Contingency and risk – the key to reducing infrastructure projects distress

With an infrastructure boom forcasting some $87bn in capital budget to be spent over four years to 2018-22, project success will be on the radar from a political, societal and shareholder perspective. As the projects we work on continue to get larger and more complex, many major projects will inevitably experience some form of distress.

So how can we mitigate these risks to the project outcome through commercial management?

Contingency is something which is frequently spoken about in project areas like budgets, in schedules, in quantities – but calculating and using it as a process to manage risk is an opportunity that is not often fully realised.

Uncertainty in any of the aforementioned project areas can lead to poor project performance and overruns, yet in many cases the solution is simple – allocate a considered risk allowance from the total and set yourself up for project success!

Identifying risks early in major projects

One of the keys to successful project management in large infrastructure projects is to understand and analyse the risks early on in the project. This can then inform and define the risk profile specific to that project. It doesn’t necessarily need to be an extensive assessment, but rather proportional to the size and complexity of the undertaking and typically in line with the project phase.

The procurement model chosen with which to deliver the project can be a significant factor in enabling the risk to be managed appropiately, and by the right party. Given this is determined in the very early stages of the project life cycle it highlights just how important it is to start thinking about risk management from the outset.

Procurement and dynamic contingency assessment

With the risk profile being understood, appropriate and informed decisions can be made about how the project is managed and delivered. Both the client and the contractors have a part to play however, above all, the client’s needs and how these will be best addressed have to be considered. It is essential that the balance between performance type requirements and presciptive requirements is well-thought-out, particularly how they are reflected in the various procurement models.

Once the project team, client, contractor or other, has stopped to think about the risks that might affect the outturn position, appropriate controls and measures can be put in place to help mitigate the impact, should they occur. As the risk profile is dynamic, continual review and reflection helps maintain an accurate, appropriate and up to date contingency allocation based on qualitative analysis.

Breaking down risk in smaller projects

Now if we think this is common place on large multi-disciplinary projects, what of the smaller ones? The projects that can overrun a budget by 100% in a matter of weeks. By breaking down the commercial risk process to something that is easy to understand, easy to manage and most importantly, easy to appreciate the benefits, we are on the way to a higher standard of commercial acumen and better project performance. By considering who is best placed to manage the risk and then using hightened influence at the beginning of a project, the outcome can be put on a solid footing for success.

Reducing distress - the future for Australia’s infrastructure market

Consideration of the current infrastructure market, the procurement models being applied and the rigour in which risks are analysed must be taken into consideration so we can start to discuss what is optimal for the best project outcome. The trends of distress  evident on some projects may be able to be mitigated before design starts. Combine this with good commercial risk modelling and some of the very common risks such as 3rd party requirements, ground conditions and existing utilities can be put on the table and worked though with all parties instead of through variations.

I look forward to tackling this topic in more detail at the Risk Engineering and Project Controls Conference this week, and to hearing from the outstanding line up of speakers.