Risk management and engineering go together

“I can tell you that there are 25 firms out there right now whose names you’ve heard of that do not exist anymore because minimizing risk to the firm was not the first priority,” said Jim Kerns. A risk manager for CH2M Hill, Kerns gave the Economics and Business seminar on risk management.

In his talk entitled A Framework for Approaching Risk Analysis for High Risk Projects, Kerns emphasized the need for proper risk management in engineering and construction. He said, “People talk a lot about avoiding risks. But the reality is: it is not always in the top of the hierarchy when it comes to making decisions on how you run the business.”

To prevent catastrophic damages to your company you can look at what caused the failure of other firms. According to Kerns, “If you look at what ended a company, it was probably a single project risk, not a whole enterprise risk.” So ensuring the value of your company requires you to avoid projects with potential risks that you know your business cannot afford. But you cannot turn away every project. Then how do you decide which risks to take?

“You have to analyze that it will take x, y, and z to do it. What’s the economics of it? Can you do all those things with the money that’s available?” Kerns explained.

Another important distinction to make in a large company is which projects are classified as high risk. In CH2M Hill, and most large companies, a contract under consideration is accepted if it is determined to be “low risk” but must go through a very intensive screening process if it is found to be “high risk”.

The severity of the risk taken on can be based on where the project is located. A service on another continent poses many more possibilities for conflicts than one that can be managed locally. Kerns gave the example of projects in the Middle East. He explained, “They have no resources there but oil and money. So everything you need to do a project there has to come on ship and has to go through the Gulf of Aden.” Somali pirates do not allow any ships through without taking captive the passengers and cargo they want. Kerns has to find and evaluate every risk for his company, even ones that seem far out. He said, “The fact is, a lot of people like CH2M Hill, who don’t do any shipping, have to have these guys on their radar.”

The higher up positions take over the decisions about whether to take a contract for something that is high risk, but there are still risks in smaller projects. Kerns also added, “As much as I’ll talk about high level stuff, it’s getting the people at the project level to do the right thing, say the right thing at the right time, raise their hand if it needs to be raise that will really spell the difference between catastrophic events like this happening or not.” This situation can be unique for CH2M Hill because the entire company is owned by its employees. Kerns said, “The reason I like that is with every employee being an owner, the way people down to the project level look at risk is perhaps a little different than others in other companies because they’re stock holders. The decisions they’re making every day on projects affect their share and the value of their company.”