Cost Risk Assessment Building Success and Avoiding Surprises Ken L. Smith, PE, CVS

Addressing Cost and Schedule Concerns Usual Questions Analysis Needs How much will it cost? How long will it take? Why does it cost that much? Why does it take that long? Risk Identification Qualitative and Quantitative Risk Analysis Value Engineering &Mitigation Strategies Risk Monitoring & Control 2

Comparison of the two processes Both use a team approach Cost Risk Assessment Learn about project Identify Risks Strategize how to handle Qualify and Quantify Develop response plans and triggers Value Engineering Investigate Functional analysis Speculate Evaluate Develop 3

Risk Management Process Step 1: Cost Risk Assessment Base cost review, identification and quantification of cost and schedule risks Financial Planning Step 2: Risk Response Development of risk response strategies and alternative solutions (Value Engineering) Decision Support Step 3: Monitor and Control Continuous risk tracking, monitoring and reporting Risk Allocation 4

Process 5

Accounting For Uncertainty? An Estimate is not a Single Number Projects are subject to many variables that cannot all be known beforehand Cost and schedule estimates represent just one of many possible outcomes of multiple variables Top of the shoulders Top of the Pant Line Below the Knee Cap Midpoint These variables are not all directly controllable or absolutely quantifiable A strike zone is not a single point. 6

Overview of Project Cost Base cost estimate serves as the basis against which cost risks and uncertainties are assessed Estimating is not an exact science: Cost estimate is only an approximation of the probable costs Composed of many elements that may not be completely or equally defined at the time the estimate is prepared A numerical value of uncertainty is an estimate of the error or tolerance within the quantity or unit price of an item. Level of uncertainty is directly related to its position in the project life cycle Planning Stages Design Stages Construction Stage Project Life Cycle Actual Cost Project Completion 7

Traditional Estimate Vs. Risk Based Estimate Fixed Contingency % Utility Stakeholder Construction Project Deterministic Estimate Design Project Base Cost Environmental Funding ROW 8

Project Cost 9

Base Cost Review Review base cost estimate Identify and remove any contingency and escalation from the estimate o Contingency will be replaced by events risk o Escalation will be reapplied in the risk analysis model Assign preliminary uncertainty ranges around key items within the estimate prior to the workshop. Outcomes from the base cost review will be reviewed and finalized during the workshop. 10

Building Risk Analysis Backbone (Schedule) Activity B Start Activity A Activity D Activity C $ } End For Each Task 11

Consensus-Based Workshops Structured Workshops to Build Consensus Among Various Stakeholders Engagement of Internal and External Subject-Matter Experts Sessions by Functional Assignment to: Identify Risks Quantify Risks Discuss Risk Response and Mitigation Strategies 13 13

Identifying Event Risks Focus on issues that matter Describe the event properly How likely is it to occur? What are the potential impacts (cost/schedule)? If the event occurs what are the impacts on the low end? on the upper end? most likely? Is the event dependent on or correlated with other events 75% Probability 14

What is Monte Carlo? Monte Carlo Analysis: A class of computational algorithms that rely on repeated random sampling to compute or iterate the project cost or schedule many times using input values selected at random from the probability distributions of possible costs or durations, to calculate a distribution of possible total project cost or completion dates. SOURCE: PMBOK Third Edition Or Production 1970 1972 Chevrolet Body style 2-door coup 15

How the Modeling Works Monte Carlo Simulation Quantities Project Schedule Risks Event Risk Environmental Permitting Right of Way o Base cost and uncertainties o Cost Event Risks o Schedule Event Risk Utilities Civil Design Hydrology Geotechnical Structures Materials Prices Project Cost Risks Contracting Schedule Making the black box transparent Construction Maintenance Operations Funding Market Conditions Management & Stakeholders 16

Contractors don t take risks, they price them! Source: http://mcgladrey.com/eclubnews/change-orders-outsize-construction-contracts 17

Baseline Risk Assessment Results Using VE to Mitigate 18

Risk Management Risk Assessment s aim is to assess potential impact of various scope, event, and budget risks on the project s cost and schedule. Risk Management s aim is to identify mitigation strategies to reduce both the likelihood of a threat event occurrence and the potential effect if it occurs AND to identify strategies to increase the both the likelihood of an opportunity event occurrence and the potential benefits if it occurs Impact INITIAL RISK MANAGED RISK Probability of Occurrence 19

Risk Response From the tornado diagrams we will define response strategies (how to respond to the risk) o Include how will be communicated in the contract documents These will assist the design team on how to respond to risks as the project progresses. 20

Develop Risk Response Strategies Threats Risk Factors that Increase Cost or Schedule Avoid: Change the project scope to eliminate the impact of a risk. Opportunities Risk Factors that Reduce Cost or Schedule Exploit: To make a proactive decision to take action to show that an opportunity is realized. Transfer: Move a risk to another party who is more capable at handling the risk (such as the developer or insurance company). Share: Assigning ownership of the opportunity to a third-party who is best able to capture the benefit for the project. Mitigate: The project team may seek to lessen the impact of a specific risk item, which may involve the consumption of additional time and/or money. Mitigation usually requires positive action and has a cost. Enhance: Take action to increase the probability and/or impact of the opportunity for the benefit of the project; seeking to facilitate or strengthen the cause of the opportunity, and proactively targeting and reinforcing its trigger conditions. Accept: To take no action when a response may be too costly to be effective or when the risks are uncontrollable and no practical action may be taken to specifically address it. In active acceptance, the project team sets up a contingency reserve fund to account for the residual expected value of the remaining risks. 21

Analysis of Results Risk Reserve Mitigation Savings $7.07M Total: $86.39 22

Program Risk Management 24

Risk Management System tool Used as a tool to proactively manage risk in the delivery of a program of projects The tool allows for the capture and storage of risk data for both pre-response and post-response scenarios Visual displays of risk impact versus risk likelihood demonstrate the risks relative impact to budget and schedule Generates reports for individual Projects and for entire Programs 25

Identification and Quantification Response Strategies Monitor and Control 26