Some of today’s top contractors manage multiple mega-projects each year. The potential downside to such a high-dollar workload is that poor management discipline can result in budget overruns of 5 percent to 10 percent per project. Ultimately, one unprofitable project could wipe out the profitability of a firm’s entire portfolio.
A robust, truly integrated risk management solution that identifies, quantifies, tracks and mitigates threats can improve the overall performance of an entire portfolio and ensure projects are delivered on time and on budget–potentially saving an organization hundreds of millions of dollars.
For contractors, enterprise risk management (ERM) begins during a project’s bid phase. ERM provides organization-wide visibility so companies can accurately assess risk levels and make informed decisions on whether to bid on a project, how to bid, and how the project may affect others in the portfolio.
In a 2012 KPMG survey of global engineering and construction executives who were asked about projects that significantly under-performed, more than 50 percent admitted they failed during the bidding stage to identify the risk that ultimately materialized and caused margin erosion. Lack of visibility during the bid phase can mean taking on projects that are too risky, leading to inaccurate contingency funds and “best guess” timelines. Increasingly, proof of the ability to effectively manage risk is used in the selection criteria for project partners and contractors.
Once a project is under way, accurate visibility and forecasts are critical. Getting surprised by unforeseen risks after months or even years of a seemingly smooth-running project can cause budget overruns and schedule delays. Additionally, surprises on one project often cause a ripple effect across a portfolio, such as drawing down contingency funds too early or causing logistical issues with capital equipment and other assets.
Balancing workload with accurate capacity forecasts must be practiced on every project and throughout an entire organization. Being caught short-handed or overstaffed while trying to balance existing projects with backlog is detrimental to a project’s completion and, ultimately, the company’s reputation.
Using an integrated risk management system helps contractors identify risks and balance their workload by making the most of finite resources. Additionally, this 360-degree visibility helps mitigate interconnected risks. A centralized risk management solution also creates a consistent process, resulting in a systematic approach to project risk management.
A recent report from A.T. Kearney on global capital project spending found leading companies stand out based on how they identify, prioritize and manage risk. Well-managed risk equals reward. Organizations that do not implement strategic risk management not only miss out on an important best practice, but also on the associated rewards.