1. The gambler risk PROGRAM PRESENTATION
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2. 1. The Point
2. Concepts

3. Beyond risk and bravado
1. THE POINT
Beyond risk and bravado
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4. ”
An investment in knowledge pays the most interest. If you cannot afford the first bit of knowledge, you have no business considering the whole nine yards.
Steven Keays (2014)

5. THE FAILURE OPTION
The somber reality of projects is a relentless path towards failure
70% of projects beyond the $1B threshold will likewise miss their cost, schedule and performance targets
50% of projects priced at $100M will yield the same failure outcome
30% of projects budgeted at $20M or less will fail to meet investors’ expectations
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6. The investor’s perspective
To the CEO, a project is a financial risk, until it isn’t.
In the boardroom, projects are seen as financial risks. The risks will linger for what seems like an eternity, until breakeven is reached. Even then, sustained profitability by
No amount of faith, wishful thinking, management edicts, or corporate hubris can change the reality of a project’s intrinsic cost. Either the project budget matches it or rushes
headlong toward a financial quagmire. In capital projects, the cheapest at the front end will cost the most, at the back end.
the asset remains mired in a fog of uncertainty. To management, a project is a subfuscous ogre with a bottomless hunger for cash.
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7. 2. CONCEPT
Getting to a success-imbued budget

8. What it is WHY? THE POINT The effect The conditions
The price of entry into the project game
WHY?
Can you survive a project gone off the rails? Any industrial asset is characterized by its intrinsic cost – the minimum valunomic price of a good or service that will warrant its purchase by a buyer. An owner must be know ahead of time if he can afford that cost without threatening the firm’s very financial survival, should the project go off the rails.
THE POINT
Projects fail when budgets are chosen to make the numbers work. A project requires a budget that is compatible with the asset’s intrinsic cost. For that, one must be prepared to spend what’s necessary to gauge that intrinsic cost AND assess whether the firm can afford it a priori.
The effect
A frank assessment of the firm’s resilience. The gambler risk is the money spent to assess the firm’s ability to survive a blown project budget. It also sets the financial risk threshold beyond which lies death.
The gambler risk is the price of admission. Sufficient money must be spent to determine if the project is worth pursuing – usually 1% of TIC. To spend less is to amplify the financial risk. The greater the gambler risk’s expense, the lower the probability of corporate disaster.
The conditions

9. A necessity, not an option
If you cannot afford the price of the gambler risk, you have no business playing the project game.
The correct viewpoint
What matters is not the bottom line impact of the gambler risk, but the economic threat presented by the remaining 99%
The gambler risk is throw away money. You must be prepared to spend it and walk away if the numbers don’t add up to resilience
A project is safe to execute when its owner can afford the upper limit of the TIC estimate range, and be prepared to incur, if push comes to shove.
What a budget really buys
It buys the risk to the actual revenue streams generated by the asset
And the expense risks incurred, whether the asset is active or not
And the risk to the profit stream that ensues – or not;
And the opportunity cost of those risks
Until the asset has proven itself profitably performing, it remains a commercial risk to the business, far into the future.
Economically-safe project
Safe if the owner can withstand a doubling of the original TIC without suffering financial ruin
Unsafe if the owner can only afford the lower bound of the TIC range. The resilience risk here ranges from high to extreme
Economically dangerous (medium to low resilience risk) if costs lie inside the TIC range
Prudence dictates that the owner should seek partners or scale back the project to lower the risk.
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10. Extreme High Medium Low Lowest
Resilience risk spectrum
The consequences of worst-case scenarios
Resilience risk
Extreme High Medium Low Lowest
What can be afforded
80% TIC
90% TIC
100% TIC
150% TIC
200% TIC
The spectrum illustrates the consequences of a project’s worst-case scenario. The severity of this scenario is in inverse relation to the owner’s resilience risk. Conversely, the owner’s financial safety is proportional to the risk. For instance, a high resilience risk means that the owner’s worst-case scenario shows up quickly at the point where the project has accrued 90% of the TIC. A different owner blessed with the lowest resilience risk can afford going over budget (100%) while remaining financially viable.
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