Professional Documents
Culture Documents
Project Risk
What is Risk Amity Business School
Contd.
• Site selection-investment decision-Finalizing
technical package-implementation schedule-
obtaining LOI-conducting contour survey and
Benchmarking-Conducting investigation of
ground water-development of plot plan-
manpower-fabrication-construction workload
forecast-recruitment.
• -Ernest money---The amount to be deposited
with tender document.
• Retention money—is generally considered as a
contractual safeguard and not as cheap form of
finance…10% with order, 80%with completion,
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Advance activities
• Fencing /boundary walls.
• Development of approach road.
• Preliminary soil investigation.
• Agreement for power.
• Agreement for water.
• Sliding arrangement.
• Arrangement of Communication network.
• Site office development.
• Cement go down,
• Arrangement for transport system.
• Registration for Tax, co, law.
• Building house for staff and labor.
• Guest house, construction /school building.
• Infrastructure, equipment for construction. Drainage and sewage plan.
•
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Project Activities
• Procurement of machinery and material.
• Transportation of Machinery and material.
• Civil works for site development/building.
• Fabrication/erection of structure, equipment
and material.
• Pre commissioning, trial run.
• Performance test.
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– Equity Mix
Financing/Refinancing Risk
• Bid Related
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Default risk
• Firms that generate high cash flows
related to its financial obligations should
have lower default risk.
• Thus firms with existing cash flows will
have lesser default risk.
• More stability in the cash flows, lesser is
the default risk.
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Managing risk
• Change the fixed cost/VC ratio---ford in
1980, outsourced component
manufacturing which resulted in lower
Fixed cost and lowering of breakeven
point.
• Lower price increases demand but
increases breakeven point, so publishers
bring hard cover edition first and then shift
to soft cover.
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Cont.
• If you are not sure to market reaction to your product,
start small , it may increase high cost of production per
unit but reduces risk.
• Don't test the depth of the water with both feet.
• If the operating risk of the risk is high, go for low debt
dependence.
• Take insurance.
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Contd.
• Go for long term arrangements suppliers,
employees , lenders, customers.
• Strategic alliance like joint venture,
contribute resources and core
competence, work together with
competitors as ET reports on 10th Aug that
Spencer's, reliance, more etc are joining
hands to reduce costs.
• Derivatives and hedging.
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Abandonment value
• The value of a project, if the project’s assets were
sold externally , or alternatively , its opportunity
value if the assets were employed else where in
the firm.
• Managerial options include the option to expand,
contract, , the option to abandon, and the option
to postpone. Considering of these various options
can sometimes turn a reject decision otherwise
made in evaluating a capital budgeting project
into a accept decision and a accept decision into
a decision to postpone.
Pre-completion Risks Amity Business School
Category Project Risk Possibility of Occurrence
Resource Risk • Quantity of crude oil •Hired external agency, DeGolyer
• Right grade of crude oil to and MacNaughton to estimate
ensure the correct
functioning of upgradrer
project’s reserves
•Only 7% of estimated reserve is
required for project
(120,000*365*35)/21.5 = 7.1%
Technological • The drilling technology •External agency, Stone & Webster
and Conoco refining
Risk technology are proven
found design to be in accordance
to good industry practices
Timing and • 3 segments and complex •Stone & Webster found execution
Completion • Timely finish to realize schedule to be achievable
early project cash flows
Risk •Use of known technologies
• Use of local players
Post-completion Risks
Category General Risk Amity Business School
Possibility of Occurrence
Market Risk • Price of oil is volatile •Chem Systems found the pricing to be
• Lack of established reasonable and consistent with market
market for syncrude
developments and expected that a 3rd -
party market may develop
Supply/ Input • Labour, materials, •Most of the utilities were either owned
part suppliers and
Risk utilities are located in
by government or PDVSA
Venezuela •Post-completion, project would be
independent
Throughput • Simultaneous •Usage of known technologies and
functioning of 3
Risk components to
experienced participants
produce the syncrude •Engineers didn’t expect varying density
• Varying density of to be a major problem
crude effecting the
efficiency
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Macroeconomic Risks
Category General Risk Possibility of Occurrence
Mitigation Strategies
• Insure
• Allocate
• Hedge
• Deter
• Bear
Risk Classification Amity Business School
Low High
Ability to Control
Agreements to Mitigate Risk
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• Financing Agreements
• Construction Agreements
• Supplies Agreements