Using PDRI for project risk management
Yu-Ren Wang, Ph.D. Candidate and Graduate Research Assistant, University of Texas at Austin, Austin, TX G. Edward Gibson, Jr., Associate Professor, Associate Chairman for Archetiectural Engineering in Department of Civil Engineering, and Austin Industries Endowed Faculty Fellow, University of Texas at Austin, Austin,TX
Preproject planning is “… the process of developing sufficient strategic information with which owners can address risk and decide to commit resources to maximize the chance for a successful project” (CII 1995). One of the key tasks of preproject planning is to develop a detailed scope definition for the project.
Inadequate or poor scope definition, which negatively correlates to the project performance, is recognized as one of the most serious problems on a construction project (Smith and Tucker 1983). As stated in the Business Roundtable’s Construction Industry Cost Effectiveness (CICE) Project Report A-6 (Business Roundtable 1982), two of the most frequent contributing factors to cost overrun are: poor scope definition at the estimate (budget) stage and loss of control of project scope. The result of a poor scope definition is that final project costs can be expected to be higher because of the inevitable changes which interrupt project rhythm, cause rework, increase project time, and lower the productivity as well as the morale of the work force (O’Connor and Vikroy 1986). Success during the detailed design, construction, and start-up phases of a project highly depends on the level of effort expended during the scope definition phase as well as the integrity of project definition package (Gibson and Dumont 1996).
A scope definition package that encompasses the results of the preproject planning efforts is developed for each project. During this process, information such as general project requirements, necessary equipment and materials, and construction methods or procedures are identified and compiled in the form of a project definition package. This document consists of a detailed formulation of continuous and systematic strategies to be used during the execution phase of the project to accomplish the project objectives. It also includes sufficient supplemental information to permit effective and efficient detailed engineering to proceed (Gibson et al 1993).
The Project Definition Rating Index (PDRI) is a project scope definition tool developed under the guidance of Construction Industry Institute (CII), that is a powerful and easy-to-use tool offering a method to measure project scope definition for completeness. Research has shown that PDRI allows a project team to evaluate the completeness of scope definition prior to detailed design or construction and helps a project team to quickly analyze the scope definition package and predict factors that may impact project risk (Gibson and Dumont 1996). Extraordinary risks are many times the result of unresolved scope issues or unforeseen conditions (Smith and Bohn 1999). At a point of time right before detailed design, poorly-defined scope definition elements are identified during the PDRI evaluation process within the owner’s organization. These poorly defined scope definition elements should be treated as potential risk factors that might cause negative impact to project outcomes. By identifying potential risk factors early in a project, the project team may quickly respond to the risks and thus reduce the possible negative impact resulting from the risks.
Preproject planning is a major phase of the project life cycle. This phase begins after a decision is made by the owner/investor to proceed with a project concept and continues until the detailed design is developed. In general, industry practitioners perceive that early planning efforts in the project life cycle have a greater influence on project success than planning efforts undertaken later in the project delivery process. Exhibit 1 identifies the conceptual relationship between influence and expenditure in a project life cycle. The curve labeled “influence” in Exhibit 1 reflects a company’s ability to affect the outcome of a project during various stages of a project. The diagram illustrates that it is much easier to influence a project’s outcome during the project planning stage when expenditures are relatively minimal than it is to affect the outcome during project execution or operation of the facility when expenditures are more significant (CII 1995).
In 1991, CII chartered a research project to determine the most effective methods of project definition and cost estimating for appropriation approval. This investigation showed the relationship between preproject planning and project success through survey research and data analysis. The data sample represented $3.4 billion (USD) in total project costs, and the projects included chemical, petro-chemical, power, consumer produces, petroleum refinery, and other manufacturing facilities. A regression analysis showed that a higher preproject planning index (i.e., more effort in preproject planning) translates into a more successful (predictable) project in terms of cost, schedule, attainment of nameplate capacity, and plant utilization (Gibson and Hamilton 1994). Further analysis showed that facilities with a high level of pre-project planning experienced fewer scope-based change order costs on average than projects with low preproject planning efforts.
Exhibit 1. Influence and Expenditure Curve for the Project Life Cycle
Exhibit 2. PDRI for Building Projects, Category A
The construction industry, perhaps more than most, is plagued by risk (Flanagan and Norman 1993), but often this risk is not dealt with adequately, resulting in poor performance with increased costs and time delays (Thompson and Perry 1992). Nevertheless, available literature provides little information as to how the owner/client identifies project risk factors and quantifies potential risk impacts during the early stage of a project. This research developed and investigated a systematic risk management approach incorporating the PDRI during preproject planning. This paper will outline data collection and analysis of 140 projects representing approximately $5 billion (USD) in total construction cost and a systematic risk management approach will be presented.
Project Definition Rating Index
CII constituted a research team in 1994 to produce effective and easy-to-use preproject planning tools that extended previous research efforts so that owner and contractor companies would be able to better achieve business, operational, and project objectives (CII 1996). This research effort led to the development of the Project Definition Rating Index (PDRI). The PDRI is a weighted matrix with seventy scope definition elements (issues that need to be addressed in preproject planning) grouped into fifteen categories and further grouped into three main sections. It serves as a scope definition tool for industrial projects. In responding to the needs of the building industry, CII developed the PDRI for Building Projects in 1999 (CII 1999).
Exhibit 3. Example Description for Element A1: Building Use
The PDRI provides a means for an individual or team to evaluate the status of a construction project during preproject planning with a score corresponding to the project’s overall level of definition. The PDRI helps the stakeholders of a project to quickly analyze the scope definition package and to predict factors that may impact project risk specifically with regard to industrial and building projects (CII 1999; Cho 2000). For illustration purposes, Section I— Category A of the PDRI for Building Projects (both elements and their weights) is shown in Exhibit 2. This is one category of eleven in the PDRI for buildings and encompasses eight of sixty-four scope definition elements (Cho and Gibson 2001). The industrial project PDRI version is similar and is made up of seventy elements in fifteen categories (CII 1996). Each element has a corresponding detailed description. Exhibit 3 gives an example of an element description. Please refer to CII (1996, 1999) for detailed information on development of the tool, all the element descriptions, and application of the PDRI.
Data Collection and Analysis
Three different sources were pursued for sample projects with the PDRI evaluation. Previous PDRI research, CII Benchmarking and Metrics research, and organizational benchmarking data from an institutional organization (which prefers to remain anonymous) were the three main resources of data (Wang 2002). In summary, information for a total of sixty-two industrial projects representing a total budget cost of approximately $3.9 billion dollars was obtained for the research. Seventy-eight building projects representing approximately $1.1 billion dollars in total budget cost provided information for the research analysis. Both domestic and international projects are contained in the sample. It is important to note that the sample selection of the study is based on organizations volunteering projects for the study and not on a random sample of a known population.
In the PDRI survey questionnaires, specific questions were intended to obtain historical and “after the fact” project information. The questionnaires included questions regarding project basics (location, type, budget, and schedule), operating information, and evaluation using an unweighted PDRI score sheet. Survey participants were asked to think back at a point just prior to construction document (detailed design) development when they filled out the PDRI evaluation score sheet. The total scores were then calculated based on preassigned element weights after the questionnaires were returned. Please refer to CII (1996) and CII (1999) for detailed development of PDRI element weights. Exhibit 4 shows the wide spread of PDRI scores among the sample projects. Due to the unique nature of these two different sectors, industrial and building projects were examined separately throughout this research investigation (Wang 2002). Note that lower PDRI scores indicate a more well-defined scope of work.
Scatter plots were created to investigate the relationships between the PDRI score and cost/schedule overruns. The scatter plots revealed linear relationships between the PDRI scores and cost/schedule overruns for both industrial and building sample projects. The least squares regression models were developed for this research to investigate the linear relationship between the cost/schedule performance (dependent variables) and the PDRI scores (independent variable). With cost and schedule performance as dependent variables and PDRI score as independent variable, bivariate linear regression analyses were performed for the industrial and building projects. For illustration purpose, only the linear regression results for industrial projects (industrial PDRI scores versus cost performance) and the regression statistics are presented in Exhibit 5.
Exhibit 4. Histogram: Industrial and Building PDRI Scores
As shown in Exhibit 5, the ANOVA results showed that Significant F is less than 0.05 and indicates the linear relationship is statistically significant. The coefficient of determination, R2,records the proportion of variation in the dependent variable (cost overruns) explained or accounted for by variation in the independent variable (PDRI score). In this case, an R2 equals 0.23 indicates that 23 percent of the variation in cost performance can be explained by the variation in PDRI scores. The analysis results showed that the linear relation between PDRI scores and cost performance is statistically significant and the PDRI score (level of scope definition) can be used to explain a certain proportion of cost performance predictability. Following a similar fashion, linear regression analyses were conducted between schedule performance and industrial PDRI score as well. Similar linear regression analyses were performed for the building projects. Results obtained were consistent with previous observations that there is significant linear relationship between project performance (cost/schedule overruns) and PDRI scores (Wang 2002). It should be noted that many factors may influence the project after preproject planning and therefore, can contribute to cost overruns and schedule slippage such as poor contract documents, unforeseen conditions, market conditions, strikes, and Acts of God, and so on.
Exhibit 5. Linear Regression Results
Previous PDRI research has statistically shown that projects with a PDRI score of 200 or lower outperformed projects scoring above 200. Exhibit 6 shows the mean project performance for all projects, projects with PDRI score of 200 or below, and those projects with a PDRI score above 200. From the results, it is evident that projects with lower PDRI scores (better scope definition) outperform those with higher PDRI scores (poor scope definition) for both industrial and building projects in terms of estimate predictability.
Construction Project Risk Management
Often times, risk is interpreted in association with uncertainty. In this sense, risk implies that there is more than one possible outcome for the event, where the uncertainty of outcomes is expressed by probability (Al-Bahar 1988). In project management, risks are typically associated with cost, schedule, safety, and technical performance (Rao et al 1994). For the purpose of this study, risk is defined as the exposure to the chance of occurrences of cost or schedule overrun as a consequence of uncertainty.Risk will be studied as it relates to overruns caused by incomplete scope definition. Risk management is a quantitative systematic approach used to manage risks faced by project participants. It deals with both foreseeable as well as unforeseeable risks and the choice of the appropriate technique(s) for treating those risks. The process of risk management includes three phases: risk identification, risk quantification, and risk control. The process is a continuous cycle that consists of risk analysis, strategy implementation, and monitoring (Minato and Ashley 1998).
Risk identification is the first process of the risk management. This process involves the investigation of all possible potential sources of project risks and their potential consequences. A survey of the top 100 US construction contractors identified twenty-three risk factor descriptions, including permits and ordinances, site access/right of way, defective design, changes in work, labor, equipment and material availability, safety, quality of work, and financial failure of any party (Kangari 1995). Most of these risk factors descriptions can be found or related to the element descriptions in the PDRI. Accordingly, the scope definition elements in the PDRI can serve as a comprehensive list of potential risk factors for capital facility project development as addressed in preproject planning. During the PDRI evaluation process, the project team can obtain knowledge about the completeness of pre-project planning efforts and also identify potential project risk factors by looking at poorly defined scope definition elements.
Exhibit 6. Project Performance Comparison
Exhibit 7. Systematic Risk Management Process Using the PDRI
The second process, risk quantification, is needed to determine the potential impact of the risk quantitatively. This process incorporates uncertainty in a quantitative manner to evaluate the potential impact of risk. In this process, an analyst integrates information from numerous sources through quantitative and/or qualitative modeling, while preserving the uncertainty and the complex relationships between the elements of information (Rao et al 1994). By identifying the relationship between PDRI scores and project performance, PDRI scores can be used as an indicator for possible project outcomes (ranges of cost and schedule performance) (Cho and Gibson 2001).
The third phase of the risk management process is risk control. Risk control involves measures aimed at avoiding or reducing the probability and/or potential severity of the losses occurring. Risk control includes risk avoidance, risk reduction, risk sharing, risk transfer, insurance, risk acceptance by establishment of contingency accounts, risk acceptance without any contingency, and risk containment (CII 1989). It is risk reduction that this research focuses on as the major risk control measure. Risk reduction is a two-fold risk management technique. It decreases risk exposures by 1) reducing the probability of risk, and 2) reducing the financial consequences caused by the risk exposures. If poorly-defined elements are properly addressed, the chance and magnitude of the potential negative impact caused by these poorly-defined elements can be reduced. Therefore, by improving the poorly-defined scope elements (i.e., mitigating the risk) and thus lowering the PDRI score, the project team is able to increase the probability of better project performance. The PDRI score evaluation also serves as a good measure for monitoring the effectiveness of risk control techniques implemented.
Exhibit 8. Example Risk Register and Action Items
Applying PDRI in Project Risk Management Process
Based on the Construction Risk Management System (CRMS) model developed by Al-Bahar (1988), a Systematic Risk Management System incorporating the PDRI was proposed by the authors. The proposed risk management process, risk identification, risk quantification, and risk control is summarized in Exhibit 7.
The first series of activities in risk management process deals with risk identification. The four major functions are conducting PDRI evaluation, identifying risk consequence, classifying risk, and registering risk. During the preproject planning process, the PDRI evaluation is carried out by the project team, which consists of major stakeholders of the project. The PDRI score sheets serve as a comprehensive potential project risk checklist. Poorly-defined scope elements are identified and total PDRI score is determined. These poorly-defined scope elements are treated as potential risk factors to the project. The project team then attempts to identify a set of credible risk event or consequence scenarios. The relative value of the PDRI element scores gives some indication of risk impact. Risk classification deals with classifying risk by its nature or potential impact and assigning the ownership of the risk. These risks are grouped and documented in the risk register along with their financial consequence, nature, and ownership.
The second series of activities in risk management process deals with risk quantification. There are four major functions: collecting data, developing model, modeling risk using PDRI, and evaluating risk impact. In order to assess the potential risk impact caused by these risk exposures, historical project information within the company is first collected. The information collected should at least include basic project information, project performance, and PDRI scores. Linear regression models are developed to describe the collected data. The models are used to estimate potential risk impact based on the results provided by the PDRI evaluation. With the given PDRI scores and basic project information, expected cost/schedule performance can be estimated. Thus, potential risk impacts caused by these risk exposures are determined. For instance, projects with a higher PDRI score (i.e., above 400) should possibly set aside more contingency than projects with a lower PDRI score (i.e., 200 or below) to cover for the potential cost predictability problems caused by incomplete scope.
The third series of activities in risk management process deals with risk control. There are three major functions in this process: improving scope definition, lowering PDRI score, and implementing risk control measures. After potential risk impacts are estimated for the risk register, a list of action items to improve the scope definitions is developed for risk reduction. Exhibit 8 illustrates an example of a partial risk register and action items identified after PDRI evaluation. These are the results of an evaluation of an approximately $10 million electrical/mechanical upgrade of a courthouse. The relative risk score shown in Exhibit 8 was obtained from the results of PDRI evaluation. The project team evaluated each scope element in the PDRI and the relative weight for the definition level was recorded as the relative risk score in the risk register. The actions were subsequently assigned to project team members. Higher priorities are given to those action items that aim at risks with higher financial impacts. Once the poorly-defined elements are improved, the PDRI score will be lower and the risk of poor performance is reduced.
In addition to risk reduction technique such as improving the project scope, other risk control techniques should be included to ensure a successful project. These techniques include risk avoidance, risk prevention, risk retention, risk transfer, and insurance. It should be noted that risk control can take two forms. The first was identified in the previous two sections. Another method is contingency set asides to take care of unknown risks.
An objective way of measuring the results from risk control measures is to conduct a PDRI evaluation for a second time on a project. The PDRI score provides an objective measure of scope completeness and can be used to compare with each other to obtain metrics for improvement. In addition to PDRI evaluation, the results from other risk control measures should be tracked as well. All this information should be well documented to monitor the progress of risk management. This proposed systematic risk management process can begin from as early as the conceptual stage of a project and continue until the beginning of detailed design to achieve the project goals set by the project team.
Conclusions and Recommendations
A number of different methods to collect and analyze the data were utilized in the dissertation research. Historical project performance and PDRI data were collected from 140 sample projects representing approximately $5 billion (USD) in total construction cost. The large amount of data was analyzed using various statistical techniques as well as qualitative analysis techniques. In addition, a systematic risk management approach using the PDRI along with a risk management process flow diagram were presented and discussed in detail.
The results are clear. Unresolved scope issues contribute greatly to construction project risk. Projects with good scope definition, including effective risk management, have better outcomes. Developed as a project scope definition tool, the PDRI is also an effective tool for addressing risk issues, estimating potential risk impacts, and assisting in risk control. The systematic risk management approach of applying the PDRI in risk identification, risk quantification, and risk control can help the project team address the risk issues in the preproject planning stage of a project life cycle and thus, lead to a more successful project.
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Proceedings of PMI Research Conference 2002