Introduction Work on the London Heathrow terminal 5(T5) began in 2002 after a 4 year public enquiry. It took six years to build at a cost of ? 4. 3bn. The facility, situated on a 251hectar site had 6000 people working on site at any one time (Health and Safety Executive, 2005). It boasts of 30,000 square meters of glass walls, has 60 new aircraft stands and includes 13km of tunnels which were bored for baggage handling and rail links (BBC, 2007a).
This report will be evaluating the project risk management in the construction of T5 airport.
It will start with a brief background on Heathrow terminal 5. The report will then take a critical look at some of the British Airport Authority’s (BAA) method of risk allocation and identification. It will then provide an analysis and will finally conclude with recommendations. In undertaking a project of this magnitude, BAA would have had to overcome a fundamental characteristic of any project; risk.
Kerzner (2009:743) defines risk as “a measure of the probability and consequence of not achieving a defined project goal” and suggests that risk management must judge both the probability and the consequence as significant to be efficient.
It has also been recognised by Chapman and Ward(2003) that, it is a basic good practice to ensure that all the risks be allocated to an owner in financial terms and they should possibly be different parties as suggested in their Shape, Harness And Manage Project Uncertainty (SHAMPU) process.
In its simplest form, the SHAMPU process advocates the shaping of the project which will include clarification of risk ownership, harnessing plans and implementation management. Risk identification It could be argued that one of the main sources of risk identification for BAA was through lessons learned due to the amount of time it took for planning and enquiry which included a look at various other airport projects. During his interview with the House of Commons, Mr.
Collins Matthew, the chief executive of BAA suggested that they had taken into account lessons learned from various other airports projects and were aware of the various risks that could be realised on the T5 project (Parliament. uk, 2008). It could also be suggested that through the lessons learned from their research into past projects, BAA may have identified as a major risk the likelihood of legal disputes between contractors having a detrimental effect on the time and cost constraints of the project and therefore put in place mitigating factors which lead to them agreeing to take on all the risk.
This is also supported by evidence which shows that major UK construction projects in the past decade preceding the T5 project had always finished beyond schedule and above cost, most of which was to do with legal disputes between the contracting parties involved. BAA was also already involved in the Heathrow express project which was running behind schedule and It decided to adopt a different contractual approach which aided in the completion of the expressway on schedule and this was then incorporated into the T5 agreement(Davies et al, 2009).
In addition BAA adopted the view that partners are worth more than suppliers and hence developed an ‘integrated project team approach’ when it drafted the T5 agreement which focused on the causes of risk. What this did was to allow BAA to work closely with its suppliers and hence allowed them to minimise risk along the supply chain (National Audit Office, 2005). Also included in the T5 agreement was an open book cost reimbursable contract wherein BAA would repay the contractors for incurred costs and would also include profits dependent on performance.
Project risk and uncertainty is normally evident throughout the entire life cycle of a project. Chapman and Ward (2003) argue however that it is at the pre-execution stages of the project where risks become particularly evident, with regards to variable estimates, uncertainty with estimates, design and logistics, objectives and priorities and the fundamental relationships between project parties. It is believed that BAA would have had this in mind when drafting the T5 agreement due to the uncertainty it would have been faced with at the early stages of the project life cycle.
In getting all parties involved to work as part of an integrated team, the risk identification process would have involved a larger number of people and increased the identified sources of risk for the project. This fundamental relationship between project parties played a huge role in the success of the project with regards to time and cost. (Davies et al, 2009) Another area that BAA also identified as a major source of risk going into the project was the Information Technology (IT) systems that would go into T5.
The head of systems for BAA, Nick Gaines stressed that the IT systems represented the largest risk to the entire project ( Illet, 2006). This is further supported by the fact that T5 underwent 6 months of testing prior to it’s opening, most of which was to do with its IT systems integration including the baggage system (BBC, 2007b) Risk allocation As mentioned in the introduction, allocating risk in financial terms to different parties is encouraged as good practice.
BAA however took on an entirely different approach to their allocation of risk by choosing to take on all the risk. They went against the normal convention of contractual agreements which are normally reactive in their nature and mostly end up with a focus on each party involved claiming against the other for any extra expenditure in delays. (Chartered Institute of Purchase and Supply, 2007) BAAs choice for this unique risk management method was based on its view that that the client always bears the risk.
It was of their opinion that any delays or cost overruns would still affect them in terms of lost revenue and tarnish their brand name. This was supported by studies which revealed that major UK construction projects and other international airports had suffered delays and costs had overrun due to disputes between the parties involved over responsibility. (Davies et al, 2009). The inclusion of the open book cost reimbursable contract in the T5 agreement also meant that BAA was able to effectively control the project environment.
In choosing to take on all the risk, BAA as the client had to ensure that all its suppliers and contractors were providing the best possible service. As suggested by Chapman and Ward (2003) one of the main disadvantages of this type of reimbursable contract is that contractors may not use a cost effective approach and may even be excessive in their testing and purchasing. Conversely, a fixed price contract where the contractor caries all the cost creates an adversarial environment and more often than not leads to legal disputes when it does not go as planned (Chapman and Ward, 2003).
BAA’s approach was to incorporate a detailed ‘bottom up’ cost analysis which was outsourced to independent consultants as well as working with more than one supplier to encourage and maintain competition and this proved successful (National Audit office, 2005) Analysis In any risk management process, identifying the sources of risk is inherent. Chapman and Ward (2003) however advocate the identification of the sources of risk, the primary responses to the sources identified and the secondary sources arising from the primary responses, which they call issues.
BAA may have failed in this area of risk identification as the T5 agreement focused on the causes of risk (National Audit Office, 2005). The T5 project was finished on time and within budget but it may be argued then that even though BAA’s risk management process was unique and effective in delivering to these two constraints, they were so focused on the cost and especially, the time constraint of the project that they did not pay as much attention as they should have to other aspect, quality.
The chief executive of British Airways (BA), Mr Willie Walsh is reported to have stated that it was a calculated risk in going ahead with the opening of the airport knowing full well that there had been a compromise in the level of staff training (Done, 2008). This would suggest therefore that BAA took an acceptance stance to the risk. However, Kerzner (2009) suggests that in accepting a risk may happen, resources should be made available in case the risk occurs and it is in this aspect that BAA may have failed.
Evidence would also suggest that in their allocation and prioritisation of the various risks faced in the project, BAA rated higher the risks relating to the schedule and costs and did not put quality on the same level. Most of the problems that BAA faced on the open day had to do with staff familiarisation and information technology relating especially to the baggage handling. (Parliament. uk, 2008)These were all risks that had been identified beforehand but may not have been given a high priority.
On the contrary, they may have adopted a corporate risk efficiency model which states “never reducing risk for a project by increasing expected cost when the risk involved does not threaten the organisation as a whole more than a proportionate increase in the expected costs of all projects”. (Chapman and Ward, 2003:45). As reported by Donne (2008), BA estimated the cost within the first five days of opening T5 to be ? 16million.
Mr Walsh stated however that the cost the airline would have incurred had they decided to delay the opening would have been considerably higher. Baa may also have failed in addressing the probability and impact of all the possible identified risks happening at the same time and put in place adequate contingency plans. They failed to take into consideration the various risk interdependencies even though they had identified the potential risks. Mr Walsh suggested that they knew these risks were possible but did not expect them to all occur at the same time.
However during the planning stages and from the research that had been garnered through lessons learnt, BAA had identified that a high percentage of major airports had had issues on its opening day, most of which had to do with baggage handling and IT (Parliament. uk, 2008). Recommendation and conclusion It is recommended that the format of the T5 agreement be incorporated into all major UK government projects. It proved to be effective in meeting with cost and time constraints.
Their method of risk allocation and open book cost reimbursement meant that all parties involved worked together as part of a single project team which proved successful for the project environment. It also allowed BAA to effectively control the project environment and identify early on major risks in collaboration with the various parties and put in place measures to address these risks. It should however be noted that quality is still an important aspect of the project and should not be ignored in favour of the other two. Risk interdependency is also a very important aspect of risk management and should not be ignored.
In the lessons learnt report submitted by BAA, they found it necessary to over- provide for staff on airport opening days (Parliament. uk, 2008). As part of their risk identification process however, they had gained access to lessons learnt from other airport openings and should have had this as part of their risk response. Lessons learnt from past experience should be taken into account and adequate measures put in place especially if the project manager decides that acceptance is the best option to take in response the risk (Kerzner, 2009).
In conclusion, it can be seen that BAA were innovative in the drafting and implementation of the T5 agreement. They took a different stance to conventional norm in drafting of the contract by identifying early on the potential risks involved in the normal adversarial methods of contract agreement by choosing to take on all the risks. This led to the completion of the project on schedule and within budget. Even though it was plagued with problems in the few days after it’s opening, the risk allocation stance taken by BAA led to a co-operative response between the parties involved to address the issues faced rather than blame each other nd it may be this unique attitude to risk management that may have led to the eventual success of Terminal 5. References •BBC (2007a) Countdown to terminals takeoff. Available at http://news. bbc. co. uk/1/hi/uk/7015785. stm [Accessed: 30th October, 2009] •BBC (2007b) One year deadline for terminal 5. Available at http://news. bbc. co. uk/1/hi/england/london/6496285. stm [Accessed: 2nd November, 2009] •Chapman, C. And Ward, S. (2003) Project risk Management: Processes, Techniques and Insights. 2nd edition . Chichester: John Wiley & Sons. Chartered Institute of Purchase and Supply (2007) ‘A game of two halves’. Supply management magazine. 6th October, 2005. Available at http://management. silicon. com/itdirector/0,39024673,39156524,00. htm [Accessed, 5th November, 2009] •Davies, A. , Dodgson, M. , Gann, D. (2009) From Iconic Design to Lost Luggage: Innovation at Heathrow Terminal 5. Copenhagen Business School Summer Conference. 17th -19th June. Denmark. Available at http://www2. druid. dk/conferences/viewpaper. php? id=5622&cf=32 [Accessed: 1st November, 2009] •Donne, K. 2008) ‘BA took “calculated risk” on Terminal 5’. Financial Times. 8th May, 2008. [Online] Available at http://www. ft. com/cms/s/0/4250cfca-1c96-11dd-8bfc-000077b07658. html? nclick_check=1 [Accessed: 6th November, 2009] •Health and Safety Executive (2005) Heathrow terminal 5 project. Available at 2005)http://www. hse. gov. uk/construction/engagement/heathrow. pdf [Accessed: 6th November, 2009] •Illet, D. (2006) ‘Heathrow’s high tech Terminal 5 prepares for takeoff’. Silicon. com. 20th February, 2006.
Available at http://management. silicon. com/itdirector/0,39024673,39156524,00. htm [Accessed, 2nd November, 2009] •Kerzner, H. (2009) Project Management: A Systems Approach to Planning, Scheduling and Controlling. 10th edition. New Jersey: John Wiley & Sons. •National Audit Office (2005) Improving Public Services Through better Construction. Available at http://www. nhs-procure21. gov. uk/news/downloads/87/mkcasestudy. pdf [Accessed: 28th October, 2009] •Parliament. uk (2008). The opening of Heathrow terminal 5. Available at
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