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1 Breakout Session: A5 Dr. Mike Criss, Senior Fellow, Fluor Corporation Date November 5, 2012 Time12:30 – 1:45 PM Risk Fundamentals for Contract Managers

2 Source Documents on Risk ISO –Guide 73 –31000 Institute of Risk Management (IRM)

3 Source Documents on Risk Orange Book –HM Treasury Institute of Internal Auditors (IIA) Risk Management Guide (RMG) For DoD Acquisition

4 What is Risk? Oxford (OED) – Risk A chance or possibility of danger, loss, injury or other adverse consequences –At Risk Exposed to danger Negative Consequences –Positive Outcome Related to Uncertainty of an Outcome

5 Definitions ISO Guide, ISO 3100 –Effect of uncertainty on objectives. Note that the effect may be positive, negative, or a deviation from the expected. Also, risk is often described by an event, a change in circumstances or a consequence. Fundamentals of Risk Management, P. Hopkin, IRM, 2010

6 Definitions, Cont. IRM –Risk is the combination of the probability of an event and its consequence. Consequences can range from positive to negative

7 Definitions, Cont. Orange Book –Uncertainty of outcome, within a range of exposure, arising from a combination of the impact and the probability of potential events Fundamentals of Risk Management, P. Hopkin, IRM, 2010

8 Definitions, Cont. IIA –The uncertainty of an event occurring that could have an impact on the achievement of the objectives. Risk is the measured in terms of consequences and likelihood

9 Types of Risk Hazard Risk –Pure Control Risk –Uncertainty Opportunity Risk –Speculative Estimate Schedule Event

10 Risk Types No clear divisions Hazard or Pure Risks –Only Negative Consequences –Example Theft –Must be managed within the tolerance limits of the organization

11 Risk Types Control or Uncertainty Risks –Uncertainty about the outcome of a situation –Examples: Project Procedures, Budgets, Schedules –Managed by control procedures

12 Risk Types Opportunity or Speculative Risks –Risks deliberately taken –Examples: Investments, Projects

13 Characteristics of Risk Likelihood Severity –Magnitude Black Swans

14 Risk and the Organization Risk Importance Risk Tolerance –Risk Ranges Risk and Strategy Mission Statement Tactics Attitudes Members

15 Risk Responses Tolerate Treat Transfer Terminate

16 Risk and Communication Know stakeholders –Internal and External Efficient Lines of Communication –Up and Down

17 Risk and Communication Shared Risk Vocabulary –Risk List –Standard Framework Internet Risk Management Information Systems (RMIS)

18 Risk Frameworks Risk Architecture Risk Strategy Risk Management Process Risk Protocols Fundamentals of Risk Management, P. Hopkin, IRM, Pg 6.2

19 Risk Tools Risk List –Unique to Organization Company Standards –Risk Policy Analysis –Severity –Likelihood –Monte Carlo –Expected Values

20 Risk Tools Risk Categories –Tolerate (Accept) –Treat (Mitigate) –Transfer –Terminate (Walk Away)

21 Risk Likelihood and Severity Severity Likelihood Low Likelihood High Severity High Likelihood Low Severity High Likelihood High Severity Low Likelihood Low Severity

22 Application to Contract Terms Payment and Financing Changes Disputes Termination Schedule Quality Price

23 Case Studies It Depends… What Does It Depend On?

24 Case Study 1 Risk or Not

25 The Rain Event You have consulted the last 100 years of the Farmer’s Almanac, analyzed weather data from all relevant government sources, and completed a two week session with Karnak – the all knowing and all seeing diviner of things related to weather. Based on this information you are absolutely convinced that it will rain 10 inches on your project site on the 100th day of performance. You also know with absolute surety that because of the rain storm, your project will be delayed an additional 100 days. There is no question in your mind of your facts and you have convinced your client likewise. Discuss your approach to the risk of this rain event, how you will characterize the risk and what strategies you will employ to mitigate it.

26 Case Study 2 What are the Risks?

27 Classifying Risk You are selling Carbon-Based Rotary Accelerator Pumps to the Department of Defense. This is a state-of-the-art, first-of-a-kind technology. The government is developing the design and is scheduled to reach 100 percent final design (ready for production) in 30 days. You have received the initial 60 percent and the pre-final 95 percent design drawings and specifications. Based on those drawings and specifications your have entered into production planning, facility design, and construction of the equipment and facility. From what you can tell thus far, the 60 and 90 designs were less than complete, and the designs were not completed on time. However, you have received reasonable assurances that the final designs will be delivered on time and will be complete. You final bid for a firm-fixed price production contract for 1000 units is due 100 days after receiving the final design package. Ignoring the issues regarding competition and the pay back for the capital investment in facilities and equipment, Identify three risk elements, develop a schema for identifying severity and likelihood of risk. (This should be two different tools). Lastly, discuss what risk mitigation strategies you would employ and how they might affect your price.

28 Bonus Questions If you where trying to develop a bid/no-bid decision for the very beginning of this project, what would you consider? If this were a competitive bidding situation, what would you consider? What are the risk drivers in the capital investment decision for this project? If you were the government, what do you consider risks?

29 Case Study 3 Risk Perspectives

30 Risk Perspectives Consider three prime contract flow down or flow-type provisions: Changes, Termination, and Disputes. Discuss how risk flows through each of these provisions from the perspective of the government, prime contractor and subcontractor.

31 Questions?