunity
Threat
Threat
Desirable
Undesirable
You cannot manage one without managing the other
Value and Risk 9
Agenda
Define basic concepts and terms
Show parallels between Value and Risk
Describe some best practices in industry
Show how to integrate the practices
Value and Risk 10
Risk Management Process
Establishing the context
Risk identification
Risk analysis
Risk evaluation
Risk treatment
Monitoring andreview
Communicationand
consultation
Derived from draft of ISO 31000 “Risk Management”
Risk assessment
Value and Risk 11
Is This Process Generic to BothValue and Risk?
Establishing the context
Risk identification
Risk analysis
Risk evaluation
Risk treatment
Monitoring andreview
Communicationand
consultation
Risk assessmentValue
Value
Value
Value
Value
Value and Risk 12
Value and Risk Management ProcessSimplified
Identify Ideas/Risks
Scope
Assess/Analyze
Take Action?
Look Out For More
Value and Risk 13
Value and Risk Management ProcessSimplified
Value Improving Practice/Opportunity
PlannedValue
AddedValue
ReducedValue
Risk/UncertaintyTre
atment/
Oppor
tunity
Uncert a in ty
VI P
/Opp
ortu
nity
Value and Risk 14
Understanding How Value and Risk areRelated Does Not Mean Practices Should beCombined (But Do Integrate the Processes)
Use of practices to improve Value have lagged the useof Risk Management practices
Because Value was being short-changed, some “Risk”practitioners attempt to cram everything into their riskassessment methods
My experience is that this generally diminishes thefocus on each
Companies need to…
Implement Value Improving Practices Integrate them with the Risk Management Process
Value and Risk 15
Agenda
Define basic concepts and terms
Show parallels between Value and Risk
Describe some best practices in industry
Show how to integrate the practices
Value and Risk 16
Best or Recommended Practices
Construction Industry Institute (CII) definesthese as “practices that can lead to enhancedproject performance”
i.e., practices that increase value
AACE International uses the termRecommended Practices because it is rare thatanyone can really say what is “Best”
For a high performing company, “best”practices should be “business as usual”; i.e.,part and parcel of their everyday activities
Value and Risk 17
Example: CII Best Practices
From: The Use and Impact of Value Improving Practices and Best PracticesJim Lozon, P.Eng. and Dr. George Jergeas, P.Eng.AACE Cost Engineering Journal, Vol. 50/No. 6 JUNE 2008
Value and Risk 18
Example: AACE RecommendedPractices (RPs)
From: www.aacei.org/technical
10S-90: Cost Engineering Terminology
11R-88: Required Skills and Knowledge of Cost Engineering
12R-89: Model Master's Degree Program with Emphasis in CostEngineering
13S-90: Recommended Method for Determining Building Area
14R-90: Responsibility and Required Skills for a Project Planning andScheduling Professional
15R-81: Profitability Methods
16R-90: Conducting Technical and Economic Evaluations: As Appliedfor the Process and Util ity Industries
17R-97: Cost Estimate Classification System
18R-97: Cost Estimate Classification System: As Applied inEngineering, Procurement, and Construction for the ProcessIndustries
19R-97: Estimate Preparation Costs: As Applied for the ProcessIndustries
20R-98: Project Code of Accounts
21R-98: Project Code of Accounts: As Applied in Engineering,Procurement, and Construction for the Process Industries
22R-01: Direct Labor Productivity Measurement: As Applied inConstruction and Major Maintenance Projects
23R-02: Identification of Activities
24R-03: Developing Activity Logic
25R-03: Estimating Lost Labor Productivity in Construction Claims
28R-03: Developing Location Factors by Factoring: As Applied inArchitecture & Engineering, and Engineering, Procurement &Construction
29R-03: Forensic Schedule Analysis
30R-03: Implementing Project Constructability
34R-05: Basis of Estimate
40R-08: Contingency Estimating: General Principles
41R-08: Risk Analysis and Contingency Determination Using RangeEstimating
42R-08: Risk Analysis and Contingency Determination UsingParametric Estimating
43R-08: Risk Analysis and Contingency Determination UsingParametric Estimating – Example Models as Applied for the ProcessIndustries
44R-08: Risk Analysis and Contingency Determination Using ExpectedValue
52R-06: Time Impact Analysis: As Applied in Construction
53R-06: Schedule Update Review: As Applied in Engineering,Procurement, and Construction
Value and Risk 19
Value Improving Practices (VIPs)
The term “VIP” originated from IPA, Inc. and its clients VIPs are more than “business as usual”. They are:
a formal, planned process with assigned responsibilities facilitated efforts led by an independent experts done in a way that involves all the key stakeholders done in a way that documents, communicates, and follows
up on the results Unlike most of what are often labeled “Best Practices”,
IPA’s “VIPs” have been shown by empirical research toactually improve project outcomes Big Caveat: VIPs do not “add value” until you have
solid “basics” such as good project scope definition,project control, etc., etc.
Value and Risk 20
Example: IPA VIPs
From: The Use and Impact of Value Improving Practices and Best PracticesJim Lozon, P.Eng. and Dr. George Jergeas, P.Eng.AACE Cost Engineering Journal, Vol. 50/No. 6 JUNE 2008
Most Used
Most Used
Value and Risk 21
Value Analysis and Engineering
VA/VE is “the systematic application of recognizedtechniques which identify the functions of the productor service, establish the worth of those functions, andprovide the necessary functions to meet the requiredperformance at the lowest overall cost.” (per SAVEInternational)
Given that functions are attributes of an asset orproject that give it a purpose and make it useful ordesirable (i.e., anything that provides what a customerwants or needs), VA/VE is arguably the most importantVIP; i.e., it is directed straight at the issue of value
Note: Many mistakenly think Value Engineering is anysession where they search for savings of any type
Value and Risk 22
Constructability Reviews
“The use of construction knowledge and experience inplanning, design, procurement, and field operations toachieve overall project objectives (per CII)
The purpose of the constructability review is to identify thefollowing five items:
Design errors, in either material selection or dimensions Ambiguous specifications Project features that will be difficult or exceedingly costly
to construct as designed Project features that exceed the capability of industry to
properly build Project features that are difficult to interpret and will be
hard to accurately bid Project “features” include both physical characteristics and
planning attributes
Value and Risk 23
Other VIPs (*abilities)
There are a group of VIP methodologies that involveanalyzing “…abilities,”; i.e., how “executable” a projector work process is and how “operable” or usable theresultant asset, product, or service is
Common examples include: Constructability; focused on execution Reliability, availability, and maintainability (RAM)
which is focused on operations. The are many others. Their common goal is to find the
best value alternative approach They are similar to VA/VE except the focus is on the
relation between design and how a process isperformed (an ability), rather than functions of the endproduct or service
Value and Risk 24
Apply VIPs Early and Often Enough toInfluence Design, Planning & Decisions
Pote
ntia
lto
Infl
uenc
eV
alue
Asset Planning Asset Implementation Project Control
Asset OptionSelected
AssetOpportunityIdentified
Project Fully Authorized
Asset Planning and Implementation Phase
VIPs
VIPs
Value and Risk 25
Risk Management
Risk Management is is covered by ISO,PMIBOK, AACE’s TCM etc.
Processes are all pretty much the same However, what is lacking in most
processes is the step to incorporate riskcost and time into project plans (e.g.,contingency)
AACE’s TCM and RPs address these gaps
Value and Risk 26
AACE’s TCMChapter 7.6 Risk Management
QuantifyRisk Factor
Impacts
AnalyzeContingency
Identify andAssess
Risk Factors
Screen RiskFactors
ControlRisk Factors and
Impacts
Develop RiskManagement Plan
Plan for RiskManagement
Develop andMaintain Methods
and Tools
HistoricalInformation
(6.3 and 10.4)
Asset orProjectScope
(3.2, 7.1)Project
ImplementationBasis(4.1)
StrategicAsset
Requirements(3.1)
PlanningInformation
(7.1,7.2, 7.3,7.4,
7.5, 7.7)
MitigateRisk Factor
Impacts
Cost, Schedule,and Resource
Information(7.2, 7.3, 7.4)
SelectedAlternative
Planning BasisInformation
(3.2, 7.1, 7.2,7.3, 7.4, 7.5, 7.7)
ChangeInformation
(6.2 and 10.3)
ProjectImplementation
Bas is(4.1)
RiskManagement
Plan(3.2 and 8.1)
Riskacceptance
criteria
Risk Analysis Risk Mitigation
Alternativesfor furtheranalysis
Risk Assessment
AssessChanges and
Trends
ManageContingency
(10.3)
RiskPerformanceAssessment
(6.1 and 10.1)
HistoricalInformation
(6.3 and 10.4)
Process takes a “second pass” through assessment
Value and Risk 27
AACE ContingencyRecommended Practices
AACE is developing Contingency-related RPs inreadiness for its Decision and Risk ManagementProfessional (DRMP) Certification
40R-08: Contingency Estimating: General Principles 41R-08: Risk Analysis and Contingency Determination Using
Range Estimating 42R-08: Risk Analysis and Contingency Determination Using
Parametric Estimating 43R-08: Risk Analysis and Contingency Determination Using
Parametric Estimating – Example Models as Applied for theProcess Industries
44R-08: Risk Analysis and Contingency Determination UsingExpected Value
Value and Risk 28
What is Not An AACE ContingencyRecommended Practice?
The contingency method used by mostcompanies is not recommended
That method is “estimate line-item ranging”
i.e., assigning high-most likely-low rangeto estimate and running Monte-Carlo
Empirical research has shown that it doesnot address systemic risks (and it violatesthe principle of linking risks-to-impact)
Value and Risk 29
Agenda
Define basic concepts and terms
Show parallels between Value and Risk
Describe some best practices in industry
Show how to integrate the practices
Value and Risk 30
TCM: An Integrated Process forApplying the Skills and Knowledgeof Cost Engineering
The world’s firstintegrated process forportfolio, program, andproject management(published 2006)
The foundation for allAACE Internationaltechnical products
Covers the entire assetlife cycle
Value and Risk 31
ProjectPerformanceAssessment
(10.1)
Project Scopeand Execution
StrategyDevelopment
(7.1)
SchedulePlanning andDevelopment
(7.2)
WBS &ExecutionStrategy
Cost Estimatingand Budgeting
(7.3)
ResourcePlanning
(7.4)
Value Analysisand Engineering
(7.5)
RiskManagement
(7.6)
AnalysisBasis &
Feedback
Analysis Basis & Feedback
Project ControlPlan
Implementation(8.1)
ScheduleBasel ine
(Activi ties)
CostBaseline(Budget)
ResourceBaseline
(Quantities)
I terative, concurrent processes
Project CostAccounting
(9.1)
Performance andPerformanceMeasurement
(9.2)
BaselinePlans
Strategic AssetManagement
Process(2.3)
Improvement Opportunities(variance from baseline plans)
ScopeChange &Forecasts
ChangeManagement
(10.3)
Project Implementation Basis(Asset Scope, Project SystemRequirements, Budget, etc.)
Cost, Progress and Performance Measures
BaselinePlans
Forecasting(10.2)
ProcurementPlanning
(7.7)
Project Historical Database Management(10.4)
All ProjectControl
Processes(7.1 to 10.3)
ActualData
HistoricalData
ActualData
HistoricalData
ContractRequirements
Status Checks& Feedback
TCM Project Control Process
Each block representsa process further
defined in the TCMFramework
PlanPlanDoDo
CheckCheck
AssessAssessIn TCM, Value and Risk Are Assumed To Be Parallel
Processes
Value and Risk 32
Integration in AACE’s TCMChapter 7.6 Risk Management
QuantifyRisk Factor
Impacts
AnalyzeContingency
Identify andAssess
Risk Factors
Screen RiskFactors
ControlRisk Factors and
Impacts
Develop RiskManagement Plan
Plan for RiskManagement
Develop andMaintain Methods
and Tools
HistoricalInformation
(6.3 and 10.4)
Asset orProjectScope
(3.2, 7.1)Project
ImplementationBasis(4.1)
StrategicAsset
Requirements(3.1)
PlanningInformation
(7.1,7.2, 7.3,7.4,
7.5, 7.7)
MitigateRisk Factor
Impacts
Cost, Schedule,and Resource
Information(7.2, 7.3, 7.4)
SelectedAlternative
Planning BasisInformation
(3.2, 7.1, 7.2,7.3, 7.4, 7.5, 7.7)
ChangeInformation
(6.2 and 10.3)
ProjectImplementation
Bas is(4.1)
RiskManagement
Plan(3.2 and 8.1)
Riskacceptance
criteria
Risk Analysis Risk Mitigation
Alternativesfor furtheranalysis
Risk Assessment
AssessChanges and
Trends
ManageContingency
(10.3)
RiskPerformanceAssessment
(6.1 and 10.1)
HistoricalInformation
(6.3 and 10.4)
The Risk (and Value) processes exchange information
e.g., findings from VIPs (uncertainties) are in input toRisk Identification, and Mitigation options
(opportunities) are inputs for VIP consideration
Value and Risk 33
Are you…- using a robust set of VIPs ANDRisk Management practices?- AND are they integrated?
Value Improving Practice/Opportunity
PlannedValue
AddedValue
ReducedValue
Risk/UncertaintyTre
atment/
Oppor
tunity
Uncert a in ty
VI P
/Opp
ortu
nity
Value and Risk 34
Questions?
Contact:
John K. Hollmann PE CCE CEP(jhollmann@validest.com) or 1-703-945-5483
Key References:
TCM and RPs• Free (.pdf format) from AACE at www.aacei.org/technical
VIPs• AACE Cost Engineering Journal, Vol. 50/No. 6 JUNE
2008; The Use and Impact of Value Improving Practicesand Best Practices, Jim Lozon, P.Eng. and Dr. GeorgeJergeas, P.Eng,