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Risk Management for

Contractors It's not


just about Insurance!
February 9, 2012

2012 FMI Corporation

Learning Objectives

At the end of this discussion, participants will be able to:


Understand how a risk management process addresses and
mitigates risks
Determine the potential business and project risks that exist
Implement proven project management methods for
mitigating project risk
Understand the role of risk management in strategic planning

2012 FMI Corporation

New Realities

Competition willing to work for wages

Competition has doubled or tripled for your targeted


customers or projects

Historically strong sectors have disappeared

Its not coming back to the good old days any time soon

Risk is higher than ever

2012 FMI Corporation

What is Risk Management?

Risk Management is the structured approach to managing


uncertainty

Identifying potential risks


Analyzing the potential impact of those risks
Responding to risk factors to either mitigate or eliminate those risks

2012 FMI Corporation

Company Risk Management Process

1.
2.
3.
4.
5.
6.

Identify Potential Risks


Analyze Impact of Risks
Determine Potential Risk Treatments
Create a Risk Management Plan
Implement Plan
Evaluate Plan

2012 FMI Corporation

Determining Potential Risk Treatments

Avoidance

Eliminate

Reduction

Mitigate

Transference

Outsource or Insure

Retention

Accept and Budget

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Insurance Costs

Insurance should be a manageable cost


Realistic way to lower insurance:

Reduce frequency of claims


Accident-free is the ultimate objective

Return-To-Work Plan - When accidents do happen, focus on


returning the injured workers to their jobs absolutely as soon
as possible

2012 FMI Corporation

How to Lower Insurance Costs

Better maintenance on equipment


Hiring capable employees
Continuous safety training
Efficiently training employees on equipment use
Consider increasing deductible levels to fully realize
improvements in reduced losses

2012 FMI Corporation

Risk Management Plan (1 of 2)

Plan should include:


Management Actions to Take Regularly
Responsibility for Risk-Management Oversight
Tools to Use to Govern the Process
Budget for Risk

2012 FMI Corporation

Risk Management Plan (2 of 2)

Assign a risk officer


Create anonymous risk-reporting channel
Prepare mitigation plans
Review and monitor performance

2012 FMI Corporation

Discussion

Common Types of Risks


Strategic
Design
Financial
Contractual

Disputes
Delays

Subcontractor and Vendor


Operational
Project Performance

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Discussion

Less Common Types of Risks


Political

Breach of Contract
Regulatory Changes
Transfer Restrictions
Sovereign-Guarantee Breaches
Civil Disturbance
Terrorism
War

Source: Multilateral Investment Guarantee Agency Survey of Investors, 2010

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Reducing Project Risk: Change Management

Can cost and resource-loaded schedules help the


contractor encounter unanticipated changing
conditions on the project site that impact the level of
effort?

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Schedule-Change Management

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Schedule-Change Management

Fewer surprises, resulting in reduction in risk


Increase in overall productivity
Smoother processing of changes resulting in fewer and less
costly claims
Better forecasting of project performance and management
of resources
Most importantly, its the best tool for minimizing the
impact of claims and change issues

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Reducing Project Risk: Collaboration

1. Develop Good Relationships and Communications


2. Set Standards Early in the Process

3. The Work-Breakdown Structure Is the Common Language


4. Communicate Bad News Early

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Set Standards Early in the Process

Requirements for Collaboration to Work


Define standardized processes for communication and
collaboration
Routinely enforce and practice these processes to develop a
culture of collaboration
Utilize technology systems where appropriate to codify
standardized processes and ease of collaboration

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Set Standards Early in the Process

Benefits of Successful Collaboration


Standard processes for handling risk link to cost and time on a
project
Issue management and resolution
Speed of notification
Ability to view reference documentation
Ability to act proactively in order to mitigate delay
Progress measurement

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The WBS Is the Common Language

Project Team must be the central hub of communication


Must have specific information that clearly shows what must be
done, by whom and with target dates of completion
This information must be communicated to all the appropriate
partners on the project
Must attach consequences for both performance and
nonperformance persistently and consistently driving
accountability

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Activities Logic 2

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Communicate Bad News Early


Early Warning Indicators:
Accurate reports
Alerts, email notification
Key performance indicators (KPIs)
Communicate corrective action
Executive

Early Warning Indicators


Client

Resources

Critical Path
Reports

Planning and
Scheduling

Cost

Project
Controls

Schedule
Changes

Work Packages
Project
Manager

Project
Engineers

Subs

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Schedule/Cost Management

Our project managers need to do a


better job of forecasting costs and
schedules. The managers also lack
the ability to schedule. I dont mean
put together a schedule, but manage
it as if it were living and breathing.
They cant manage a dynamic
schedule and effectively use it as a
tool.

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Break the Program Into Individual Projects

Establish major milestones and create the Work Breakdown


Structure (WBS) across program

Both large and small projects can be better-defined once the major
milestones have been established
Milestones are generally represented by the completion of a
deliverable (something that can be seen, touched or signed)
When everyone knows the major milestones, accountability can be
defined
Helps the project team control scope creep

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Break the Program Into Individual Projects

Most programs can readily be broken into multiple


subprojects. This allows for:

A greater degree of control for the subproject team in its area


Better collaboration within a smaller group of people
Bringing specialist talent to bear for maximum effect

It also enables a WBS for the subproject to:

More precisely define the scope and sequence logic


Can be functional-based By discipline
Can be phased-based Chronological

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Standardize the Process and Reporting

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Establish Project Performance Indicators

Identify the Key Performance Indicators KPIs are essential


shortcuts to understanding the status of the project. They
enable the project team to quickly view a summary of
project performance.

Traditional Lagging Indicators

Actual Cost versus Baseline Costs


Actual Schedule Milestones Accomplished
Productivity (rate or units) to date
Cash Flow to date Compared to Budget

Common Leading Indicators


Projected Total Cost to Complete
Projected Completion Date
Projected Cash Flow

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Establish Project Indicators:


KPI Cost Report & RFI Status

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The End Game:


Effective, Efficient Programs

Project A

Project B

Dashboard

Estimating
System

Schedule,
Cost,
Documents

Accounting
System

Project C

Project D

Project E

Project F

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Did You Know

A post-job review meeting is the best way to improve


performance on all projects going forward

You learn what went well, what didnt and why, so youll be more
prepared for the next job. It also provides great feedback to Estimating
about how well it performed.

Postmortem meetings are often the most


underutilized project management tool in the business.

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Key Learning Points

Common types of risks


Reducing project risks
Steps in the Risk-Management Process

Identifying Risks
Analyzing Risks

Potential Risk Treatments


Creating a Risk-Management Plan

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Lee Smither
Managing Director
As managing director for consulting, Lee Smither helps construction companies and design rms
sharpen their management practices and corporate performance. He specializes in strategic
consulting, developing and implementing organizational initiatives, and designing executive
development programs. Additionally, Lee serves as a speaker for individual clients and many of
the industrys associations. Experience in conducting seminars and speaking nationally makes him
an effective and highly regarded speaker.
As manager for numerous organizational improvement engagements, Lee has overseen client
implementation efforts ranging in scope from a single project to a corporate division to an entire
company. He has worked with a broad spectrum of industry rms, including many of the nations
largest general contractors, specialty constructors and construction managers. Having worked in
the industry prior to joining FMI, Lee has developed a practical and objective perspective.
Lee has published articles on a wide variety of topics in numerous construction trade journals
such as Transportation Builder, Midwest Contractor, Construction Weekly, Journal of Construction
Accounting and Taxation and Constructor. Lee is a member of the National Association of
Accountants and the Construction Institute of ASCE.
Lee holds an undergraduate degree in economics from North Carolina State University and a
master of business administration degree from East Carolina University. He also serves as a board
member for several industry associations and client rms.

2012 FMI Corporation

Lee D. Smither
FMI Corporation
5171 Glenwood Avenue
Suite 200
Raleigh, NC 27612
Tel: 919.785.9243
Fax: 919.785.9320
Email: lsmither@fminet.com
Website: www.fminet.com

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About FMI

Knowledge

Expertise

Relationships

FMI is the largest provider of management consulting, investment


banking and research to the engineering and construction industry.
We work in all segments of the industry providing clients with
value-added business solutions, including:
Visit us at www.fminet.com

Strategy Development
Market Research and Business Development
Leadership and Talent Development
Project and Process Improvement
Mergers, Acquisitions and Financial Consulting
Compensation Data and Consulting

Founded by Dr. Emol A. Fails in 1953, FMI has professionals in


offices across the U.S. FMI delivers innovative, customized solutions
to contractors; construction materials producers; manufacturers
and suppliers of building materials and equipment; owners and
developers; engineers and architects; utilities; and construction
industry trade associations. FMI is an advisor you can count on to
build and maintain a successful business, from your leadership to
your site managers.

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