Contingency Allocation for

Large Infrastructure Projects

Using @ Risk
11/11/11

Presented By
Francisco Cruz, PMP, PMI-RMP
Mitul Parikh, PE, PMP
PMA Consultants

Agenda

Overview of PMA
The Case for Risk Analysis
Risk Analysis Approach for Large Infrastructure Projects
Final Remarks

Slide 2

PMA - Clients

Slide 3

Risk Assessment Experience

Over 250 cost & schedule risk assessments conducted across five continents for on &
offshore drilling and production facilities, refining and chemical plants, pharmaceutical
and solar manufacturing facilities, power and co-gen plants, and infrastructure projects
Slide 4
(i.e., tunnels, airports, bridges, and ports)

The Case - Key Observations

What are the three most common causes of cost overruns?
Material Price Escalation

60%
55%

Poorly Defined Scope

Industrial Relations
Others

57%
36%
34%
21%
17%
15%

Achieving Productivities

6%

Lack of Approvals

D i
Design
C
Creep

Time Delay

19%

Achieving Productivities

57%

Weather

32%

Design Creep

Poorly Defined Scope

Contractual Disputes

36%

Time Delay

What are the three most common causes of delays?

Lack of Approvals

40%

Contractual Disputes

Weather

Material Price Escalation

4%

g Process
Commissioning

2%

13%
2%

Others

26%

19%

* KPMG 2008 Global Construction Survey

According to the Bent Flyvbjergs

Flyvbjerg s Study on Large Projects
Projects,

9 out of 10 projects have cost overrun;

Overrun is found across the 20 nations and five continents.

Overrun is constant for the 70-year period covered by the study; cost estimates have
not improved over time.
Slide 5

Cost Estimate Classification Matrix

Class Degree of

End Usage

Expected
Accuracy
Range

Project
Definition
V

0% to 2%

Concept Screening

-50% a +100%

IV

1% tto 15%

St d or Feasibility
Study
F
ibilit

-30%
30% a +50%
50%

III

10% to 40%

Budget Authorization or Control

-20% a +30%

II

30% to 70%

Control or Bid/Tender

-15% a +20%

70% to 100% Check Estimate or Bid/Tender

-10% a +15%

Source: AACEI RP 18R-97

200

50
80
90

130
115

Rough Order of Magnitude

Budget Authorization
Definitive

100 Ud (Actual)
Slide 6

Alarming Data

Source: Flyvbjerg, B. - Survival of the Unfittest, 2009

Inaccuracy is constant for the 30-year period covered by the study; forecasts have not improved over time

Source: Halcrow Fox, 2000

Slide 7

Projects with Undesired

Cost-Benefit
Cost
Benefit Ratio

Source: CATO Institute, Tax & Budget Bulletin, No. 17, 2003; FHWA - Predicted and Annual Impacts of New
Starts Project 2007; Flyvbjerg,
Flyvbjerg B.
B - Survival of the Unfittest
Unfittest, 2009

Characteristics.

Explanations.

1. Overestimate Benefits

1. Technical

2. Underestimate Cost

2. Psychological (Planning Fallacy and Optimism

Bias)

3. Minimize Environmental Impact

4. Maximize Social Benefit

3. Political-Economic

Underestimated Costs + Overestimated Benefits = Funding

Slide 8

Projects with Good CostBenefit Ratio

Source: FHWA - Predicted and Annual Impacts of New Starts Project 2007

Slide 9

Organizational Vision

Scope

Integrated
Project
Deliveryy

Cost

Risk Analysis
is not a
Discrete Event

Schedule

Risk

Slide 10

Life-cycle Risk Analysis

Project
Approval

Preliminary &
Detailed Planning

Execution

Closure

Total Project Risks

Risks

Amount
att Stake
St k

Amount at Stake
Typical Risk Events per Phase
Unavailable
Subject
j
Matter Experts
Poor Definition of
Problem
Unclear
Obj ti
Objectives
Buy-in
(by Competitive
Bidding)

No Risk
Management
g
Plan
Hasty Planning
Poor Specifications
Unclear Scope of
Work
No Management
Support
Poor Role Definition
Inexperienced Team

Unskilled Labor
Material Availability
A ailabilit
Strikes, Weather
Scope Changes
Changes in
Schedule
Regulatory
Requirements
OSHA / EPA
Compliance

Poor Quality
Unacceptable to
Client
As-Built
Changes
Cash Flow
Problems

Source: Project Management a Systems Approach to Planning, Scheduling & Controlling, 7th edition
Harold Kerzner, PhD
Slide 11

Implementing A Risk Management

Practice - Nurture
Well defined review, qualitative and
quantitative processes
Qualitative
Risk
Assessment

Schedule
Development,
Estimate
Review

Quantitative
Risk
Analysis

Increasing standardization in
templates, procedures, style
Clear recipe to integrate Risk
Components
Stricter adherence to organization
project management standards
Project Managers actively seek

Recommended Project Cost

&S
Schedule
h d l Contingencies
C ti
i

risk support

Slide 12

Implementing A Risk Management

Practice - Mature
Risk
Management
Planning

Migration to project risk

assessment life cycle
Review
Process

Risk Monitoring
& Control

Project
Communication
Summarize

Increasing standardization in
templates, procedures, style
New risk components being
integrated

Risk
Identification &
Prioritization

Continued adherence and

feedback to organization project
management standards
Risk management inherent to

Risk Response
Planning

Risk
Quantification

project management culture

Risk practice scalable to project
size
Slide 13

Benefits to Project Delivery

Project
j
Document Review
Clarity in Scope
Assumptions.

Qualitative Assessment

Better Estimates.

Recognition and
transparency in project
challenges.

Better Schedules.

Focus on project agenda.

Improved Project Controls

Brainstorming and
innovative solutions.

Quantitative Analysis
y
Risk based, documented
project contingencies.
SMART support
pp to p
project
j
change management.

Early risk warnings and

mitigation strategies.
Risk Register is a Project
Teams
Team
s tool.
tool
Key stakeholders to the
table.

Slide 14

Schedule & Cost Risk Analysis

Process
Qualitative Risk Analysis
OPRA
Critical &
Risk-sensitive
s se s e
sequences
Project Risks
& Uncertainty

SRA

Range

Summarize
Simulate

Prioritize

Review

Simulate

Model

Identify
RMP

Summary
Sequences
Sequences,
Probabilistic
Branching

Durations of
Critical
Activities

Model

Identify
Project Scope,
Estimate Issues,
Project Assumptions,
CPM & GPM Schedules, Possible Risks &
Response Plans
Estimates
E
Execution
ti Pl
Plans &
Strategy

Range

CRA

@Risk

Cost Breakdown,
Variables, &
Distributions

Develop Ranges for

Variables: Scope, Price,
Productivity, & Duration

Reports,
Graphics,
Options to
R
Respond
d tto
risks

Quantitative Risk Analysis

Slide 15

Identify Risks
Qualitative Risk Assessment
Scope

Price

Schedule

Productivity

Technology
Selection
Design Options
Level of Definition
Equipment Design
Environmental
Onsite/Offsite
Site Layout
Demolition

Market Conditions
Equipment
Vendors
Materials
Labor Rates
Exchange Rates
Engineering Rates
Indirect/Overhead
Construction
Equipment

Release of Work /
Approval
Periods
Procurement
Periods
Equipment/Material
Delivery
Work Area
Restrictions
Coordination with
j
Other Projects
External
Constraints
Vendor/Contractor
Resources

Near Operating
Areas
Workforce Quality
Labor Productivity
Turnaround Timing
Contract Strategy
Weather
Conditions
Manpower Density
Shift
Work/Overtime

Other
Contracting
Strategy
Joint Ventures
Communication
Permitting
Political
Influences

Slide 16

Qualitative Risk Assessment

Risk Management
Planning
R i
Review
Process

Risk Monitoring
& Control

Project
Communication
Summarize

Risk Response
Planning

Risk
Identification &
Prioritization

Risk
Quantification

Slide 17

Risk Thresholds
Figure 1: Defined Conditions for Probability Scales of a Risk

Probability

Low

Medium

High

Very High

0% 10%

11% to 30%

31% to 50%

51% to 70%

>70%

Figure 2: Defined Conditions for Impact Scales of a Risk on Major Project Objectives
Project
Objective

Very Low

Very Low

Low

Medium

Cost

Insignificant
Cost Increase

<2% of TPC

2 7%
2-7%
Increase

Time

0-2
Week
Time Increase

3-6 Week Time

Increase

Scope

Scope
S
Decrease
Barely
Noticeable

Quality

Quality
Degradation
Barely
Noticeable

High
Cost

8 15%
8-15%
Increase

Very High
Cost

>15%
15%
Cost
Increase

7-12
Week
Time Increase

13-18
Week
Time Increase

>18
Week
Time increase

Minor Areas of
Scope Affected

Major Areas of
Scope Affected

Scope
S
Reduction
Unacceptable
to PA

Project
P
j t Does
D
not
Satisfy
Original Intent
at Completion

Only
Most
Demanding
Specs Not Met

Degradation
Requires
PA
Approval

Quality
Reduction
Unacceptable
to PA

Major Re-work
Required
to
Complete
Project

Project team
defines
thresholds to
classify risks
and reduce
subjectivity

Slide 18

Prioritization

Probability & Impact Matrix (P/I)

Probability
VH
5.00
H
4.00
M
3.00
L
2.00
VL
1.00

5.00
4.00
3.00
2.00
1.00
1.00
VL

Probability-Impact
Score Legend
High = > 9
Med = 5 - 9
Low = 1 - 4

10.00
8.00
6.00
4.00
2.00
2.00
L

Threats
15.00
12.00
9.00
6.00
3.00
3.00
M
I
Impact
t

20.00
16.00
12.00
8.00
4.00
4.00
H

25.00
20.00
15.00
10.00
5.00
5.00
VH

Tolerance is
used to define
Ri k appetite
Risk
tit off
the organization

Tolerance Thresholds

Slide 19

Risk Register
Sample
S
l Risk
Ri k Register
R i t used
d tto prioritize
i iti risks
i k and
d subsequently
b
tl input
i
t
in the quantitative model.

Slide 20

Quantitative Risk Analysis

Risk
M
Management
t
Planning
Review

Risk Monitoring
& Control

Process

Project
j
Communication
Risk
Identification &
Prioritization

Summarize

Risk Response
Pl
Planning
i

Risk
Q
Quantification
tifi ti

Slide 21

Schedule Validation
NetPoint - GPM Alternative to CPM

Slide 22

Ranging Considerations
Quantitative Risk Assessment
Do the potential outcomes fit
the normal, triangular or beta
distribution function?
Would a different distribution
function be better, such as
discrete/uniform or compound?
Does the deterministic
schedule duration or the cost
estimate
ti t truly
t l representt th
the
most likely outcome for that
y
activity?
Slide 23

Schedule Risk Analysis

Primavera Risk Analysis
Include only
y schedule driven Risks in the model.

Slide 24

Schedule Risk Analysis

Distribution Graph Used to determine probabilistic completion
dates for a given percentile.
Data
Finish Date of :
Entire Plan

Schedule Distribution Plot

892
100

Hits

80

60

40

20

0
17/06/2017

100% 29/01/2020
95% 23/09/2019
90% 31/07/2019
85% 08/07/2019
80% 14/06/2019
75% 21/05/2019
70% 01/05/2019
65% 10/04/2019
60% 21/03/2019
55% 01/03/2019
50% 19/02/2019
45% 31/01/2019
40% 17/01/2019
35% 31/12/2018
30% 13/12/2018
25% 26/11/2018
20% 06/11/2018
15% 15/10/2018
10% 13/09/2018
5% 31/07/2018
0% 15/02/2018

Cumulative Frrequency

Entire Plan : Finish Date

Analy sis
Iterations:

1000

Statistics
Minimum:
Maximum:
Mean:
Bar Width:

15/02/2018
29/01/2020
21/02/2019
month

Highlighters
g g
50%
80% - Determinis...
Deterministic (03...
80%
90%

19/02/2019
892
<1%
14/06/2019
31/07/2019

30/10/2018

Distribution
st but o (sta
(startt o
of interval)
te a )

Deterministic Date 02/03/2017

P90 Date 07/31/2019
Slide 25

Schedule Risk Analysis

Tornado Diagram Duration Cruciality (Correlation of Activity Duration &
Criticality to Project Duration)
Large Infrastructure Program - Probabilitic Schedule
Duration Cruciality

A155 - Preparation of 100% Design Documents

57%

A240 - Select D/B Team & Execute Contract

43%

A730 - Switch Traffic to Final Alignment

42%

A160 - Designer Incorporates Review Comments

33%

A140 - Review & Accept DDP Report

A710 - Erect segments West

22%

14%

A150 - Preparation & Review of 90% Design Documents

12%

A410 - Set-up Casting Yard & Forms

12%

A420 - Cast Segments East

12%

Slide 26

Schedule Risk Analysis

Tornado Diagram Risks (Prioritized based on degree of influence on the project)
Large Infrastructure Program - Probabilitic Schedule
Duration Sensitivity

REN4 - Environmental permits may not be received by Q1 2012

57%

RC20 - Restricted Work Hours may delay construction

40%

RD2 - Procurement Process could take longer than 8 months

32%

RD11 - FHWA Design Exception for substandard geometry may not be received b...

31%

RD9 - Cash Collection may not be temporarily stopped in toll Lanes

17%

RD3 - Program amy not bet fully defined by Q1, 2012

RD1 - Design Package for Design Build may take longer than expected

RD4 - Field Inspections may show considerable distress on main Structure

14%

11%

9%

Slide 27

Schedule Risk Analysis

Distribution Analyzer
y
- Helps
p determine impact
p
of each risk on project
p j
schedule

Distribution Analyzer
Removing RD1 - Finish Date
Removing RC14 - Finish Date

Removing RC23 - Finish Date

Removing RD2 - Finish Date
Variation:13 Variation:128 Variation:19

Variation:144

Removing RC20 - Finish Date

Removing REN4 - Finish Date
Variation:111

Variation:73

Variation:82

Removing RD9 - Finish Date

Removing RD11 - Finish Date

All Risks - Finish Date

100%

Variation:175

Variation:5

Variation:54 Variation:85

Variation:119 Variation:25

Variation:59

60%
Variation:72

Variation:127

40%

20%

0%
22/ 09/ 2017

31/ 12/ 2017

10/ 04/ 2018

19/ 07/ 2018

27/ 10/ 2018

04/ 02/ 2019

15/ 05/ 2019

23/ 08/ 2019

01/ 12/ 2019

10/ 03/ 2020

18/ 06/ 2020

26/ 09/ 2020

Slide 28

04/ 01/ 2021

C u m u lative P ro b ab ili ty

80%

Cost Risk Analysis

Palisades @
@Risk Model
Use only Cost driven risks in this analysis
C t Ri
Cost
Risk
kU
Uncertainty
t i t V
Variables
i bl
The following items can vary from the deterministic estimate
based on the estimators interpretation of the Contract
Documents
Quantity / type of material / Price
Construction Means & Methods
Labor & Equipment Productivity

Slide 29

Typical Risk Assessment Exclusions

Changes in contracting strategy
Force Majeure, such as war or terrorist activities (work
suspensions due to hurricanes included)
Drastic change in market conditions
Major scope changes
g
facility
y operation
p
disruptions
p
Significant

Strikes
Impact of Politics
Slide 30

Cost Risk Analysis

Insert Ranges (Risks & Estimate) & Define Distribution

Slide 31

Cost Risk Analysis

Simulation Settings

Slide 32

Cost Risk Analysis

Simulate

Slide 33

Cost Risk Analysis

Analyze Results
Tornado Charts (Regression & Correlation Coefficients)

Slide 34

Cost Risk Analysis

Total Cost Distribution Graph

Slide 35

Risk Based Contingency

Schedule Based Cost Contingency from OPRA

OverallProjectCompletion

Variability(Probabilistic
Dates DeterministicDates)

Deterministic

Contingency =(Probabilistic
Date DeterministicDate)X
IndirectCosts(i.e.,$10,000/day)

P10

587

$5,870,000

MostLikely P50

746

$7,460,000

P90

908

$ 9,080,000
OPRA Oracle Primavera Risk Analysis
Slide 36

Risk Based Contingency

Cost Based Contingency from @Risk
OverallProjectCompletion

Total cost

Risk Basedcostcontingency

Deterministic Estimate

$ 250,000,000

P10

$265,277,700

$15,277,700

MostLikely P50

$273,829,600

$23,829,600

P90

$ 283,200,200

$33,200,200

Slide 37

Integrated Cost & Schedule

Risk Results
C t D
Cost
Driven
i
C
Contingency
ti
= $33
$33,200,000
200 000
Schedule Overrun = P90 Date Deterministic Date
= 908 d
days
Overhead/Financial Expenses - $ 10,000/day
Schedule Based Cost Contingency = 908 X 10,000 = $9,080,000
Total Risk Based Contingency
C
= Schedule
S
C
Contingency + C
Cost C
Contingency
Total Risk Based Contingency (P90) = $ 42,280,000

Slide 38

Multi-Year Capital Forecasting

Pre-Risk Assessment Capital Allocation

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Total

Construction

$0

$0

$25,000

$60,000

$65,000

$80,000

$20,000

$0

$0

$0

$250,000

Inflation

$0

$0

$1,500

$5,400

$7,800

$12,000

$3,600

$0

$0

$0

$30,300

Total Direct Costs

$0

$0

$26,500

$65,400

$72,800

$92,000

$23,600

$0

$0

$0

$280,300

Engineering Staff

$7,000

$11,800

$13,000

$1,180

$1,180

$950

$950

$0

$0

$0

$36,060

Project Management Staff

$3,000

$3,000

$8,000

$4,000

$5,000

$5,000

$5,000

$0

$0

$0

$33,000

Subtotal Staff Costs

$10,000

$14,800

$21,000

$5,180

$6,180

$5,950

$5,950

$0

$0

$0

$69,060

Administrative Costs

$200

$296

$420

$104

$124

$119

$119

$0

$0

$0

$1,381

Project Contingency

$816

$1,208

$3,834

$5,655

$6,328

$7,846

$2,374

$0

$0

$0

$28,059

Total Indirect Costs

$11,016

$16,304

$25,254

$10,938

$12,632

$13,915

$8,443

$0

$0

$0

$98,500

Total Project Cost

$11,016

$16,304

$51,754

$76,338

$85,432

$105,915

$32,043

$0

$0

$0

$378,800

Total Project Cost (Cum)

$11,016

$27,320

$79,073

$155,412 $240,843 $346,758 $378,800 $378,800 $378,800 $378,800 $378,800

Direct Costs

Indirect Costs

Empirical
Contingency
Allocation

All figures should be multiplied by $1000

Slide 39

Multi-Year Capital Forecasting

Post-Risk Assessment Capital Allocation
Cost Categories

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Total

Construction

$0

$0

$30,000

$50,000

$54,000

$62,000

$24,000

$20,000

$10,000

$0

$250,000

Inflation

$0

$0

$1 800
$1,800

$4 500
$4,500

$6 480
$6,480

$9 300
$9,300

$4 320
$4,320

$4 200
$4,200

$2 400
$2,400

$0

$33 000Risk
$33,000

Total Direct Costs

$0

$0

$31,800

$54,500

$60,480

$71,300

$28,320

$24,200

$12,400

$0

Based
Contingency
$283,000
Allocation

Engineering Staff

$7,000

$11,800

$13,000

$1,180

$1,180

$950

$950

$950

$950

$0

$37,960

Project Management Staff

$3,000

$3,000

$8,000

$4,000

$5,000

$5,000

$5,000

$5,000

$5,000

$0

$43,000

Subtotal Staff Costs

$10,000

$14,800

$21,000

$5,180

$6,180

$5,950

$5,950

$5,950

$5,950

$0

$80,960

Administrative Costs

$200

$296

$420

$104

$124

$119

$119

$119

$119

$0

$1,619

Project Contingency

$800

$900

$4,500

$6,080

$9,500

$12,000

$3,500

$3,000

$2,000

$0

$42,280

Total Indirect Costs

$11,000

$15,996

$25,920

$11,364

$15,804

$18,069

$9,569

$9,069

$8,069

$0

$124,859

Total Project Cost

$11,000

$15,996

$57,720

$65,864

$76,284

$89,369

$37,889

$33,269

$20,469

$0

$407,859

Total Project Cost (Cum)

$11,000

$26,996

$84,716 $150,580 $226,863 $316,232 $354,121 $387,390 $407,859 $407,859 $407,859

Direct Costs

Indirect Costs

* Analysis represents a pre-mitigated analysis

Additional
Overhead
Expenses

All figures should be multiplied by $1000

Slide 40

Post Mitigated Analysis

Post-mitigated analysis can be used to:

Track the progress of mitigation in successive
iterations of risk analyses to help re
re-cast
cast
appropriate contingency levels
Perform what-if analyses on to determine the
affect of specific mitigation steps and help the
Team evaluate prudent measures for risk
response

Slide 41

Risk Monitoring & Control

Risk
Management
Planning
Review
Process

Risk Monitoring
& Control

Project
Communication
Risk
Identification

Summarize

Ri k R
Risk
Response
Planning

Ri k
Risk
Quantification
Slide 42

Risk Monitoring and Control

Often project risk assessments end up being

expert-facilitated discrete events.
Project
P j t tteams never ttake
k ownership
hi off risk
i k
monitoring and control.
Risk monitoring and control must become
integral to project change management for a
truly successful risk management process
process.

Slide 43

Risk Monitoring and Control

* The results in the above chart are for illustration purposes only. They do not reflect current risk activity

Contingency Management

Contingency Rundown Chart

R
Remaining
Contingency ($ Thousands)

$25,000

Contingency Rundown
Plan
Contingency Rundown
Actual

$20,000
$15,000
$10,000
$5,000
$6 900
$6,900
$0

$5,100

Financial Period

* Constantly monitored and revised as indicated by organization policy

Slide 45

Final Remarks

Quantitative Risk Assessment should be performed at

different stages of the project to revalidate the contingency.
Management
M
could
ld have
h
a contingency
i
d
drawdown
d
plan
l b
based
d
on their organizations governance policy.
Risk Assessment helps owners devise better procurement
strategies.
Risk Assessment can help an organization allocate proper
amount of capital for a project and reduce project overruns

Slide 46

References

Survival
S
i l off th
the U
Unfittest:
fitt t Wh
Why th
the W
Worstt IInfrastructure
f t t
G
Gets
t Built
B ilt
And What We Can Do About It, Oxford Review of Economic
Policy, vol. 25, no. 3, 2009, pp. 344-367

FHWA Risk Assessment and Allocation for Highway

Construction Management

Palisade @Risk Webinar Project Cost Analysis by Javier

Ordonez, PhD

Schedule Risk Analysis David Hulett

Integrated Cost - Schedule Risk Analysis David Hulett

Slide 47

Questions ?

Slide 48

Contact Information

Francisco Cruz
Senior Engineer
fcruz@pmaconsultants.com
Mitul Parikh
Senior Engineer
mparikh@pmaconsultants.com

Slide 49