CostRiskAnalysis (CRA)

PedramDaneshmand AssociateDirector Associate Director BlueVisionsManagementPtyLtd Jan2011

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Content
ProjectCostManagement Project Cost Management Risk&Opportunities ProjectRiskManagement CostRiskAnalysis(CRA) y ( ) SimulationResultsReview CRAFinalReport CRA Fi l R t IntegratedSchedule/CostRiskAnalysis
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Project C t M P j t Cost Management t Overview

Everyprojectmustbemanagedagainstabudget; Every project must be managed against a budget; Projectcostcontrolshasbeenaroundalongtime; ProjectManagersshouldliaisethebudgetbetween theclientandtheprojectteam;and Moreconcernabouthowmuchthanhowlong.
ProjectCostManagementincludestheprocesses requiredthattheprojectcanbecompletedwithin theapprovedbudget(PMBOK,2004).
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Project C t M P j t Cost Management t Process

CostEstimating developinganapproximationof Cost Estimating developing an approximation of thecostsoftheresourcesneededtocomplete projectactivities. project activities CostBudgeting aggregatingtheestimatedcosts ofindividualactivitiesorworkpackagesto of individual activities or work packages to establishacostbaseline. CostControl influencingthefactorsthatcreate f f costvariancesandcontrollingchangestothe projectbudget. b d
(PMBOK,2004)
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Cost E ti C t Estimating ti Tools and Techniques

AnalogousEstimating Analogous Estimating DetermineResourceCostRates BottomupEstimating ParametricEstimating ProjectManagementSoftware VendorBidAnalysis Vendor Bid Analysis ReserveAnalysis CostofQuality f l
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Cost E ti C t Estimating ti Inputs

Estimators develop the project estimate by using:
Available organisational process assets; Available quantities resources and productivity rates; quantities, Available work/scope statements; Work Breakdown Structure (WBS) and (WBS); Other assumptions/documents e.g. PMP, etc.
Alltheseadduncertaintiestotheestimateand reducetheconfidencelevel.Whataboutrisksand opportunitiesinthetotalprojectcost?
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Cost E ti C t Estimating ti Outputs

TheoutputsofCostEstimatingprocessare: The outputs of Cost Estimating process are:
(Deterministic) Activity Cost Estimate; (Deterministic) Total Project Cost; (Deterministic) Cost Model Data (Deterministic) Cost Baseline (Deterministic) Resource Requirements
Withalltheseuncertainties intheinputsandthe possiblerisksandopportunities intheestimate,the questionis,howconfidentweareinthisestimate? i i h fid i hi i ?
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Cost E ti C t Estimating ti Project Management Software

Software,likecostestimatingsoftware Software like cost estimating software applications,computerisedspreadsheets,and simulations and statistical tools are widely used to andstatisticaltoolsarewidelyusedto assistwithcostestimating.

Tohavearealisticestimate,CostEstimatingprocess shouldbeimprovedbyusingCostRiskAnalysis(CRA). InotherwordsProjectCostManagementandProject In other words Project Cost Management and Project RiskManagementneedtobeintegrated!
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Cost E ti C t Estimating ti Risks & Opportunities

Everyestimatehasuncertainties/assumptions. Every estimate has uncertainties/assumptions. Everyprojecthasrisksandopportunities.
Effect Eff on project j
(positive or negative)

Time Scope Q Quality y Cost

So,RisksandOpportunities shouldbemanagedeffectively tominimizethesurprises!!

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Project Ri k M P j t Risk Management t Process

AS/NZSISO31000:2009
COMMUN NICATE AND CONS A SULT Establish Context MONITOR AND REVIEW D W
RIS ASSESS SK SMENT

Identify Risks Analyse Risks

Evaluate Risks E l Ri k Treat Risks

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Project Ri k M P j t Risk Management t Risk Assessment

Risk Assessment include
Risk Identification (both Uncertainties and Events) Risk Analysis
Qualitative Quantitative (Cost Risk Analysis or CRA)

Risk Evaluation
Thegoalistohaveabetterunderstandingofrisks/ opportunitiesandtheiroverallimpactontotal projectcost.Thiswillbridgesthegapbetween project cost This will bridges the gap between traditionalcostestimatingandtheREALproject.
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Project Ri k M P j t Risk Management t Risk Analysis

RiskAnalysisistheprocesstocomprehendthe Risk Analysis is the process to comprehend the natureofrisks(oropportunities)andtodetermine thelevelofrisks(oropportunities)intheschedule the level of risks (or opportunities) in the schedule
Risk analysis provides the basis for risk evaluation and decisions about risk treatment; and Risk Analysis includes risk estimation.
ByCostRiskAnalysis(CRA),wemodeltherisksand opportunities(uncertaintiesandevents)withinthe complexityoftheinterrelationshipsbetweenthe complexity of the interrelationships between the variouselementsoftheestimate.
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Cost Ri k A l i C t Risk Analysis (CRA)

CRAisaprobabilisticanalysistoquantifythe CRA is a probabilistic analysis to quantify the impactstoaproject,programorportfoliototalcost asaresultofcarryinguncertaintiesand/orrisks as a result of carrying uncertainties and/or risks andopportunitiesortosimulatethepossiblewhat ifscenarios. if scenarios

Relyingonaaccuratemostlikelyestimateasa base,CRAtakestheprojectcostestimatingtothe nextlevelofaccuracyandconfidence. l l f d fid

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Cost Ri k Analysis C t Risk A l i (CRA) Objectives

Whatistheproject smostlikelycost? What is the projects most likely cost? Howlikelyisthebaselineestimatetobeoverrun? Wherearetherisks/opportunitiesandtheimpacts / (negative/positive)inthisproject? Howmuchcontingencydoesprojectneed?
Relyingonaaccuratemostlikelyestimateasa base,CRAtakestheprojectcostmanagementto thenextlevelofaccuracyandconfidence. h l l f d fid
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Cost Ri k A l i C t Risk Analysis (CRA) Overview

Available data gathering Estimate Review Technical Research Risks & Opportunities Register
Both Uncertainties and Events

Cost Risk Model CostRiskModel Simulation ResultsandDiscussions Res lts and Disc ssions
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Cost Ri k A l i C t Risk Analysis (CRA) Process - sample

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Cost Ri k Analysis C t Risk A l i (CRA) Data Gathering

Required information for a CRA
Welldevelopedprojectscope; Qualityestimate excludingcontingencyandescalation; Quality estimate excluding contingency and escalation; Schedulereflectingtheestimate; Riskmanagementpolicy/processesinyourorganisation; Risk management policy/processes in your organisation Riskchecklistpresentingtypicalrisksandopportunities; Risk&OpportunitiesTemplate; Ri k & O t iti T l t CostRiskTemplates/Models;and Samplereportoftheprocessandrecommendations. S l f h d d i
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Cost Ri k Analysis C t Risk A l i (CRA) Estimate Review

How to review the deterministic estimate?
Validation of all quantities (most likely); Validation of all resource cost rates (most likely); Validation of all durations (most likely); Minimum number of constraints constraints; Work Statements; Contract; C t t Reasonable duration for tasks; and Reasonable C i i l P h R bl Critical Path.
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CRA E ti Estimate Review t R i Sample Estimate

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Cost Ri k Analysis C t Risk A l i (CRA) Technical Research

Whentheteamisconfidentthattheproject When the team is confident that the project deterministicestimatereflectsthemostlikelycase, thetechnicalresearchcanbegin. the technical research can begin
Historical data research Interviews Internet searches, etc.
Issuesmayincludeitemssuchasgeotechnical assumptions,EnvironmentalApprovals,material prices,inclementweather,productivityconcerns, prices inclement weather productivity concerns existingservices,contaminatedmaterial,etc.
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Cost Ri k Analysis C t Risk A l i (CRA) Risk Register

The Technical Research will enable the schedule risk analyst to complete the Risk Register file:
The identified risks & opportunities Likelihood of the identified risks and opportunities Impacted activities Schedule and/or Cost Impact/s Schedule d/ Cost Variations S h d l and/or C t V i ti Correlation of risks and opportunities to one another Notes, t N t etc.
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Cost Ri k Analysis C t Risk A l i (CRA) Risk Register - sample

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CRA Ri k Register Risk R i t Quality Check

Major risks and opportunities been identified; The likelihood and impacts been assessed; RiskMatrixalignedwiththecompanysrisk managementpolicy; Impacts checked against the allocated calendars; ; Correlations between risks been identified; Stage the opportunities if required; and Duplications are minimised and addressed addressed.
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CRA - C t Risk Model Cost Ri k M d l Uncertainties & Events

DevelopingtheCostRiskModelinvolvesmodelling Developing the Cost Risk Model involves modelling thepotentialimpactsandthelikelihoodoftherisks andopportunitiesontheprojectandthenapplying and opportunities on the project and then applying thosetotheschedule. Twoaspectsoftherisksandopportunitiesshould Two aspects of the risks and opportunities should bemodelledwithintheschedule:
EstimateUncertainties(Optimistic,MostLikelyand E i U i i (O i i i M Lik l d Pessimistic) Eventsincludingprobabilisticbranching(probabilityand Events including probabilistic branching (probability and theimpacts)
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CRA - C t Risk Model Cost Ri k M d l Types of Cost Uncertainty

FixedCosts(e.g.from$5,000to$7,000) also Fixed Costs (e g from $5 000 to $7 000) also spendingdistribution(uniform,normal,startor end)isimportant. end) is important ResourceRateuncertainty(e.g.$500/dayto $700/day) ResourceAllocationsuncertainty(e.g.from2 decoratorcrewsto5decoratorcrews) ) TimeDependentCosts(e.g.from4daysto10days)
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CRA C t Risk Model Cost Ri k M d l Probability Distributions

ProbabilityDistributionisawaytoindicatethe Probability Distribution is a way to indicate the likelihoodofvaluesbetweentheoptimisticand pessimisticvalues. pessimistic values ProbabilityDistributioncanbe:
Uniform(flat), U if (fl ) Normal(bellshaped), Beta(skinnybellshaped), (k b ll h ) Triangle(pyramidshaped),or Customised(userdefined).
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CRA C t Risk Model Cost Ri k M d l Probability Distributions

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CRA C t Risk Model Cost Ri k M d l Special Conditions

Specialconditionswhichneedsextraattention: Special conditions which needs extra attention:
ProbabilisticBranching whichconsidersthesituation wheretheoutcomeofaneventcancauseintwoor where the outcome of an event can cause in two or multiplepossiblecoursesofactivities. Correlation betweenrisks
PositiveCorrelation:occurswhenoneriskgoeshigher,somust theother. NegativeorAdverseCorrelation:occurswhenoneriskincreases, theothermustdecrease.

InclementWeather orotherexternalinfluences Inclement Weather or other external influences

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CRA C t Risk Model Cost Ri k M d l Inclement Weather

InclementWeathercanbeasignificantfactorina Inclement Weather can be a significant factor in a projectscheduleandcost.Veryoftenthereisgood dataavailablebutunderstandingtheimpactonthe data available but understanding the impact on the scheduleischallenging. Apropermodellingwillallowtheteamtodefine A proper modelling will allow the team to define riskassessmentcriteriaforinclementweather conditionsintheschedule,andincludethese conditions in the schedule and include these uncertainweatherconditionsintheriskanalysis.
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CRA C t Risk Model Cost Ri k M d l Inclement Weather

Therearetwodistinctwaysofdefininginclement There are two distinct ways of defining inclement weatherevents:
Eventwithresultsinanuncertainnumberofnon Event with results in an uncertain number of non workingdaysscatteredthroughoutaperiod,e.g.rainor snow. Eventwithresultsinasingleblockofnonworkingtime withaprobabilityofoccurrence,e.g.chanceofa hurricaneinaperiod.

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Cost Ri k Analysis C t Risk A l i (CRA) Simulation Methods

TheCRAperformsmultiplesimulationsofthe The CRA performs multiple simulations of the projectusingrandomsamplingsoftherelevant risksandopportunitiesconsideringtheirprobability risks and opportunities considering their probability andimpact. Twopopularmethods: Two popular methods
MonteCarloSimulation (MCS) fastermethodbuthasa largerpossibilityofsamplingerror larger possibility of sampling error LatinHypercubeSampling(LHS) slowermethodbut lesssamplingerrors less sampling errors
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Cost Ri k Analysis C t Risk A l i (CRA) Simulation Process

Analysisdoesthesimulationthroughmultiple Analysis does the simulation through multiple samplingsoriterations. Eachiterationispickingonesamplepointfrom Each iteration is picking one sample point from eachactivityandcalculatingthetotalprojectcost. Userdefinesthenumberofiteration(e.g.1000, 5000,etc)dependingonthecomplexityofthe projectanditsriskmodel.

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Cost Ri k Analysis C t Risk A l i (CRA) Simulation Tools

Maintoolsbeenwidelyusedforsimulationare: Main tools been widely used for simulation are:
@Risk PrimaveraRiskAnalysis(previouslyknownas Primavera Risk Analysis (previously known as Pertmaster) @RiskforProject @Risk for Project CrystalBall

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Cost Ri k Analysis C t Risk A l i (CRA) Simulation Reports

MainreportsbeenwidelyproducedbyCRAare: Main reports been widely produced by CRA are:
ScheduleCheckReport(ifintegratedwithschedule) TotalProjectContingencyAnalysis:againstthemost Total Project Contingency Analysis: against the most likelyestimatein$. SensitivityAnalysisReport(orKeyRiskDrivers):the Sensitivity Analysis Report (or Key Risk Drivers): the areasofgreatestconcernsinorderofcriticality.
Thenextslidesarepresentingresultsfromcost modelsimulationsrunbyusing@Risksoftware. model simulations run by using @ Risk software.
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Cost Ri k A l i C t Risk Analysis (CRA) Probability Density - sample

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Cost Ri k A l i C t Risk Analysis (CRA) Sensitivity Analysis - sample

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Cost Ri k A l i C t Risk Analysis (CRA) Detailed Report - sample

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Confidential

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Cost Ri k Analysis C t Risk A l i (CRA) Detailed Report - sample

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Cost Ri k A l i C t Risk Analysis (CRA) Detailed Report - sample

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Cost Ri k A l i C t Risk Analysis (CRA) Results Quality Check

After initial model a quality check is required for model, reasonableness of the simulation results. The calculation of the contingency should be checked against the project risk register, available knowledge, knowledge scope and estimate quality etc quality, etc. Sensitivity Report should be checked for the order of high risk events and out of expected order. f f

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Cost Ri k A l i C t Risk Analysis (CRA) Common mistakes

Errors within the scope development; Risks/opportunities correlations not considered; Similar risks/opportunities cause double up; / Distribution curves not evaluated right; and Simulation problems within the model.
Becauseofallthesereasons,itisnormaltoreview/run theriskmodelseveraltimesbeforeaconfidencelevel isachievedfortheavailabledatawithintheriskmodel.
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Cost Ri k Analysis C t Risk A l i (CRA) Action Plan

TheaccuracyoftheCRAoutcomesshouldbe The accuracy of the CRA outcomes should be improvedthroughanumberofiterationsofthis process. process Basedontheinitialresults,theteamshould:
Reviewtheriskregisterandmakemodificationswhererequire; R i th i k it d k difi ti h i Makechangestotheriskmodelaccordingly; Runthesimulationagainandrepeattheprocesstoachievethe Run the simulation again and repeat the process to achieve the mostcosteffectiveriskmitigationplan; FinalisetheRiskActionPlanaswellastheContingencyPlan;and Communicatethisschedulewiththeteamandthenmonitorit.
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Cost Ri k Analysis C t Risk A l i (CRA) Final CRA Report

TheFinalCRAReportshouldinclude: The Final CRA Report should include:
Projectinformationincludingthescope; Executivesummary; Executive summary; Reportpurpose,scopeandbackground; CRAmethodologyincludingsoftwareandteam; CRA methodology including software and team Assumptionsandmarketresearch; FinalRisk/OpportunityRegister; Fi l Ri k/O t it R i t CRASimulationResults,resultsandfindings;and Mitigationrecommendations,contingencyplan,etc. Mi i i d i i l
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What is Wh t i next? t? Schedule/Cost Risk Analysis

Forbigprojects,becauseofthereasonsbelow,an For big projects because of the reasons below an integrationofSchedule&Cost&Riskisrequired:
Schedule,CostandRiskarerelated; Schedule Cost and Risk are related; TimeDependentCosts; Correlationsbetweenrisksandopportunities;and Correlations between risks and opportunities; and OneSchedule/CostRiskModelfortheproject.
InotherwordsProjectCostManagement,Project TimeManagementandProjectRiskManagement needtobeintegrated!! d b i d! !
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About the Author

PedramDaneshmand,AssociateDirector Pedram Daneshmand Associate Director BlueVisionsManagement
Pedram is a civil engineer with over 15 years experience in the construction industry He is industry. highly skilled and technically proficient in many aspects of construction including Programming, Programme Performance Measurement, Quantitative Risk Analysis, Contract Management, Schedule Risk Analysis (SRA), Cost Risk Analysis (CRA), Project Monitoring & Controls (PMC) Systems, Earned Value Performance Measurement technique (EVPM) and POW (Program of Work) Planning & Controls. As an industry innovation award winner for his programming and risk analysis skills, Pedram is currently an Associate Director with Blue Visions Management leading a team of planning and controls professionals within the infrastructure sector. With more than 15 articles in the professional conferences/journals he is been regularly invited to the conferences/journals, technical presentations as one of the industry leaders in his field.
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