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Risk-based budgeting

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Risk-based budgeting

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    The two elements of risk-informed budgetingIndustry guidelines view risk as a function of both the consequence and likelihood of asset failure. Authority employees identified components of failure, assigned weights to each, and then, using a 10-point scale, categorized how the contribution to failure should be scored for each asset or asset group. Though they consider physical condition the most important factor in determining the probability of an asset failing, their framework takes performance and repair history into account as well.

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    Asset inventory profileData collected on almost 2,000 assets — everything from pumps to HVAC equipment — reveals the overall condition n of the authority authority's s assets.

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    Determining the overall risk scoreThe authority's key asset groups are ranked in order of descending risk.

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    Cumulative construction costs of addressing riskGraphs and tables helped managers schedule projects with risk reduction in mind. The “Risk rank” chart below orders projects starting with the highest risk score.

In addition to the condition assessment, scoring was completed for the other elements of risk — performance and repair history — that employees had identified.

THE HIGHEST–RISK ELEMENTS EMERGE
































The condition assessment provided a detailed evaluation of each key asset, as well as a profile of the overall condition of the authority's asset inventory as a whole. The combination of condition and other assessments enabled managers to rank assets based on the overall level of risk associated with failure, a key aid in prioritizing them for renewal or replacement.

They used this information to refine their list of capital projects, scheduling projects with risk-reduction opportunities clearly in mind. Ultimately, determining which projects to advance — and when — was based on a number of factors to achieve the following objectives:

  • Maintain reliable service to customers at levels consistent with the mission
  • Provide access to financing at reasonable interest rates
  • Keep bonding programs and rate increases at levels that support affordable rates
  • Address the demands of other projects, such as those necessary to support growth and development needs.

    • Project timing also depends on such factors as bundling related activities and sequencing projects that should be done in tandem or sequentially from a delivery and constructability perspective.

    With the completed condition assessment and related risk scoring, managers have much better information than previously existed on a key input to investment decisions. The analyses helped them divide identified capital projects into two phases, the first focused primarily on those that address the greatest identified risks.

    “It would've been much more difficult to put together a coherent plan that fits within our financial means,” Boepple says. “The analyses helped us identify projects that needed to proceed immediately versus those that could slide back a few years if necessary.”

    For example:

  • An in-house program to modernize the computer platforms for the plant's control system was accelerated due to the significant risk associated with failure of those particular assets.
  • A project to rehabilitate tertiary treatment facilities can be pushed back a few years because doing so poses limited near-term risk.
  • A project to address portions of the biological treatment system was accelerated because of new regulatory requirements.

    • Boepple and his team are using the results to develop next year's budget and work with their financial team to identify bonding needs for the next several years. Beyond that, they intend to continue using their risk-informed framework to focus future resources toward projects that address assets whose failure poses the greatest potential risk.

    — Matichich (michael.matichich@ch2m.com) is global technology leader, Financial Services, for CH2M Hill. Reach Chuck Boepple at chuck.boepple@uosa.org.