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P3 Toolkit

Analytical Tools

P3-VALUE Analytical Tools

December 2012

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Chapter 4 - Assessing Project Risks

Identifying and assessing risks is a critical first step in evaluating the costs and benefits of different project procurement options. Risk assessment involves evaluating the probability that an uncertain event will occur over a given period and the likely severity of the effect on a project's objectives if the event occurs. Typical project risks include technical, political and environmental issues, as well as financial risks associated with variables such as interest rates and inflation. Since P3s derive much of their worth from the effective transfer of risks to the private sector, it is important for public agencies to understand the value of transferring those risks.

Risk workshops are formal meetings where project team members, subject matter experts and others responsible for estimating the costs and schedule of a project work together to identify and analyze risks. Assessments also consider the timing of when an event might occur, the probability that the event will occur during that time, and the range of consequences that could result from the event occurring. The output of risk workshops can include a list and description of significant risks, qualitative assessments of risk probability and impact and risk mitigation strategies. Agencies can document these outputs in a risk register.

A risk register allows agencies to capture information on risks, the probability of risks occurring, the consequences of a risk event occurring and strategies to reduce the probability of risk events occurring or to mitigate the consequences if a risk event were to occur. A risk matrix, such as the one provided in the Risk Assessment Tool, provides a format for visualizing an assessment of the severity (i.e., high, moderate or low) of a risk based on the likelihood and consequences of identified risks (see Figure 4-1).

P3-VALUE Capabilities and Limitations: Assessing Risks

The Risk Assessment Tool provides a list of risks commonly associated with P3 projects, a risk register for documenting risks and a risk matrix to facilitate qualitative risk evaluation. The Risk Assessment Tool runs a Monte Carlo simulation that calculates a range of aggregate risk costs based on users' assumptions about the probability and consequences of risks. The calculations derived from the simulation approximate the potential effect of those risks on project schedule and costs.

The Risk Assessment Tool allows users to run a Monte Carlo simulation to model the potential effects of those risks on project schedule and costs. Using Monte Carlo simulations can be challenging because it requires users to estimate the probability distribution (mean, standard deviation, and distribution shape) of specific risks occurring. Some risks, however, cannot be easily quantified and data on risks affecting major surface transportation projects can be scarce or of poor quality. Nonetheless, the Monte Carlo method is a common method of project risk analysis because it provides detailed, quantified information about risk impacts on the project cost and schedule.

It is important to consider risk allocation and to document it in the risk register. Different P3 procurement options allow public agencies to transfer varying degrees of risks. Depending on the P3 structure, risks may be fully transferred to the private sector, retained by the public sector, or shared. Calculating the costs of transferring and retaining risks under different procurement options is a critical aspect of VfM analysis. The Risk Assessment Tool allows users to assess the timing and impact of both retained and transferrable risks.

Figure 4-1. Sample Risk Assessment Matrix

Figure 4-1. Sample Risk Assessment Matrix.

For more information on risk assessment, refer to FHWA's primer on Risk Assessment (see Appendix A).

 

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