Systemic Risk

Systemic Risk

Systemic risks are attributes of the project and project system. Research shows these are typically the greatest risks, but also the least recognized or quantified. Technically speaking they are quantified as uncertainties (i.e., the probability of occurrence is 100%; they are facts). They also compound the adverse impact late changes and risk events because a weak system is ineffective in managing them. Systemic risks that research has found to be significant include:

  • The level of project scope definition and planning (e.g., Front-End Loading)
  • Team development (clear objectives, decisiveness, filling all the roles, competence, etc.)
  • Project control practices and system maturity
  • Procurement practices (e.g., risk transfer)
  • Bias
  • Level of technology
  • Complexity; physical and execution

These types of risks are usually poorly captured in risk registers (or brushed off as “issues”). And, because most QRA approaches depend entirely on subjective team input, they are simply ignored rather than draw the ire of management by questioning the integrity of the project (a contributor to “optimism bias”). ValidRisk parametric method brings these risks front and center, making sure they are not ignored. The parametric method is also a project system quality assurance method.

For a project with no new technology and modest complexity, the most significant risk is the level of project scope definition and planning. There is 60+ years of empirical research that correlates the level of definition at the time of the estimate and cost growth and schedule slip outcomes (John Hackney, an AACE founder, published his model in 1952). The research led industry to develop phase-gate project management systems. Further, AACE International developed its estimate and schedule Classification practices to align with the industry phase-gate models. The ValidRisk parametric model risks and ratings align with the major industry phase-gate and definition rating methods. These methods include:

  • Estimate Classification (Class): AACE Recommended Practices (RPs) for various industries that define necessary scope definition deliverables and the deliverable status or maturity desired at each decision gate (i.e., a maturity matrix). The Classes range from 5 to 1 with 1 being the best defined (but Class 3 being best-practical for a full funding decision).
  • Front-End Loading (FEL): Originated by Independent Project Analysis, Inc. (IPA). This is conceptually the same as the AACE Classes except the ratings range from FEL 1 to 3 with 3 being the best-practical definition (FEL 1,2,3 corresponds to Class 5,4,3).
  • Project Definition Rating Index (PDRI): Developed by the Construction Industry Institute (CII). This is similar to Class and FEL in that it includes a maturity matrix. However, the rating is a continuous score from 0 to 1000 with 0 being best defined, but a score of 150-200 usually being considered best-practical for a full funding decision). Many companies use the PDRI to benchmark their own projects.

It should be noted that Class and FEL are threshold indices; until all the key deliverables are defined to the specified maturity, the Class has not been achieved (i.e., there is no Class 3.5). The PDRI is a continuous score; one can obtain a target score without having defined some key deliverables.

In respect to ValidRisk, the key concept of Class, FEL and PDRI that is used is the maturity matrix; i.e., the list of deliverables and their stepped levels of definition. ValidRisk includes pre-defined matrices for most project types from process plants, to buildings and infrastructure. The ValidRisk matrices are modeled on the AACE Classification RPs. However, users can customize the matrix wording, and deliverable weightings.

A feature of ValidRisk is that if a company uses the PDRI to rated their projects, one can simply enter the score (0-1000) and this will override the applicable parametric definition ratings (ValidRisk “attribute” ratings such as complexity are not covered by the PDRI). The ValidRisk partners can advise on aligning the tool with FEL, PDRI or other benchmarking approaches used by the client.

It should be quickly apparent that ValidRisk aligns with industry best practice project-system benchmarking practices. Others may call systemic risks terms such as “inherent uncertainty”, “background risk” or “issues”. Most would agree that the ambiguity and subjectivity implied by these terms is undesirable for risk identification or quantification. Identify and quantify systemic risks objectively in a way that results in process improvement with ValidRisk!