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Sample Document Risk Management Guide

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Risk Management
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          It is good practice to identify and plan how project risks will be managed and allocated. The time required and the formality with which you follow the process will depend on the scale and complexity of the project, and your own organisation’s approach to risk management. We strongly recommend you start with an initial risk identification and assessment, then, based on your findings, consider how to resource this, and how to formally approach it.  A can be defined as any factor, event or influence that threatens the successful completion and operation of a project in terms of cost, time or quality. is the process of identifying the significant risks to a project through all phases of the project life cycle including operations, devising tactics to reduce exposure to these risks, and then reviewing & monitoring, on an on-going basis, the effectiveness of risk mitigation & management actions undertaken. The fundamental principle of risk mitigation is that risk should be allocated to the party best able to manage; as such consideration should be given to which of the three possible categories each risk belongs in:   Retain,   Share or   Transfer it.  Also see section 4 paragraph 4., of the Framework document for further details on this. Cost effective allocation of risk between the client, the ESCO and the financier will result in lower costs of installation and operation, and will provide enhanced value for money when compared to traditional procurement. The risk allocation element should be included in the project tender documents. One primary benefit of EPCs (and to a lesser extent EPRPs) is that the technical performance risk is transferred to the ESCO. Normally the energy price risk is retained by the client, as this is something they are exposed to in any case and an EPC will reduce the volatility of the client’s overall energy costs.   As a general rule, good value for money is rarely served by transferring all possible risks to contractors (ESCOs). If a Contractor is asked to accept a risk over which it has little or no control, it is likely to charge a higher premium than the risk is worth. In addition, if the project funders are not satisfied that the risk quantification and allocation is appropriate the project is unlikely to be bankable. Also, it is worth considering that in a nascent market, less experienced ESCOs may not fully understand the EPC model and can overestimate the risk and cost it accordingly, resulting in a project that is not value for money for either party; this lack of understanding of the nature of the risk transfer between parties and its implications need to be recognised and catered for by robust assessment and quantification by the client.    It is beyond the scope of this handbook to provide detailed guidance on how to develop & conduct a risk management process specific to your project. There is considerable published material on the   subject and a number of useful references are provided at the end.   The process below provides an overview. Identification of all risks associated with the design, construction, operation and maintenance of the project. Risk Register  Assess the potential significance or impact of each risk and the probability or likelihood of occurrence. The resulting matrix combines these two to identify the most significant risks and providing all with a rating. These are “raw” (i.e. unmitigated) risks. Risk Register  –  Raw & Rated Risk The objective of risk quantification is to express the potential impact of a risk in monetary terms. The quantification of risk in monetary terms facilitates better understanding of the potential impact of risks, and provides a strong rationale for the client to ensure that significant risks are managed efficiently and in a cost effective way. However, the approach and resources expended in undertaking the preliminary risk quantification should reflect: - the size and complexity of project - the number of significant project risks Risk Register updated with Quantified Risks The risk mitigation process will identify how high risks can be reduced to a medium or low rating. This includes, but is not limited to, internal risk management, reduction, and /or avoidance by employing the retain/share/transfer strategy. Residual risk will remain and the register is updated with the mitigation measure and resulting new ratings. Identify whether the client or the ESCO is likely to be best able to manage each risk. This should form part of the ESCO tender bid. Risk Register   – Risk Mitigation Identify how residual risk will be monitored and reported. The client may instruct the ESCO to provide their updated risk register at various stages to keep track of allocated risk. Risk Management Plan Risk Quantification Risk Assessment Risk Identification Risk Mitigation Risk Management Risk Allocation
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