Turn Project Risk into Cash!

Just like the saying “when you get lemons, make lemonade,” there are risks that will turn into issues during project execution, so why not turn these risks into dollars? Like the domino effect, in Lean Six Sigma there is the 1–10–100 rule which states “1 dollar spent on prevention will save 10 dollars on correction, and 100 dollars on failure costs”.

Therefore, if a risk becomes an issue or failure cost, it’s too late to mitigate. You go into a reactive mode and spend money along with time resolving this issue. But if you identified the risk before it became an issue, then you have enough time to put in place mitigation measures. Because you were proactive mitigating, the chances of the risk turning into an out-of-control issue decrease drastically.

The objective is to plan for the worst by identifying all risks before they occur. This means that all the unknowns are known on your risk log in the hopes to avoid the risk from materializing into an issue for your project. Of course, we all know that it’s not possible to know all the unknowns. This is where a good integrated risk management process can help because of its closed-loop process, document control, and cross-functional expertise.

But if your company is less mature and only supplies project managers with a template to use for risk planning, then make sure you and your team identify risks that have a high potential of being a problem during the execution of the project. Remember, being aware of “what can happen…” is half of the battle. The remaining half is putting in place mitigation plans along with estimation of cost and time if the risk were to become an issue. This way, you can start laying out the foundation for turning risks into positive financial success for your projects. Here are three ways you can turn your risks from being a cost to a saving:

1. Risks that will never occur: Once you’ve identified the risks, start brainstorming ways the risks can be stopped from becoming an issue. Ask the question: What can we do now to avoid this risk? Place the actions into your mitigation plan. Don’t forget to add estimated costs if this risk were to become an issue so you and your team understand the stakes. Any risk completely avoided during execution of the project will be considered a cost-avoidance benefit. To see how well you did at not having cost overruns on your project based on risks, simply add up the costs you estimated during the mitigation period. It’s a great way of highlighting your project’s financial success.
2. Risks that become mitigated issues: If you know you cannot avoid the risk from turning into an issue during execution, then mitigate it so its impact is minimal to the project. Ask the question, “What can we do to make it less painful?” There are infinite ways you can mitigate depending on the risks out there, but here are some key tips you can use:

• Place triggers in your schedule to give you heads up when the risk may become an issue. This way you can act proactively, and it won’t be a surprise to anyone on the team when it happens. For example, the product you are building is the first of its kind, so you have additional points of inspection built in. Whenever you reach a phase in the building, the inspection milestone will trigger so you can start mitigating the issue early.
• Place a buffer in your schedule to give the task tied to the risk extra time. This way it doesn’t create a delay to your project. A fitting example is giving the designers extra time to complete the drawings because you know from previous projects, they take longer than the estimated time they give you during planning of the project.
• Keep customers close but suppliers closer. You need to satisfy your customer’s expectations but sometimes we forget to give the same love to our suppliers that are part of the extended project team. For example, include your suppliers in your team meetings by having the first part of the meeting dedicated to them. You can always continue your team meeting once their agenda points are completed. I used to have my suppliers be part of the first 30 minutes and my team would be included so I didn’t have to repeat myself with whatever transpired. Then I would continue my team meeting. This also cuts in having so many meetings!

3. Contractual or customer risks: There will be risks that arise during execution when the customer wants something that may not be explicitly spelled out in the scope of work. If you have a change management process with the customer laid out, then you can discuss the request, letting the customer know how much of an impact this change will be in terms of costs and schedule. Then come to an agreement on who pays for the change. Without a solid change process, it’ll be hard to get the customer to agree to pay. Ask the questions, “What is unclear in the scope of work?” and “At what point should I inform the customer?” If you are diligent at the planning phase and know your contract well, then these risks can turn into opportunities for your project. There are four important things to do in planning to avoid customer disputes:

• Have an agreement on how to handle any discrepancies or unknowns in the scope of work. This will help you get money for any out-of-scope changes. For example, I had a customer that did not want to know any details of the project, just wanted the assembly on site. But when the assembly was sent, they were upset with the assembly’s color because it clashed with their other equipment. Because they were not involved and the contract did not specify the color, we had painted it with our standard color. So, the customer had to pay for the new paint job, but we had to pay for the labor. We both ended up spending more money and time because of the vagueness in the contract.
• Have a way of identifying which of the risks you want your customer to be aware of. I found that when I was transparent with the customer, letting them know of certain risks we were tracking, they were more receptive when these risks became issues just because they were not blind-sided. In some cases, I’ve seen customers get involved to help mitigate the risk or be more lenient with the delays of the project just because they were informed.
• Go through the project schedule with the customer. They may just want to be kept informed or they may want to be part of the task. For example, I had a customer who wanted to be on site whenever the testing was performed, even though it wasn’t mentioned in the contract. The first time this happened to me, I had to redo all the testing to have them present and they were upset I hadn’t told them about it. Ever since that $4,700 additional cost experience, I learned to get with customers upfront to see their involvement in the project.
• Put in place weekly updates so the customer is aware of the project’s status. Communicating progress helps your relationship with the customer, and it helps the customer understand where the project is at. This way if the customer asks for a change, hopefully they will be asking at the right time to avoid rework costs. For example, the customer is informed of the progress weekly but only when the product is being constructed do they decide they want a change to the design. Status communication helps you with this issue because you can tell them about the impact on the schedule and costs incurred due to the design already being completed. This issue becomes a change order where the customer pays if they want to go forward. Your project does not lose money but makes more with this change.

If you are on a project, try putting some of these tips in place and see how you can show savings from just managing risks. If you want to learn more, watch our YouTube video.

Remember, a risk that is identified and monitored will always cost less than an issue that occurred on your project surprising everyone. Proactive project managers who take the time to plan will always have more successful projects. Are you a proactive person?