(RISK.03) Integrated Cost and Schedule Risk Analysis: A Draft AACE Recommended Practice Dr. David T. Hulett
Author Biography David T. Hulett, Hulett & Associates, LLC Degree: Ph.D. University: Stanford University Years of Experience: 20+ Professional Field: Project risk analysis and management, project scheduling 2
Purpose The purpose of integrated analysis of schedule and cost risk to estimate the appropriate level of cost contingency reserve on projects The main contribution is to include the impact of schedule risk on cost risk and hence on the need for cost contingency reserves Additional benefits include the prioritizing of the risks to cost, some of which are risks to schedule so that cost risk mitigation may be conducted in a cost-effective way.
Linkage of Schedule and Cost Risk Some resources such as labor, rented equipment and level-of-effort support by the project management team will cost more if they are engaged on the project longer than planned because activities take longer than expected Risks to schedule will also be risks to the cost of these resources
Platform / Risk Model Resource-Loaded Schedule The platform of this analysis is a resourceloaded project schedule One may use a summary schedule or a detailed project schedule The budget (without contingency) must be assigned to the activities Using resources that may be summary in nature (e.g., construction, detailed engineering or procurement) or detailed
Monte Carlo Simulation Monte Carlo simulation is the standard approach to discovering the impact of multiple risks on the overall project schedule or cost risk Simulating a resource-loaded project schedule derives both schedule risk and the cost risk implication in the same simulation The results also produce a list of risks that are prioritized through the risk model, for risk mitigation
Inputs A best-practice project schedule, basically a schedule following recommended practice CPM scheduling. A schedule of 300 1,000 activities can summarize and represent a large project in this strategic analysis A contingency-free cost estimate, meaning that line items do not have contingency padding built in and there is no below-the-line contingency included Good-quality risk data usually risks that have been identified during a qualitative risk analysis of the project leading to a list of prioritized risks are characterized by their probability and impact ranges
Outputs How likely are the project plan s cost and schedule targets to be met given the risk that may affect that plan? How much contingency of time and cost needs to be provided to meet the risk threshold of the project management or other stakeholders? Which risks are most important to the achievement of the project schedule and cost estimate? A unique and useful result is the finding of joint timecost risk result joint probability distribution, often shown as a scatter diagram of time-cost points showing the possibility of meeting both time and cost objectives jointly
Best Practice CPM Schedule 1 All work needed to complete the project must be represented in the schedule. The schedule should relate to the WBS There should not be any danglers. This means that each activity needs a predecessor to its start date and a successor from its finish date Predecessor F-S or S-S Activity 101 F-S or F-F Successor
Best Practice CPM Schedule 2 The schedule should not rely on date constraints or fixed lags between activities The schedule should be recently statused The schedule should have resources costed and assigned to activities Summary resources are OK The purpose of these resources is to get the costs on the right activities, not to level resources Sometimes we create hammocks and apply summary resources to those 10
Example of Resources Used 11
Risk Data Inputs Risk events may or may not happen, but if they do happen they will have a positive or negative impact on the cost or schedule or both Risk events probabilities are < 100% They have uncertain impacts as well Uncertainties include ambiguities such as estimating error and uncertainties such as the level of labor productivity or the price of steel. These uncertainties are 100% likely to occur but their impact on the project cost or schedule is uncertain 12
Collecting Risk Data The input risk data are usually collected in risk workshops or interviews. In workshops the people may be influenced by strong personalities or people in higher positions in the organizations. In individual interview sessions, usually protected by promises of confidentiality, people can discuss their concerns and make estimates without feeling the influence of others 13
Risk Drivers (aka Risk Factors) The risks impacts are specified by 3-point estimates In Risk Drivers (Risk Factors) the impacts are ranges of multiplicative factors. The 3-point estimate of impact is converted to a triangular distribution Risks are applied to activities A schedule risk will multiply the duration of the activity that it is assigned to For any iteration the software selects an impact at random from the distribution and uses that factor for that iteration 14
Examples of Three Risk Types Schedule duration estimate immaturity is an ambiguity. It has 100% probability of occurring and its impact range is both good and bad Construction labor productivity is an uncertainty that, compared to the assumption, could be lower or higher The possibility of quality, key personnel unavailability is a risk event It may or may not occur In this case its impact is never to the good 15
Uncertainty and Ambiguity Risks Occur 100% of the time 0010 - Construction : Duration Hits 240 220 200 180 160 140 120 100 100% 120 95% 116 90% 114 85% 113 80% 111 75% 110 70% 109 65% 109 60% 108 55% 107 50% 106 45% 106 40% 105 35% 104 Cumulative Frequency Schedule inaccuracy operates 100% of the time (all iterations). On a construction activity of 100 days duration the results are triangular The construction labor productivity risk would look similar to this figure 80 30% 104 60 25% 103 20% 102 40 15% 101 20 10% 100 5% 99 0 95 100 105 110 115 120 Distribution (start of interval) 0% 95 16
Risk Events are Described by their Probability and Impact If probability is < 100%, the risk will occur in that percentage of iterations, chosen at random On an iteration if the risk occurs, a factor chosen at random from its impact range will multiply the duration of the activities to which it is assigned If the risk does not occur the multiplicative factor is 100% with no effect on duration 17
Risk Events occur with a Probability < 100% Hits 900 800 700 600 500 400 0010 - Construction : Duration 100% 110 95% 108 90% 107 85% 107 80% 106 75% 106 70% 105 65% 105 60% 105 55% 104 50% 104 45% 103 40% 103 35% 102 Cumulative Frequency Here a risk event, the possible unavailability of quality key staff, occurs 70% of the time. Hence, in 30% (900) of the 3,000 iterations the original duration of construction, 100 days, is correct. In 70% (2,100) of the iterations, the duration is longer than 100 days as a triangle 300 30% 101 25% 100 200 20% 100 15% 100 100 10% 100 5% 100 0 100 102 104 106 108 110 Distribution (start of interval) 0% 100 18
Risk Driver Strategy Risks are usually higher-level strategic risks rather than tactical or technical risks Data about risks is derived from in-depth interviews A risk is usually assigned to several activities An activity may have several risks assigned 19
A Construction Activity with Three Risks Assigned 0010 - Construction : Duration 100% 143 Hits 160 150 140 130 120 110 100 90 80 70 60 50 95% 127 90% 124 85% 122 80% 120 75% 118 70% 117 65% 115 60% 114 55% 113 50% 112 45% 111 40% 110 35% 109 30% 108 Cumulative Frequency The interaction of the three risks produces the expected histogram. In traditional 3-point risk estimating, the analyst and interviewees must approximate the result of three risks on duration. The Risk Driver analysis computes the distribution. 40 25% 106 30 20% 105 15% 103 20 10% 101 10 5% 99 0 90 100 110 120 130 140 Distribution (start of interval) 0% 90 20
Risk Drivers Avoid the Need to Estimate the Correlation Coefficient Activities A and B Correlation is Calculated to be 100% Risk #1 P = 50%, Factors.95, 1.05, 1.15 Activity A Activity B In the traditional approach to risk analysis, the correlation coefficient has to be estimated. Risk Drivers model how correlation occurs and the coefficient is a natural result of the model 2009 Hulett & Associates LLC 21
Risk #2 P = 25%, Factors.8,.95, 1.05 Risk Factors Model How Correlation Occurs (2) Risk #1 P = 50%, Factors.95, 1.05, 1.15 Risk #3 P = 45%, Factors 1.0, 1.1, 1.2 Activities A and B Correlation is Calculated to be 48% Activity A Activity B Risk Drivers model correlation as it is caused in the project based on the common (Risk # 1) and confounding (Risks # 2 and #3) risks affecting pairs of activities The correlation coefficient is the result, not the assumption 2009 Hulett & Associates LLC 22
Integrating Cost and Schedule Risk using Risk Drivers The risks to activity durations will affect Durations and completion dates Costs of labor-type resources For each iteration the cost as well as the finish date is calculated Enhanced results include Scatter diagrams (joint distributions) of time and cost Probabilistic cash flows by month 23
Schedule Risk applied to Activity with Labor Resource Cost/Time Scatter Risk ID 1 Risk Labor Productivity may be Uncertain Probability Minimum Most Likely Maximum 100% 95% 105% 120% 700 600 RP one-path Entire Plan : Cost 100% $660,000 95% $647,000 90% $642,000 85% $638,000 80% $634,000 $660,000 $650,000 RP one-path Deterministic Point Inside both limits Outside both limits 51% 0% 49% Hits 500 400 300 200 75% $631,000 70% $628,000 65% $626,000 60% $623,000 55% $621,000 Schedul e Risk 50% $619,000 45% $617,000 40% $615,000 35% $613,000 30% $611,000 25% $609,000 20% $606,000 Cumulative Frequency Entire Plan: Cost $640,000 $630,000 $620,000 $610,000 $619,000 51% 100 15% $603,000 10% $600,000 5% $596,000 $600,000 0 $600,000 $620,000 $640,000 $660,000 Distribution (start of interval) 0% $585,000 $590,000 51% 10/ 09/ 2012 0% 10/08/2012 20/08/2012 30/08/2012 09/09/2012 19/09/2012 29/09/2012 09/10/2012 19/10/2012 Entire Plan: Finish 24
Risk ID 1 Effect on Cost Risk of Adding Risk Labor Productivity may be Uncertain Burn Rate Uncertainty Duration Impacts Probability Minimum Most Likely Cost Impacts Maximum Minimum Most Maximum Likely 100% 95% 105% 120% 95% 100% 110% Distribution Analyzer RP one-path RP one-path - Entire Plan - Cost RP one-path - Entire Plan - Cost Deterministic Point Inside both limits Outside both limits 100% 51% 9% 41% 90% $680,000 Schedul e Risk Alone Schedule, and Burn Rate Risk 80% 70% 60% 50% 40% 30% C u m u l a t i v e P r o b a b i l i t y Entire Plan: Cost $670,000 $660,000 $650,000 $640,000 $630,000 $620,000 $610,000 $624,453 50% $600,000 20% $590,000 10% $580,000 $580,000 $590,000 $600,000 $610,000 $620,000 $630,000 $640,000 $650,000 $660,000 $670,000 $680,000 0% 42% 10/ 09/ 2012 8% 10/08/2012 20/08/2012 30/08/2012 09/09/2012 19/09/2012 29/09/2012 09/10/2012 19/10/2012 Entire Plan: Finish 25
Add Uncertainty in Procurement Costs Equipment and material costs may be risky but not generally because their activities durations are uncertain Putting risk factors on material-type resources causes the risk to be applied to the entire cost Schedule Impact Factors Cost Impact Factors Risk ID Risk Probability Minimum Most Likely Maximum Minimum Most Likely Maximum 1 2 Labor Productivity may be Uncertain 100% 95% 105% 120% 95% 100% 110% Suppliers may be busy 100% 100% 100% 100% 90% 105% 120% 26
Impact on Cost Risk of Adding Risk to Material Resources Distribution Analyzer RP one-path - Entire Plan - Cost RP one-path - Entire Plan - Cost RP one-path - Entire Plan - Cost 100% RP one-path Deterministic Point Inside both limits Outside both limits 50% 16% 34% 90% $720,000 80% $700,000 Schedule Risk Alone Schedule, and Burn Rate Risk Schedule, Burn Rate and Material Risk $560,000 $570,000 $580,000 $590,000 $600,000 $610,000 $620,000 $630,000 $640,000 $650,000 $660,000 $670,000 $680,000 $690,000 $700,000 $710,000 $720,000 $730,000 70% 60% 50% 40% 30% 20% 10% 0% C u m u l a t i v e P r o b a b i l i t y Entire Plan: Cost $680,000 $660,000 $640,000 $640,372 $620,000 $600,000 $580,000 $560,000 34% 23/ 09/ 2012 16% 10/08/2012 20/08/2012 30/08/2012 09/09/2012 19/09/2012 29/09/2012 09/10/2012 19/10/2012 29/10/2012 08/11/2012 Entire Plan: Finish 27 50%
Simple Example: Construction Project Cost Resources Risk Factors 28
We have Created and Assigned Eight Risk Factors 29
Basic Cost and Schedule Results 700 AACEI Integrated Cost-Schedule Risk Entire Plan : Finish Date 100% 02-Dec-14 95% 23-Mar-14 AACEI Integrated Cost-Schedule Risk Entire Plan : Cost 100% $1,008,966 95% $819,295 Hits 600 500 400 300 200 100 0 21-Dec-12 05-May-14 Distribution (start of interval) 90% 03-Feb-14 85% 06-Jan-14 80% 16-Dec-13 75% 30-Nov-13 70% 14-Nov-13 65% 29-Oct-13 60% 16-Oct-13 55% 02-Oct-13 50% 20-Sep-13 45% 08-Sep-13 40% 28-Aug-13 35% 14-Aug-13 30% 01-Aug-13 25% 18-Jul-13 20% 03-Jul-13 15% 13-Jun-13 10% 25-May-13 5% 27-Apr-13 0% 19-Dec-12 Cumulative Frequency Hits 800 600 400 200 0 90% $792,533 85% $775,498 80% $760,750 75% $749,866 70% $740,066 65% $730,838 60% $721,955 55% $713,313 50% $706,146 45% $699,319 40% $692,139 35% $683,271 30% $675,521 25% $667,247 20% $658,705 15% $648,572 10% $636,168 5% $619,334 0% $537,199 $600,000 $800,000 $1,000,000 Distribution (start of interval) Cumulative Frequency P-80 is 16 Dec 2013, a 7-month slip P80 is $760 million, a 22% reserve 30
Joint Cost-Schedule Distribution AACEI Integrated Cost-Schedule Risk Deterministic Point Inside both limits Outside both limits 76% $1,000,000 6% 17% $950,000 $900,000 $850,000 Deterministic Plan Entire Plan: Cost $800,000 $750,000 $752,918 77% $700,000 $650,000 $600,000 $550,000 70% 03-Dec-13 7% 21-Dec-12 31-Mar-13 09-Jul-13 17-Oct-13 25-Jan-14 05-May-14 13-Aug-14 21-Nov-14 Entire Plan: Finish Joint C/S Distribution, Cross-hairs at 70% Joint Confidence Level 31
Probabilistic Cash Flow 1,000,000 800,000 Deterministic Cost: $624,220 Deterministic Finish: 29-Apr-13 Deterministic Plan P-80 600,000 400,000 200,000 Cum ulative 0 21-Jan-11 01-May-11 09-Aug-11 17-Nov-11 25-Feb-12 04-Jun-12 12-Sep-12 21-Dec-12 31-Mar-13 09-Jul-13 17-Oct-13 25-Jan-14 05-May-14 13-Aug-14 21-Nov-14 Time 32
Prioritizing Risks To Cost Risks to Cost in Priority Order at the P 80 P 80 ALL RISKS IN 760.8 NO RISK 624.2 Contingency Reserve at P 80 136.6 Risks Prioritized for Effect on Cost Activity Duration Estimates are Inaccurate 39.2 Site Conditions / Site Access may Slow Logistics 23.2 Key Engineering Personnel may be Unavailable 18.4 Cost Estimate is Inaccurate 14.9 Capable Management may not be Assigned 13.4 Equipment Suppliers may be busy 9.1 Design Complexity may Challenge Engineers 3.4 Environmental Agency may be Slow 0.1 TOTAL Contingency Accounted For 121.6 Some Interaction Effects are not Captured Prioritize risk mitigations using this table 33
QUESTIONS? David T. Hulett, Ph.D. Hulett & Associates, LLC Los Angeles, CA (310) 476-7699 David.Hulett@Projectrisk.com www.projectrisk.com 34