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Consistent Application of Risk Management for Selection of

Engineering Design Options in Mega-Projects

Article in International Journal of Risk and Contingency Management · October 2014

DOI: 10.4018/ijrcm.2012100104

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44 International Journal of Risk and Contingency Management, 1(4), 44-55, October-December 2012

Consistent Application of Risk

Management for Selection
of Engineering Design
Options in Mega-Projects
Yuri Raydugin, Risk Services & Solutions Inc., Calgary, AB, Canada

ABSTRACT
Traditional application of project risk management is limited to identifying and addressing project risks and
then developing cost along with schedule contingencies. This paper proposes a method to consistently utilize
the project risk management methods during Front End Engineering Design (FEED) phase of project develop-
ment to select engineering design options. This method was called for recently to make several key engineer-
ing design decisions in a mega-project (case study). It allows significantly accelerate decision making and
successfully manage various types of bias through leveraging the structure and visualization it provides. The
proposed method is also applicable for engineering change management in any phase including operations.

Keywords: Capital Expenditure (Capex), Decision Tree, Front End Engineering Design (FEED),
Operational Expenditure (Opex), Present Value (PV), Risk Assessment Matrix (RAM), Risk
Ranking Score

INTRODUCTION features of options are compared, with the other

Traditionally project risk management is con-
sidered one of project services functions. Its
primary focus is to identify and address project
risks of various categories. Its secondary goal is
to come up with adequate project cost and sched-
ule contingencies (Chapman & Ward, 2003;
Wideman, 1992; ISO, 2009; Raydugin, 2012).
Role of project risk management in engineering
design option selection is rather overlooked. It
is not unusual that only performance and cost
DOI: 10.4018/ijrcm.2012100104
project objectives and option’s risks being left
out. As a result, it is not unusual that a most
attractive option performance-wise or cost-wise
could be a source of unacceptable schedule,
safety, environmental or credibility risks.
It is widely recognized that project objec-
tives are inter-dependent and “compete” with
each other imposing constraints on project
delivery (Chapman & Ward, 2003). Same time,
notions such as “a cost-driven” or “a schedule-
driven” project are used by practitioners in an
attempt to implicitly introduce a hierarchy of
objectives. A robust trade-off between project
objectives should be explored instead. Other-

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 International Journal of Risk and Contingency Management, 1(4), 44-55, October-December 2012 45

wise, a situation could emerge when a project is that various types of psychological bias
was delivered, to say, on cost (and/ or on scope, normally represented in the option selection
and/ or on schedule, etc.) but resulted in multiple process are effectively addressed and managed
fatalities (and/ or dramatic impact on environ- owing to structure and visualization it brings up.
ment, and/ or ruined company’s reputation, etc.). In addition, the approach described in this
Following this logic, a “project objective’s paper can be used as part of engineering change
mix” could be introduced meaning that any management including Operations. Needles to
change in (or deviation from) one objective say, this method could be used at higher level
gives rise to changes in (or deviation from) the for conceptual design option selection.
rest of objectives. (Similar idea is widely used
in marketing as “4P marketing mix” where 4P
stands for Product, Price, Promotion and Place- LITERATURE REVIEW
ment (Wilson & Gilligan, 1997). A change in
Decision tree analysis in its various forms has
one of these components requires adjustments
been used in several disciplines. General over-
of the others to keep marketing program suc-
view of probabilistic decision tree analysis in
cessful.) Project objectives and deviations from
project risk management is done by Schuyler
them for each reviewed engineering design
(2010).
option should not be considered independently
Portfolio selection and evaluation of com-
from each other.
plex publicly sensitive nuclear project proposal
Multiple engineering design decisions
is described by Strung (2011) considering scope,
are done in FEED phase of a project develop-
budget and schedule of the proposals. A pipeline
ment which defines associated project risks in
project represented as few main work packages
Execute and Operate. They (along with project
is analyzed using probabilistic decision tree by
execution) eventually shape final project scope/
Dey (2002) to select an alternative that is most
quality, cost, duration, etc. Hence, this points
attractive economically. A general decision-
to important role of project risk management
making framework is formulated using decision
in engineering design decisions. Namely, the
trees to identify expected monetary values of
risk-based engineering design option selec-
project alternatives (Dey & Mukherjee, 2005).
tion is a control to assure that all stated project
Another example of probabilistic decision tree
objectives are reached, or almost reached with
application is done for analysis of technical risk
minimal and acceptable deviations.
responses by Kujawaski (2002). Risk response
The author led several risk-based engi-
actions were developed using Monte Carlo
neering design studies of a mega-project of the
assessments.
energy industry. However, this method is not
Decision tree analysis and an economic
seemingly restricted by any type of industry
model are used to identify technical options
or project. At least, it should be applicable to
and their ranking for development of project
any capital project. The only condition is that
cost estimates of deepwater developments
methods and tools of a standard project Risk
(Collins, 2003). Engineering economic analysis
Management System should be fully developed
of project alternatives including decision trees
and implemented by a project team (Wideman,
is proposed by Eschenbach, Lewis, Heune,
1992; ISO, 2009).
Baker, and Hartman (2007) when considering
Besides quality of the risk-based engineer-
technical options.
ing design decisions, much shorter timelines
Several decision tree based methodolo-
of option selection should be pointed out. The
gies were developed to predict outcomes of
method allows structure and visualizes infor-
IT projects (Hu, Mo, Zhang, Zeng, Du, & Xie,
mation in a way that substantially accelerates
2012; Gemino, Saur & Reich, 2010), petroleum
decision making. Another benefit of this method

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46 International Journal of Risk and Contingency Management, 1(4), 44-55, October-December 2012
exploration initiatives (Siddiqui, Al-Yateem &
Al-Thawadi (2007)), agricultural investments
(Zhu, 2008). Development of cleaning options
for contaminated sites (Sorvari & Seppala,
2010) and handling infrastructure hazards in a
small community using a value tree approach
(Li, Apostolakis, Gifun, VanSchalkwyk, Leite,
& Barber, 2009) introduce additional variants
of decision tree analyses.
In addition, several articles describe ap-
plication of decision tree analyses in education
(Strang, 2009), commercial bidding process
(Eldukair, 1995), handling contractor’s li-
abilities (Jeljeli & Russel, 1995) and conflict
resolution during negotiations (Rodrigues, De
Souza, & de Paula, 2008). Strictly speaking,
these works are outside of project risk manage-
ment discipline although shed additional light
on decision tree analysis.
Most of the works cited are featured by
using variants of probabilistic decision tree
analyses when alternative branches of the deci-
sion trees are described by a certain probabilities
of occurrence. As a rule, monetary values of
nodes are in focus of these analyses. Economic
evaluations of project alternatives are done in
some cases that again are described by monetary
values. Evaluations of monetary outcomes are
traditionally done either using expected values
for branches (product of probability and cost)
or, in more complicated cases, applying proba-
bilistic (Monte Carlo) analyses. In some cases
non-probabilistic decision trees are considered
describing options by three traditional “hard”
project goals, namely, scope/ quality, cost and
schedule.
Taking consistently into account “soft”
project objectives (safety, environmental, repu-
tation, stakeholder’s management, etc.), when
selecting project alternatives or engineering
design options seems rather challenging, has
yet to be done. Same time, it is paramount for
success of any project.
This paper bridges the gap in consistent
consideration of all project objectives (both
“hard” and “soft”) when making project option
selections. Equal importance of both “hard” and
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“soft” project objectives in decision making is
emphasized to assure project’s success.
METHODS
Project and Option’s
Objectives (Baselines)
This article was based on the approach to
treat project risks as deviations from project
objectives. Every engineering design option
selection should be conditionally considered
as a mini-project with its own objectives that
are fully aligned with overall project objectives.
Standard set of “hard” (easily quantifi-
able) objectives traditionally includes “project
triangle” of three constraints:
• Scope/Quality;
• Capital expenditure (CapEx);
• Schedule.
These objectives imply constraints on each
other to exclude dichotomies, as fast delivery
of a good project cheaply is not quite possible.
Besides these, some “soft” objectives are
widely used these days as follows:
• Safety;
• Environment;
• Reputation.
These “soft” objectives are normally treated
as additional goal-zero types of constraints: no
fatalities and injuries, no negative impacts on
environment and reputation. However, positive
impact on environment and reputation could be
achieved as a result of project delivery.
In addition to the typical objectives put for-
ward, one “hard” objective is often overlooked
as it is relevant to operations, not project deliv-
ery. Project lifetime operational expenditures
(OpEx) should be part of the picture. Normally,
OpEx is considered in project economic mod-
els. It is required to compare CapEx and OpEx
“apple-to-apple” when considering costs and
cost risk exposures during project delivery and
 International Journal of Risk and Contingency Management, 1(4), 44-55, October-December 2012 47
in Operations. Standard Present Value (PV)
approach should be used to convert annual
lifetime OpEx budgets to base period’s money
and directly compare resulting PV of OpEx
with CapEx budget (Mills, Robertson, Print, &
Rowbotham, 1999). A discounting factor equal
to average company’s cost of capital (normally
5 – 7%) should be used to get the PV of OpEx.
As a result, for the purpose of this paper, cost
objective could be treated as a sum of CapEx
and PV of OpEx, where applicable.
Hence, according to discussion, follow-
ing project objectives will be considered in
this paper:
• Scope/Quality: Performance including
reliability, availability, maintainability
(Ebeling, 2005);
• Cost: CapEx and PV of OpEx;
• Schedule: Project duration/completion
date;
• Safety;
• Environment;
• Reputation.
It is not unusual that initial risk assessment
points out serious or critical deviations from
objectives for some engineering design op-
tions. (Definitions of Serious and Critical risks
are given by Table 1) Additional engineering,
organizational, safety, etc. measures could be ap-
plied to address (i.e., avoid, mitigate or transfer)
corresponding risks in attempt to make them
Acceptable. Addressing could be done during
project delivery and after - in operations. Cost
of addressing of any risk should be included to
either CapEx or OpEx, correspondingly.
Table 1. Risk categories
Risk Ranking Score
1-5
6 - 12
15 - 25
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The “hard” objectives directly depend on
(scaled to) the scope of the option study,
whereas “soft” baselines are rather independent
of this. For instance, comparable impact on
safety, environment and reputation could result
from both small project and a mega- project.
This approach elevates “soft” objectives (or
deviations from them) and allows them to be-
come screening factors in option selection.
The six objectives put forward could be
used as building blocks of project’s Risk As-
sessment Matrix (RAM) introduced.
Option’s Differentiators and
Method’s Foundation
As mentioned, an option selection study should
be treated as a sub-project. Key approach to
outline its scope is to consider any factors that
could differentiate one option from another.
(However, a situation could emerge when the
same Critical or Serious risks pertain to all
options. This would require reviewing and
selecting better set of options or assure proper
risk addressing.) If at least one cost element
or risk of any type pertains to at least one op-
tion, it should be kept in the study to become
a differentiator.
Scope/Quality of any option before con-
sidering risks should meet overall project per-
formance objectives. For instance, any option
should assure that required number of barrels
of oil per day is produced/ processed/ deliv-
ered, etc. in a “risk free world” (baseline). So
it cannot be used as a differentiator. However,
deviation from this could occur due to option’s
risk exposure. Risks with impact on Scope/
Color Code Level of Risk Level of Severity
Green Low Acceptable
Yellow Medium Serious
Red High Critical
48 International Journal of Risk and Contingency Management, 1(4), 44-55, October-December 2012
Quality could become differentiators. In some
cases, an option of interest would not meet
the baseline Scope/Quality requirements. The
Scope/Quality deficiency should be considered
a risk with 100% probability. This option still
might become preferable in case the other
options have even worse costs as well as risk
exposures.
All technologies considered in engineer-
ing design options should be commercial.
Risks associated with them are supposed to be
known because of previous applications. This
corresponds to at least one successful demo
or pilot project. In case a technology is still in
R&D phase of development, unknown risks
(“unknown unknowns”) could make application
of methodology described in this paper impos-
sible (Raydugin, 2012). Unknown risks cannot
be integrated to the methodology presented in
this paper.
Similarly, any considered option should
comply with an approved project schedule in
the “risk free world” as related to any relevant
activities in permitting, engineering, procure-
ment, construction, commissioning, etc. If an
option of interest has longer baseline duration
than approved, the exceeding duration should be
treated as schedule risk with 100% probability.
This should become a differentiator along with
the other option’s schedule risks.
The goal-zero type “soft” objectives
(baselines) are supposed to be the same for any
option. However, deviations from the “soft”
objectives could tell various options apart being
differentiators in decision making.
According to discussion, following dif-
ferentiators could be introduced:
• Baseline costs: CapEx and PV of OpEx ($);
• Scope/Quality risks (score);
• Cost risks (score);
• Schedule risks (score);
• Safety risks (score);
• Environmental risks (score);
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• Reputation risks (score);
• Cost of addressing: Δ CapEx or PV of Δ
OpEx to address risks ($).
All differentiators are measured either
directly in monetary values or indirectly by
scores. Using scoring method is an attempt
to simplify quantification of deviations from
“hard” objectives (Schedule and Scope/ Qual-
ity) and introduce quantification of deviations
from “soft” and intangible objectives (Safety,
Environment and Reputation) following an
approach justified by Hubbard, 2010.
Option’s Baseline Cost
As discussed, the risk-based option selection
method could be applicable to any type of capital
project. That is why we don’t put forward a
particular case study but describe the method
in general terms. For simplicity and demonstra-
tion purposes, let’s consider two basic options
(e.g., two different sets of equipment). Let’s
also assume that each could have two different
maintenance programs in operations. According
to this, Figure 1 represents a decision tree that
has four nodes.
This type of decision tree differs from
probabilistic decision trees used in traditional
risk analyses when probabilities are assigned
to each branch (Schuyler, 2001). Here each
branch/ node represents an option. One of them
should be selected.
In reality, the decision tree could have mul-
tiple branches reflecting variants of scope (and
CapEx) as well as operational budgets (OpEx).
OpEx could also reflect not only expenditures
but lost revenue too due to break-down and
maintenance down-times (Ebeling, 2005). In
this case the down-times are considered as part
of option’s OpEx baseline, not risks. In practice
8 – 12 or more nodes could be introduced to
cover all major viable options.
 International Journal of Risk and Contingency Management, 1(4), 44-55, October-December 2012 49

Figure 1. Decision tree of four nodes

Being a decision visualization tool, the • Organizational context: Project team

decision tree contains information on option’s member’s responsibilities.
risk ranking scores along with cost information.
Standard Project Risk Management approach Typical risks management process is shown
is used to define the risk scores as described. by Figure 2. Only four steps of this process are
directly relevant to the subject of this study.
Namely,
DISCUSSION
Project Risk Management System 1. Identify risks;
2. Assess risks before addressing;
In order to support the method introduced in 3. Develop addressing actions;
this article a standard project Risk Management 4. Assess risks after addressing.
System should be in place. This includes fol-
lowing three key components: Step 3 includes estimating of addressing
costs.
• Process: Steps to treat risks; Ideally, risk inventory for each option
• Tools: Risk Assessment Matrix and Risk should be developed. Standard industry practice
Register; is to use three part naming for risks (cause –

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50 International Journal of Risk and Contingency Management, 1(4), 44-55, October-December 2012
Figure 2. Project risk management process
event – impacts on project objectives) to exclude
ambiguity in their definitions (ISO, 2009).
Risk Register
A standard Risk Register template adopted by
a project could be used for the option selection.
The only difference is that each risk that was
selected as a differentiator should be listed
several times. Figure 3 represents a sample
template for a case when two risks (R1 and R2)
are considered differentiators for four nodes 1A,
1B, 2A, and 2B. The template structure is based
on application of the project Risk Assessment
Matrix described.
Risk Assessment Matrix (RAM)
and Option Selection Criterion
Typical 5x5 Risk Assessment Matrix for a
mega-project of $1B – $5B of CapEx is shown
by Figure 4.
The six project objectives discussed are
included to the RAM. Deviations from these
objectives (baselines) are measured using five
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ranges of impacts and five ranges of probabil-
ities. More detailed definitions should be de-
veloped for ranges that are not measured as
numbers. For example, it would be worthwhile
to know what “Massive Effect” on environment
means for this particular project, etc. Each of
the 25 cells of the RAM could be represented
by a risk ranking score (product of impact and
probability scores). The risk ranking scores
could be grouped to three risk level/severity
categories (Table 1).
Different grouping of risks could be pos-
sible depending on risk policy of a project. As a
case in point, Acceptable category could include
scores 1 – 6, or number of groups/colors could
be four, etc. Similarly, different definitions of
ranges/probabilities could be introduced or
even different set of objectives may be used
depending on size and nature of a project. (For
instance, Scope/Quality objective for a Carbon
Capture & Storage (CCS) project could be
defined through quantification of CO2 capture
efficiency, reservoir storage capacity, monitor-
ing, measuring and verification, etc. in place
 International Journal of Risk and Contingency Management, 1(4), 44-55, October-December 2012 51

Figure 3. Sample risk register

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52 International Journal of Risk and Contingency Management, 1(4), 44-55, October-December 2012
Figure 4. Risk assessment matrix
of number of barrels of oil per day recovered/
delivered/processed, etc.) Important is consis-
tency in applications of once accepted RAM.
Key principle here is that risks of equal
ranking scores are treated as equals indepen-
dently of their nature. For instance, a Critical
risk of reputational damage (score 20), a Critical
risk of overspending (score 20) or a Critical risk
of fatality or permanent disability (also score
20) are considered equally unwelcome even in
case of so called “cost-driven” or “schedule-
driven” projects.
According to the Risk Management Pro-
cess of Figure 2, the RAM should be used for
assessment of selected risks before addressing
first. Maximum risk ranking score for each
option should be identified when considering
impacts of all risks on all six project objectives.
For instance, let’s assume two risks identi-
fied as differentiators for considering engineer-
ing design options: R1 and R2. Let’s also assume
that one of the options (1A node of Figure 1)
has impact of risk R1 on Cost with score 9,
on Schedule with score 3, on Reputation with
score 12 and Safety with score 15. And risk R2
makes impact on Environment with score 8 and
Scope/Quality with score 10. As a result, risk R1
produces the top score of 15 and risk R2 – the
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top score of 10. As a result, the top score of 15
is attached to the option 1A.
Acceptable level of severity (risk ranking
score 1 – 5) is used as a criterion for an option
to be selectable. If any option’s ranking score
including top score is equal to or higher than
6 (Serious or Critical), the option requires ad-
dressing to reduce corresponding risk ranking
scores to Acceptable level. Selectable options
should be compared in terms of total costs as
a next step.
In the example, all risk ranking scores
require addressing but one. Impact of risk R1
on Schedule has Acceptable level even before
addressing (score equal to 3). Presumably,
after developing addressing plan and spending
amount of money “G” risk level of option 1A
after addressing becomes Acceptable for all
risks and impacts (top score equal to 5).
The decision tree of Figure 1 summarizes
not only option’s cost information but also top
risk ranking scores for each node before and
after addressing. In the example of Figure 1,
options 1B and 2B should be screened out as
their top risk scores are not acceptable even after
addressing. Final selection between options 1A
and 2A depends on their total costs (CapEx, PV
of OpEx and Costs of Addressing).
 International Journal of Risk and Contingency Management, 1(4), 44-55, October-December 2012 53
Organizational Context
In general organizational context of Risk Man-
agement describes responsibilities of project
team members to support the Risk Management
Process. It also outlines types and frequency of
risk review meetings. When option selection
study is initiated, it is critical that project team
members involved in engineering, estimating,
planning as well as in safety, environmental,
procurement, quality and risk management work
closely together. They should be available to
take part in risk identification and assessment
workshops. These workshops are usually held
when CapEx and PV of OpEx information for
each option is fully developed and available.
When initial results and conclusions are
developed, a broader group of stakeholders
could be invited to validate all cost assumptions,
risk assessments and conclusions.
One of advantages of this approach is that
it brings up enough structure and visualization
to suppress various types of psychological bias.
At least, sources of bias could be identified
and addressed.
CONCLUSION
In the method described in this paper, Accept-
able risks (risk ranking scores 1 – 5) doesn’t
require addressing. They have Low level of
residual risks that could be simply neglected.
The risks with higher scores are screened out
and don’t take part in the final round of option
selection. This simple approach allows avoid
estimating residual risks after addressing.
All CapEx, OpEx, Δ CapEx and Δ OpEx
costs should be considered as ranges initially.
Even discounting factor used to obtain PV of
OpEx and Δ OpEx could be considered as a
range. Probabilities and cost impacts could
be also assessed as ranges. This opens a door
to probabilistic cost risk analysis (Hubbard,
2009). However, we believe that in majority of
cases this would be overshooting. Mid-points
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of all ranges could be used as one-point range’s
representatives.
Safety objective and corresponding risks
are trickiest in terms of consistent consideration
in the option selection studies. As a matter of
fact, H&S teams have their own corporate
guidelines and manuals using very different
safety risk assessment tools. Moreover, due to
zero-level Safety goals, level of tolerance is
very low. Same time, to apply “apple-to-apple”
comparison of risks, Safety objective should
be part of the project RAM. As a result, we
recommend using Very Low probability level
in the RAM of less than 0.1% (Figure 4). This
corresponds to Acceptable risk ranking scores
1 – 5 and symbolizes very low acceptable fre-
quency of Safety risk events.
Different set of objectives could be in-
cluded to a project RAM and different size of
RAM (3x3, 4x4, 6x6, etc.) could be selected.
Important is consistency of application of the
adopted RAM in all risk management activities
including option selection studies. Same time
we believe that 5x5 RAM is optimal for these
purposes. RAM’s smaller than 5x5 don’t provide
required level of detail to differentiate risks
and compare them before and after addressing.
Whereas, RAM’s bigger than 5x5 put forward
too much detail.
Some risks could have quite high ranking
scores before addressing (e.g., node 2A of Fig-
ure 1). Same time if they are manageable, their
severity could be reduced to Acceptable level,
assuming cost of addressing is not prohibitive
(cost “I” for node 2A). Supposedly, it is not
always a case. Despite some nodes could have
relatively low risk score initially (e.g., node 1B
of Figure 1), level of their risk manageability
could be low. Practically this means that cost of
addressing could be uneconomical. Probably,
it would be possible to reduce corresponding
risks to Acceptable level for such options. But
prohibitively high cost of addressing should
make those uncompetitive cost-wise.
The proposed method of engineering
design option selection provides high level of
54 International Journal of Risk and Contingency Management, 1(4), 44-55, October-December 2012
visualization and allows identify and manage
psychological bias of various origin and type.
It also allows substantially reduce time spent on
decision making. The method proposed could
be also used in engineering change manage-
ment to justify engineering design changes in
all phases of project development as well as
in Operations.
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Yuri Raydugin has been working on more than a dozen capital mega-projects related to Oil and
Gas Industry as either an employee of major Oil and Gas companies or independent consultant
of Risk Services & Solutions Inc. He has a PhD degree in Physics & Mathematics from Rus-
sia’s Academy of Sciences, an Engineering degree in Applied Physics from Ural’s Polytechnics
University (Russia), and an MBA degree from Henley Management College (UK). Dr. Raydugin
is a Practicing Engineer and a member of The Association of Professional Engineers and Geo-
scientists of Alberta (APEGA).

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