Capital Projects and Risk
What initiates a capital investment project? The inertia is often a perceived opportunity and speculation of a beneficial return on investment. Because there are many unknowns early in a project's development, there are risks. The term risk gets a lot of attention in our industry, yet it is very hard to quantify, and its measurement is rarely equal from one project to another. In this blog we argue that there is a complementary and more uniform way to measure “Risk”, which is by measuring “Certainty”.
Certainty, given a simple definition, is a measure of what is known. We have found that utilizing a process that focuses on continual measurement of a project’s level of certainty throughout the project’s life is a powerful method to better understanding risk. In our experience this approach provides stakeholders with a higher confidence metric for decision making, and ultimately equates to project outcomes that meet objectives relative to the Business Case, the Technical Case and the Project Case.
Certainty versus Risk and Uncertainty
Certainty is a measure of what is knowable, definable, and or measurable; certainty is an antonym of risk. A definition of risk is the potential or perception of the potential for loss because of what is uncertain, unknown, unmeasured and or unquantifiable (we recognize risk also represents a potential for opportunity; opportunity is not referred to in this blog, but these concepts can easily overlay opportunity too).
In the beginning of a project some factors are known, but most are unknown. Thus, the level of certainty is low, and risk is high. In our project management experience, we have learned to focus our efforts on increasing certainty as quickly as possible and continuously measure its progress throughout the project’s lifecycle. We use a structured process to identify, define and analyze the elements of each unknown, this yields information that is quantifiable and hence increases certainty; and in turn, provides a more defined context to understand overall risk.
A common industry practice to manage risk is to assign a percentage-based contingency to a project’s identified risks. While this is a widely utilized strategy, it does not yield consistent favorable results. Many projects that utilized only assigned contingency to address risk, exceed the approved budget and schedule due to an inaccurate definition and measurement of risk.
Deploying a process to drive to certainty provides stakeholders a better context of the actual risks. We have named this process the “Certainty Register”. We have found that the Certainty Register provides a higher confidence measurement for use in making decisions versus the more common percentage-based contingency method.
Why Measure Certainty
We all know a project needs stakeholder engagement and support throughout the life of the project, while stakeholders need to have confidence in the project delivery team and the provided information. Utilizing the Certainty Register, in our experience, is a catalyst for enhancing stakeholder confidence and support. This process also produces a focused conversation by using a common language and a unique matrix for measuring progress.
Which is better, making decisions based on what is known (certain) or only on what is unknown (uncertain)?
Our experience says, “What is known, through the use of the Certainty Register.”
Given the level of uncertainty inherent in industrial projects, stakeholders need the most accurate information possible at each point in a project’s life. Each project has many major decisions and countless minor ones, all these decisions impact the project outcome.
Certainty only increases as a project matures. Thus, it is critical to measure and track certainty as part of a structured process throughout the development and execution phases. We are not suggesting using certainty as the only measure of risk as that could allow the optimism bias to unbalance the investment decision. In our experience utilizing the measurement of certainty throughout a project’s lifecycle provides a significant value add to the decision-making process by helping to put risk in context. The measurement of certainty is a very powerful complement to traditional risk measures.
"Stakeholders will have the best information and the most confidence in knowing what is certain."
Known and Unknown
The Certainty Register provides stakeholders with a percentage of "knowns" and "unknowns" along with the probability of "knowables" and "unknowables". As already noted, at the onset of a project some factors are known, but most are unknown. Of the unknowns some are knowable, meaning they will be discovered through the progression of work (e.g. site soil conditions are knowable once the Geotech analysis and report has been completed), but some are unknowable.
Having a framework for navigating the investigation of unknowns and unknowables is critical to, and provides better knowledge in, developing our understanding of certainty and hence risk.
We remind ourselves, "The unknown, if knowable, can only become known as a project matures".
Conclusion
We believe that the industry’s current tools for risk analysis are in need of innovation and improvement as these tools were developed to focus on only risk and uncertainty. Adding a complementary structured framework to the industry’s tool set that captures and measures “certainty” continuously through a project’s life is an innovative and additive tool that we have found enhances the decision-making process and improves a project’s overall technical and economic outcome.
Stakeholders can significantly benefit from requesting the use of a Certainty Register, knowing it will inform, align and decrease a project’s timeline to certainty. We have found the Certainty Register to be the decision-cornerstone that keeps the project informed and aligned throughout its lifecycle. The Certainty Register is a powerful complementary tool that is designed to help align all stakeholders on the project’s foundational objectives in accordance with the business case, the technical case and the project case.
Thanks for reading our first blog article. We plan to publish new content quarterly so visit again. Bye for now and as my college economics mentor, Dr. Robert Rooney, drilled into me... always remember and practice this: “become certain about as many factors as soon as possible; sooner is always preferred to later”.
Please share if there was something that resonated with you and we encourage you to provide comments and more importantly join the conversation.
Richard
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