During these uncertain times, it is all too easy to catch a cold on a project. Uncertainties drive up costs and delays, profits vanish from this project and the next two. Soon, the business is forced to make some difficult decisions. This scenario is more likely in today’s riskier, more uncertain times. But better risk management can help.
EPC contractors with a higher risk maturity win more projects. This improves profitability and provides better business security. Asset owners with superior risk maturity enjoy a faster time to value, as projects are more likely to be completed on time.
And for both, commercial success turns into reputational success. This attracts higher-skilled talent and new opportunities, both of which drive an organization further.
5 Ways Better Project Risk Management Improves Profitability
1. Clear Understanding of Risks, Costs, and Contingencies
A better understanding of risk makes it easier to identify potential problems that can arise over a project.
A culture of risk data democratization allows project teams to learn better from previous projects apply lessons learned to new ones. This can give them foresight into potential risks in new projects.
Strong processes for collecting data from cost teams and project teams allows risk management professionals to create better, more realistic schedules.
Improved data management and better internal processes allows project teams and managers to go into a project with full knowledge of the factors in play. This enables you to have more accurate contingencies and a more confident approach to new projects.
2. Greater Insight into the Cause of Overruns
We know that there will always be surprises that arise despite risk management – the unknown-unknowns. But there doesn't have to be as many, and they don’t have to be as painful.
For example, risks to cost come from multiple sources including uncertain project duration. Project teams with lower risk maturity often ignore this in cost risk analyses. When an activity runs over duration, it has an impact on cost because that activity is attached to a fixed or variable cost in your schedule. Change one, change the other.
If you can’t see the schedule risks that are driving cost risks, you won’t have a complete understanding of the factors that impact your project outcomes. An integrated schedule and cost analysis reduces those uncertainties.
3. Better Quality Data for Decision Making
A good schedule of risks requires good and timely scheduling information. Businesses with better risk management processes can capture and interrogate data more effectively. This provides them with a range of benefits beyond project controls. It extends to company culture, customer service and so on.
In today’s world of big data, organizations that can manage data better have a competitive advantage. And for businesses looking to win big projects and stay competitive, demonstrating your data management abilities through risk management provides one of the clearest connections between data quality and bottom line.
4. Improved Capture of Lessons Learned
And of course, better data quality means businesses have better historical data to draw on when they take on new projects. Historical risk information can be used to generate a lessons learned database to streamline future project risk analyses. Over time, this improves project risk management across the business, not just on the project-specific level.
5. More COntrol Over Client Expectations
Winning a project from a huge entity like a multinational or a government opens the doors for lucrative, long-term relationships. Businesses that actively engage their stakeholders with project risk have an advantage when risks become issues.
When stakeholders fully understand project risks, activation of risk contingencies, however difficult, is at least seen as logical and planned. They feel more comfortable that a contingency is there to be used. They also understand that time and cost have an inherent relationship that can be leveraged to achieve project outcomes.
How to Improve Project Risk Maturity & Unlock the Benefits
Organizations with mature capabilities can minimize risks, control costs, and are better able to adapt to changing market conditions.
- Organizational culture must support risk. Management must enable risk analysis to make its decisions. Project teams should champion a culture of honesty and realism during interviews and workshops, so all issues are discussed openly.
- Collect high-quality project risk and uncertainty data. Risk analysis is “garbage in, garbage out”. Many pressures can impede the collection of good data from project and cost teams, so having strategies to get at the heart of risks are key.
- Use a trusted risk analysis platform. The platform you choose must comply with best practice scheduling principles. Good practice critical path method (CPM) scheduling also is important since the schedule will be simulated using Monte Carlo methods.
- Use modern software for Monte Carlo simulation. The software needs to treat the effect of risks on the cost of labor and of materials differently. Then needs to be able to simulate schedule risk histograms and scatter diagrams of cost and schedule simultaneously.
There is a perception that project controls have become stale. But demonstrating high risk maturity can help differentiate yourself in a competitive market. Risk-savvy companies are better positioned to avoid bad situations and continue to find success despite the uncertainty all around us.