Whether it’s new roads, bridges, airports, rail lines, oil platforms, or mines, it seems the world is awash with capital projects. Emerging markets/countries are building the basic infrastructure of commerce while established nations and companies are upgrading aging assets and capabilities to manage increasing demand. All the while, what seems like an endless supply of money is being poured into theses major projects by governments, investors and the general public. However, despite the best intentions, advancements in technology and a keener focus on sound project management, the recent statistics on project outcomes does not bode well for owners, operators and the people funding these projects.
According to a recent IEA report, over the next 20 years the energy industry will overspend by $5 trillion on their capital projects. A.T. Kearney, the global project consulting firm recently suggested that 67% of projects are over budget and 74% are behind schedule worldwide, and PMI, the Project Management Institute, just released findings which suggest for every $1B spent on projects, over $135 Million of that money is at risk due to poor project execution capabilities. So while we continue to spend trillions on infrastructure and energy projects every year, it seems that a lot of that money, and time will be wasted.
My question is why? With all of the focus, money and effort being exerted on these projects, how is it that they continue to under-perform. With CEO’s, Boards and other senior executive’s jobs on the line, how has project success not improved?
Let me propose an answer.
As the profession and process of project management has developed, we have focused our efforts, resources and time on two major areas of project success, the project schedule, and budget. What we did not realize fully, and until recently have not spent enough time on, was a third component, or pillar of project success… the Risk Profile and Risk Management. Project risk management has been the under-ultilized, undervalued third pillar of project success, but can provide the most potential leverage to improve project outcomes.
Project Risk Management Summarized
Project Risk Management looks at the impact the project risk profile will have on the two other pillars of project success, Schedule and Cost. Said in another way, we know there are risks to every project, what we don’t always know is how those risks will impact our costs or our schedules. For many project managers, the first day of the project is the last day the schedule and budget are known for sure. Daily reality sets in and the complex nature of the project (contractors, contracts, HSE, regulatory, budgets, schedules, customers, etc) starts to affect our budgets and our schedules. The risks and the unforeseen start costing us time and money, and our projects start to suffer.
For many project managers and project executives, these “surprises” are a nightmare, which cost them margin, destroys their contingency planning, and results in delays, overruns and unhappy stakeholders. An over-reliance on cost and schedule leaves you vulnerable.
But all is not lost. In the same A.T. Kearney study done in 2012, it was shown that of all the important criteria surrounding the project, none was getting more attention, and more interest than risk. Many of the large consulting firms have been writing on how critical project risk management was for positive project outcomes, and the impact an effective risk management process can have on margin, delivery and contingency budgeting.
I would argue that risk management is as critical to project success as understanding schedule, or costs. Without risk management your project is flying blind, and subject to constant surprise and re-direction.
To improve how you manage the risk associated with your projects start by asking yourself three questions;
1. Do I know the real risks which can negatively impact my projects cost or schedule?
2. What are we doing right now to lower the impact of those risks?
3. Is what we are doing actually working?
If you struggle with any of these questions, don’t fret, it can get better. In my next post I will lay out a simple way to start improving how you manage project risk, to help build up the third pillar of project success.