Developing a risk management approach for portfolio cost control

Abstract

The assessment and prediction of the impact of risks on the financial performance of portfolios is a very challenging task, and many portfolios in Qatar and worldwide are still suffering from cost overruns. This aspect is undeveloped in the body of literature on portfolio risk management, and very few studies have addressed this need. Therefore, organisations and portfolio managers are still looking for tools and techniques which enable them to incorporate the financial impacts of risks during the estimation of the cost and contract price of their portfolios. In this paper, a risk management-based methodology for the prediction of the cost and the financial performance of portfolios is presented and tested on real case studies based at Qatar Gas. The methodology is based on calculating the combined effect of multiple risks on the different work packages composing part the portfolio project, while considering the probabilistic occurrence of each risk. The methodology was tested on four projects in Qatar Gas and proved to be able to predict the effect of the identified risks on financial performance related to each portfolio. It also helped to prioritize the risks and identify the risks that most affected the financial performance of the portfolio and, thus, provide valuable information for particular stages of response planning. One of the limitations of the proposed methodology is that it calculates the impact of risks on the financial performance of a portfolio at a specific date, where risk impacts have a defined probabilistic distribution. However, the dynamic nature of risk attributes could be reflected by changing the values of those attributes in the risk management model of the portfolio every time the risk register is updated.