Manage Project Risk Right

Successful project management requires identifying and planning for events that can impede the undertaking. Each event poses different potential consequences. Some risks can impact cost, others can affect schedule, and still others can alter the facility's operating parameters. While you can easily identify some risk events such as delays in equipment fabrication, others aren't obvious without the benefit of hindsight.

So, use of a formal risk-management tool and process is essential during project planning to avoid project failure due to anticipated or unanticipated events. Failure Mode Effect Analysis (FMEA), a flexible yet powerful tool, is a good option where risks are diverse.

FMEA Basics
Originally developed for the military aerospace program in the 1940s, FMEA has spread to other industries and areas as a risk management tool. It often serves as an integral part of formal quality systems such as QS-9000. While specialized software programs are available for conducting and documenting results of a FMEA, you needn't use them. Indeed, a simple spreadsheet program can suffice for conducting a FMEA.

A FMEA-based risk management process consists of two phases: completion of a FMEA matrix and then integration of the FMEA matrix results into the project execution and control plan.

The first phase has three steps; each involves completing various columns in the FEMA matrix (Table 1).

The first step is failure mode identification. In the project management context, failure modes are equivalent to project risk events. During this step, you list all possible failure modes in the FMEA table and assign each a severity rating that reflects its impact on project success.

In the second step, you estimate probability of occurrence of each risk. This involves identifying its causes and their probability.

The final step is to determine how to detect occurrence of risks. It's critical to ensure that early detection is possible.

Once you've completed the analysis, you can begin the second phase of the FMEA process. Here, you calculate a risk priority number (RPN) for each risk and document mitigation actions. RPNs enable sorting risks in terms of impact and thus allow the project risk management team to focus on highest impact risks first.

Getting Ready
Before conducting a FMEA, you must address two crucial preliminaries.

Creating the FMEA team. You must assemble a small team of key stakeholders. Team members typically include the project manager, the process engineer and the construction manager. This core team should complete the initial FMEA matrix and then send it to people in support functions such as procurement, permitting and process safety for input. You can conduct the FMEA in one working session. You may save time by asking team members first to individually complete the FMEA table and then focusing the working session on consolidating their tables.

Assembling necessary documents.Running a FMEA too early after project initiation could lead to missed risks and inadequate risk characterization. So, you should conduct the FMEA as part of the project execution planning process during the later part of front-end design. The recommended minimum documents needed are:

• preliminary process and instrumentation diagrams;
• major equipment list;
• roster of applicable permits and critical process safety requirements;
• current contracting strategy for detail design and construction; and
• cost and schedule estimates.
Depending on the particular project's scope, you also may need other documents such as equipment arrangement drawings, control system architecture and equipment supplier lists.

Conducting the FMEA
The first and most crucial step in an effective FMEA is identification of project risks. During this step, you should pinpoint all potential risks along with their causes. The risk identification step should address key project aspects such as material procurement, technology selection, resources' availability and contracting strategy.

To illustrate what's involved, let's consider some major project categories and risks they commonly face.

Schedule. Risks can come from lack of engineering resources, contractor availability as well as late decisions. Missing key stage gates or not completing design documents on time can impact the project schedule. The FMEA team should list all risks to the schedule.

Cost. These risks can stem from external or internal factors. Grouping risks as external and internal can provide clarity. Price escalations of materials and engineering labor are examples of external factors. Internal factors to consider include: missed scope, poor or inadequate definition of equipment specifications as well as changes in project objectives such as capacity.

Regulations and permitting. Unanticipated delays in obtaining permits or permit-driven scope changes can impact schedule and cost. This category is especially important for projects in countries without well-developed permit regulations and experience.