Risk-Based Estimate Self-Modeling - Wikispacesgr40-au2010.wikispaces.com/file/view/Estimate+Self-Modeling.pdf · risk-based estimate ... project team in its estimating process and

2009 AACE International Transactions

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Risk-Based Estimate Self-Modeling

Dr. Ovidiu Cretu, PE and Terry Berends, PE

ABSTRACT— Cost estimating and risk analysis (risk-based estimate) usually require employing Monte Carlo method (MCM) in developing the range and shape of the estimated project cost. The MCM mostly requires dedicated software and specialized users to model and compute large amount of data generated within the process of simulation. The risk-based estimate self-modeling (RBES) eliminates the need of specialized software by allowing a regular excel user to develop an integrated cost and schedule estimate with limited knowledge of risk analysis. The RBES has the flexibility of entering simple independent risks and more sophisticated risks that are dependent of each other and/or correlated. In this way large or small projects can benefit of the value added by employing the risk-based estimate process. The outcome of the RBES consists of graphs, and tables that present the project cost in current year dollars, and year of expenditure dollars, plus the advertisement, and end construction date. In addition to that the RBES computes the tornado diagram of the most significant cost and schedule risks. Keywords: Cost estimating, Excel, Monte Carlo, project, risk analysis, and software

roject cost estimating is an important component of project management throughout the life of a project. Good project cost estimating may determine whether the project will go forward or not and whether its delivery is a success or a failure.

There are many methods of developing an estimate for a project. Generally, they are segregated into two major categories: the traditional estimate and the risk-based estimate (presented in figure 1). The traditional estimate requires a sagacious estimator who has developed the fine art of contingency’s appreciation for different kinds of situations. The apparent simplicity of the traditional method is overcome by the following disadvantages:

• It doesn’t stimulate the identification and management of events that could change the estimate in a positive or a negative way.

• It allows little control over the project’s estimate. And,

P


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• It is reactive, and in the majority of cases, any remediation is more costly than it should be.

Figure 1—Contingency Based Estimates Vs. Risk Based Estimates

The risk-based estimate (RBE) appears more complicated, and it requires a quantitative risk analysis that involves team effort and some training in risk elicitation and analysis. The process is quite similar to the “successive principle” or “intelligent cost estimating” [1]. The cost of producing the RBE may be higher than the cost of producing a traditional estimate for the same project, but the following benefits of RBE go well beyond the traditional estimated values:

• It recognizes and quantifies the events (risks) that may change the project’s estimate. • It promotes the study of “what if” scenarios. • It allows reasonable control over the project’s estimate through risk management.

And, • It shares information among disciplines and improves the knowledge the support

offices have about the project.

Furthermore a great benefit of the RBE is its richness of data and how the results are organized and inform the decision makers. It gives management users a sharper and far more realistic long-distance view of the prospects awaiting their projects [3]. In other words,

Threat 1

All known and unknown risks are equally weightedAllows little control over the project cost/scheduleReactive

Clear recognition of project�’s threats and opportunitiesAllows reasonable control over the project cost/scheduleProactive

Traditional Estimate Risk-Based Estimate

Base Estimate

Base Estimate

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New Threats New Threats


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the RBE is intended to keep the owners, contractors, and stakeholders from being surprised [5]. The RBE should be performed starting with Planning/Scoping phase of the project and continue updated throughout the project’s life.

Figure 2—Risk-Based Estimate Process Risk-Based Estimate The risk-based estimate described by figure 2 has emerged as a cutting edge estimating method. This concept was created and developed within Washington State Department of Transportation (WSDOT) throughout the progression of the cost estimating validation process (CEVP) and cost risk assessment (CRA) process. WSDOT has more than six years of institutional RBE experience and has conducted hundreds of RBE workshops with project values ranging from 1$M to 5$B [11]. Risk-Based Estimate Overview Usually, the RBE is a team approach where a dedicated group, including the cost lead, risk lead, SMEs, and project team members, meet in a workshop setting and evaluate the project, looking at all phases of project delivery [5,6]. The process is designed to help the project team in its estimating process and should not be considered an audit. Having the appropriate and knowledgeable team members is of utmost importance. Full cooperation among all workshop participants is the key to its success [6].

Engi

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Identify Quantify Risks

Likelihood of Occurrence [%]

Impact [$,Mo]

ValidateBase CostDuration

Cost [$]Duration [Mo]

Variability+2% to +10%

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The RBE workshop members validate the estimate prepared by the project team; risks are elicited and recorded; project cost and schedule risk analysis is performed; and, finally, results for cost and schedule are presented as graphs, tables, and narrative. Often times risk mitigation strategies are identified during the workshop. The risk analysis presents risk sensitivity results, which allow the project team to develop a sound risk management plan. All definitions of terms presented in this paper are taken from the Glossary for Cost Risk Estimating and Management [9]. Base Estimate Validation The validation of the base estimate is conducted by the cost lead, who is an experienced estimator with no stake in the project. The estimator’s objective in performing this task is to compute an estimate for neutral conditions (when the project is delivered as planned without incident). It is critical that the values of the base cost estimate and base schedule estimate be as accurate as project conditions warrant. The base estimate represents the cornerstone of a project’s estimate, and any error would induce linear errors in the project’s total estimate. The validation process has the following main steps:

Step 1 Review and validate the project assumptions, and examine, discuss, and document the estimate basis. This step is critical because it helps the workshop participants understand the project (scope and schedule). The outcome of this step will constitute the foundation of risk elicitation.

Step 2 Review the project cost and schedule based on the information available. During this step, the workshop team reviews the unit price and quantities and update as needed. It is very important to document any changes that are made to the base estimate.

Step 3 Removal of contingencies which are hidden or included in various items. The group would focus on removing all contingencies included to cover “what if” scenarios. At this time, all group members understand that the contingencies removed will be replaced by clearly identified and quantified risks. An item called change order contingency remains and it covers minor omissions or errors in the plans.

Step 4 Capture the “unknown cost” of miscellaneous items, which are usually called “design allowances.” This step covers the cost of items that are included in the project but, at the time of estimate, there is no data about how much they might cost [7].

Step 5 Assign variability to the base estimate. The neutral effect of variability should be preserved. The authors recommend using the symmetrical form of “Beta3distribution” (Pert), which captures the meaning of variability. Figure 3 presents a base cost of 10$M with “+ 10 percent variability.”


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Figure 3—Base Cost “10$M ±10 Percent In summary, the validation of the base cost and schedule estimate ensure that:

• Assumptions and basis of estimate are appropriate for the project; • Items are not missing; • Historical data, the cost-based estimate, or other data that was used to develop the

estimate accurately reflect the project scope and site conditions; and • The base cost estimate is an accurate reflection of the project’s scope of work.

2.3. Identify and Quantify Risks Risk’s identification and quantification is perhaps the most demanding phase of the entire RBE process. During this process, the risk lead is responsible for conducting elicitation of unbiased risks and must be aware of numerous biases and agendas some team members may have. The risk elicitor must have the ability to encourage the analysis group to identify all the significant sources of uncertainty and to classify them in sufficiently independent groups [3]. A good risk analysis requires no more then 20 critical risks to be analyzed. At the start of the risk elicitation, limits should be established on what is a significant risk. The non-significant risk should still be documented in the risk register, since often times project managers can still use these to manager their project. Typically, there will be only 10 to 20 critical items, even in the largest projects with hundreds or thousands of components to consider [2]. If no critical items are ranged, the inevitable result will be a far narrower predicted range of possible project costs than actually exists; misstatements of risk and opportunity; and understatement of required contingency [2].

Min(9$M)

Most Likely(10$M)

Max(11$M)

Min(9$M)

Most Likely(10$M)

Max(11$M)


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Risk as an Event A risk is an event that changes the estimate or schedule when it occurs. The change can be positive, such as a cost reduction or a shortened schedule; this risk is called an “opportunity.” When the event increases the cost of the project or lengthens the project schedule, the risk is called a “threat” [2, 4]. Regardless of whether it is a “threat” or an “opportunity,” a risk is described by two parameters:

• Probability of occurrence; and, • Impact (effect)

Probability of Occurrence Probability of occurrence indicates the chance that a specific event will occur. It is measured in percentage, and any values from 0% to 100% are permissible. Defining a risk’s probability of occurrence is probably the most tenuous characteristic of the risk-based estimate, and it is heavily dependent on subject matter experts (SMEs). To facilitate the process of assigning a probability of occurrence to a risk event, the authors recommend using the following scale:

! very low = 5 percent; ! low = 25 percent; ! medium = 50 percent; ! high = 75 percent; and, ! very high = 95 percent

This scale is for guidance only. In the process of elicitation, any value, such as 20 percent (one fifth), 33 percent (one third), 67 percent (two thirds), is acceptable. The value of 0 percent is not acceptable because, in this case, the risk will never occur. It may be called a “non-occurring risk.” The value of 100 percent should be avoided, but it could happen. It is worthwhile to specify the situation when the SMEs have no clue as to risk’s probability of occurrence. In this case, the 50 percent value “no clue option” is appropriate. Any assumption used to determine probability of occurrence should be documented. At no time should the probability be to the nearest 1 percent, for example 23 percent. In summary, it is important that the process of defining the probability of occurrence be as accurate as conditions allow and that not too much time is spent debating over it. To paraphrase voltaire: Waiting for perfection is the greatest enemy of the current good. The RBE focuses on developing the current good, so trust your experts and challenge them on substance and biases—don’t negotiate guesses. Risk Impact Risk impact is defined by range and shape. Typically, there are two main categories that describe the risk’s impact:

• Discrete distributions such as:


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o Binomial – The discrete probability distribution of the number of successes in a sequence of “n” independent “yes/no” experiments, each of which yields success with probability “p.” And,

o Discrete – Each outcome has a value and a probability of occurrence. • Continuous distributions such as:

o Pert Distribution – A useful distribution in modeling the RBE process. o Triangular Distribution – Has close properties to Pert distribution and, in

many cases, is more intuitive. And, o Uniform Distribution – Also called “no clue” distribution.

The risk based estimate self-modeling may use all three continuous distributions and some of discrete distributions

Pert Distribution The RBE collects most of its data using the SMEs judgment. The authors’ observations show that SMEs are most comfortable when they are asked the following three questions:

• What is the maximum value of the risk’s impact when the risk occurs? • What is the minimum value of the risk’s impact when the risk occurs? And, • What is the most likely value of the risk’s impact when the risk occurs?

Figure 4—Distribution’s Range and Shape The Pert distribution is defined by three points, as presented in figure 4: the minimum risk value, the maximum risk value, and the most likely risk value. It is worthwhile to point out that the minimum and maximum values are not values an expert expects to happen. They are values that can happen, and if they can happen, they must be captured in analysis [2]. The most likely value represents the expert’s “mode guess,” which is the value with the highest frequency in distribution. It is what the expert actually provides when answering the question: What is your “best guess”?

1. �“ MIN �” the first point2. �“ MAX �” the second point3.

The �“Most Likely �”

Range

Shape


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RBE and Monte Carlo Method Monte Carlo method (MCM) is a well-established statistical method that consists of running a large number of plausible cases (called iterations or realizations), developing a database, and treating it statistically.

Cost and Schedule: Integrated vs. Nonintegrated The MCM can be applied to the RBE at different degrees of complexity. The simplest one is computing the project’s RBE using only current year (CY) dollars. The project cost could then be aged using different methodologies and could estimate the cost in year of expenditure (YOE) dollars. This approach offers relative simplicity, but it lacks the value brought in by integrating cost and schedule.

The integration evaluates in detail the schedule’s effect on the YOE estimate and it provides better information to the decision makers. Because of that, the RBE presented here uses an integrated cost and schedule approach where risks could affect the CY cost and schedule.

Project’s Flowchart The project’s schedule may have different forms and different complexities, and the RBE may be applied to any of them. However complex schedule could confuse the workshop participants and dilute the results.

Usually, the RBE uses the SMEs, who are asked questions related to events that may change the project cost and schedule. The SMEs have no stake in the project; their role is to bring unbiased opinions about what may happen during the life of the project. So it is important to them that the project schedule is presented in a clear, concise, easy-to-follow manner.

Further, considering the scope of RBE, it is recommended that a simple project schedule specifically design for estimating purpose be created. The project schedule is usually in the form of a flowchart diagram, which is a good communication tool for workshop participants and others.

Project’s Flowchart: Free of Risks The simplest flowchart diagram that may be created to represent a project schedule for heavy construction would have four activities (presented in figure 5). The box named “estimate date” acts as a milestone and represents the time the estimate is done. More importantly, it represents the time that defines prices; in other words, it represents the CY prices. Project’s Flowchart: Risks-Loaded Figure 6 represents a schematic of how the data created for the risk analysis is organized. Each activity has a base cost and base duration assigned. The base cost and base duration are considered in the form of symmetrical “Pert distribution” and above them risks may affect an activity’s cost or duration according to its description.


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Figure 5—The Simplest Flowchart Diagram For a Heavy Construction Project Figure 6—Risks Loaded Flowchart For a Heavy Construction Project Monte Carlo Simulation Applied to RBE Let’s describe how the project cost in CY dollars is computed using the MCM. Figure 6 and table 1 show that for a plausible situation the model extracts a random value for the base cost of “preliminary engineering,” “right of way,” and “construction” using the cost distribution definition.

Ad/Bid/Award

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Right of Way

ConstructionAd/Bid/Award

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Right of Way

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Phase PE ROW CN PE ROW CN

Range 2.5 to 3.5 11 to 13 32 to 35 .5 to .8 1 to 5 2 to 8

Percentage 100% 100% 100% 50% 30% 67%

Iteration #

1 3 11.6 33 0.7 4 6 58.3

2 2.9 11.9 34 0.55 3 52.35

3 2.8 11.3 33.5 47.6

4 3.4 12 32.9 0.65 3 51.95

5 3.2 12.3 34.6 0.63 7 57.73

6 3.3 12.7 33.5 2 51.5

7 2.8 11.8 33.8 0.66 5 54.06

8 2.6 12.4 32.9 6 53.9

9 3 11.7 34.3 7 56

10 3.3 12.6 34.2 0.76 4 54.86

11 2.9 12.4 33.4 4 52.7

12 2.9 12 33.8 0.65 5 54.35

Total cost Min value 47.6

Total cost Max value 58.3

Total cost Median value 54.0

Base cost Risks Cost when occurs

Tota

l cos

t

Table 1—Monte Carlo Method Applied for the Cost Estimate in CY Dollar The model then tests each risk applied to the matching flowchart activity. If a risk was meant to occur, the model will extract a random value from risk’s distribution that describes its impact. All of these values are then added together and will form the total cost of the project in CY dollars. The preceding description is simplistic, but it has the benefit of being intuitive and easy to understand. Reality is more complex when the model must consider all possible situations, such as: risk’s dependency, risk’s correlation, escalation factors, and the schedule’s dynamics, in order to define CY and YOE estimates.

Risk-Based Estimate Results Table 1 presents in a simple manner how the RBE may compute its results. Real projects require analysis and presentation of large amounts of data (thousands of iterations), so the results are presented in the form of graphs and tables.


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The transportation industry is primarily interested in the estimate of preliminary engineering, right of way, construction, and total cost. These estimates should be provided using CY and YOE dollars. In addition, the model should present the estimated ad date and estimated end construction date.

Base Value Variability

10/10/09 10%

12.0Mo 10%

2.00$M 10%

2.00$M 10%

WSDOT accepts no responsibility for its use 2.00$M 10%Estimated CN Cost

Project Manager

Target AD Date

Estimated CN Duration

Estimated PE Cost

Estimated ROW Cost

Last Review Date 12/12/08

Project Title

Estimate Date

Project PIN #

Highway to Heaven

10/10/08

Figure 7—Base Cost and Duration Data Entry

Mob A/B/A Duration 2Mo

Tax

CE PE

PE ROW

C.O.C CN

Risk Markups WSDOT Escalation tables built-in

Escalation for non-WSDOT

Figure 8—Risk Markups and Escalation Factors/Rates

Risk-Based Estimate Self-Modeling (RBES) Spreadsheet The RBES spreadsheet is open code software, designed to facilitate the integration of the cost and schedule estimate of projects by performing a risk-based estimate [10]. The RBES employs only Excel functions, and any user with minimal Excel knowledge may use it. It was designed to facilitate RBE for projects described by the simplest flowchart diagram, presented in figure 8.


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RBES Overview The RBES is capable of capturing, analyzing, and displaying the simulation results of “pre-mitigated” and “post-mitigated” scenarios on the same graph. The pre-mitigated scenario represents the range and shape of a project estimate before any action is taken to manage risks. The post-mitigated scenario represents the project estimate after the risk management plan is developed. The post-mitigated scenario considers so-called “residual risks,” which remain after the risk response strategy is implemented. Cost and Schedule Data Input As stated before, the RBES can run two different scenarios: each of the scenarios is served by 2 tabs, each tab can record 12 risks, and each risk may have 2 components (cost and duration). Each risk is quantified by its probability of occurrence and its impact. The RBES allows the entry of any shape of Pert distribution for quantifying the risk’s impact. Base Cost and Schedule Data The base cost and schedule values are entered in the base tab. (see figure 7). The light-yellow-shaded cells are required to be filled in by the user. The required data should be free of errors because the cells’ definitions are self-explanatory and a pop-up window provides additional guidance if needed. The RBES is set up to consider the cost in millions of dollars ($M) and duration in number of months. The “base estimate” requires entering the validated values as defined in the Base Estimate Validation. Base variability section requires a single percentage. Risk Markups and Escalation Factors/Rates The “risk markups” column (see figure 8) is meant to adjust each construction risk by the project markups. It includes mobilization (mob), taxes (tax), construction engineering (CE), preliminary engineering (PE), and change order contingency (C.O.C.). The RBES assumes that each risk applied in the construction phase is defined as either an addition to a construction pay item or as a new pay item. If the entry cell for a markup is left blank, it means that the respective markup factor does not apply to risks. The PE markup is computed using the information entered for the base cost estimate, which is the ratio of base estimate for PE over base estimate for construction (CN). The PE markups may be overwritten and entered as a specific percentage. The model can accommodate different escalation rates for PE, ROW, and CN phases. WSDOT escalation factors are built in the body of the model. By default, the model uses the WSDOT escalation tables, but this can be easily overwritten by typing annual escalation rates in designated cells.


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Risk Data Entry The RBES spreadsheet organizes the risk data into two major sections: risk assessment and risk management. The risk assessment section comprises three areas:

• risk identification; • quantitative analysis; and • qualitative display of the most likely impact.

The risk management section includes two areas:

• risk response plan; and • risk monitoring and control.

Each area has different elements bound together by the concept of risk identification, analysis, and management.

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Detailed Description of Risk Event

(Specific, Measurable, Attributable, Relevant,

Timebound) [SMART]

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Threat MIN 2.00$MMAX 13.00$M

BEST GUESS 3.50$MMaster Duration Risk

MIN 5.0MoMAX 12.0Mo

Threat BEST GUESS 7.0Mo

The assumption was made that the

highway will be closed for a part of

construction duration and the city's streets will not be damage.

Signs of city's roads

deterioration

25%

Act

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require fixing their roads used during

construction

Sco

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Risk Identification

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Quantitative Analysis

Risk Impact ($M or Month)

Figure 9—Risk Data Entry Risk Assessment The risk assessment section of the RBES spreadsheet allows the risk data to be entered through the risk identification and quantitative analysis areas, and it displays the “most likely” value in the risk matrix. Risk data is entered into the clearly defined cells. Figure 9 presents the requirements related to risk identification and quantitative analysis. All cells should be filled in but the yellow-shaded cells are critical for computing the estimated cost and schedule. Following is a brief description of the functionality of each cell. Column 1 matches the risk number from the risk data tab. Column 2 asks for information about risk status. It is menu-driven and has three options to choose from:


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• Active: When the risk is being actively managed and the values entered are used in determining the modeling results.

• Dormant: When the risk is not currently a high priority in the management plan but might become active in the future, however the values entered are used in determining the modeling results.

• Retired: When risk is terminated either because of the mitigation strategy applied or because it simply disappeared. When the risk receives the status of “retired,” its data is kept on file, but its value will not affect the model’s results.

Column 3 requires advanced information about the risk’s relationship with the above risk. The column is divided into two active cells, which are shaded light green. Both active cells in the third column are menu-driven and each one has a different function in defining the risk’s relationship with the above risk. The upper cell defines the conditionality between the identified risk and the above risk. The RBES can capture all possible relationships between the two risks:

• Independent: When the risk occurrence doesn’t depend on the above risk. This is the default cell’s value if the cell is left blank.

• Dependent Inclusive: When the risk occurrence depends on the occurrence of the above risk. The risk may occur only when the above risk occurred. If the risk probability of occurrence is 100 percent, then the risk occurs any time the above risk occurs. In this case, the relationship between these two risks may be called “mutually inclusive.”

• Dependent Exclusive: When the risk occurrence depends on the non-occurrence of the above risk. The risk may occur only if the above risk does not occur. If the risk’s probability of occurrence is 100 percent, then the risk occurs “only and always” when the above risk does not occur. It is called a “mutually exclusive” relationship.

The lower cell defines the correlation between the identified risk impact value and the above risk. The RBES can capture three main correlations between the two risk impact distributions: Positive correlation, zero (or non-) correlation, and negative correlation. In the case of positive correlation, the correlation coefficient is “one,” and in the case of negative correlation, the correlation coefficient is “minus one.” Correlation defines how impact value is sampling from risk distributions when the risks occurred. Figures 10 through 12 explain how the risk correlation works. The risk correlation effect could be significant and can be summarized as follows:

• The positive correlation of two risks tends to expand the range of the cumulative risks’ impact.

• The non-correlated risks will have a narrower range of the cumulative risks’ impact. And,


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• The negative correlation will narrow even more the range of the cumulative risks’ impact.

Risk CorrelationRisk CorrelationPositivePositive

Risk �“X�”

Risk �“Y�”

1 6

.5 8

Figure 10—Positive Correlation

When risk “X” takes a high impact value, risk “Y” takes a high impact value from its own range. When risk “X” takes a low impact value, risk “Y” takes a low impact value from its own range. When risk “X” takes the middle value, risk “Y” takes its own middle value.


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Figure 11—Negative Correlation

When risk “X” takes a low impact value, risk “Y” takes a high impact value from its own range. When risk “X” takes a high impact value, risk “Y” takes a low impact value from its own range. When risk “X” takes the middle value, risk “Y” takes its own middle value.

Risk CorrelationRisk CorrelationNegativeNegative

Risk �“X�”

Risk �“Y�”

1 6

.5 8


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Figure 12—No Correlation

No rules. The risk “Y” impact value is taken from its range without any regard to the risk “X” impact value.

Moving ahead to risk assessment, the user needs to fill in Column 5 with information related to the risk functional assignment: pre-engineering (PE), right of way (ROW), and construction (CN). It is critical to choose the correct field for each risk since the information in this cell directs the cost and duration risk impact to the corresponding project phase where the risk produces changes The cells in Column 6 have a brief description of the risk. The upper cell defines whether the risk event is threat or opportunity for the project cost. The lower cell defines whether the risk event is threat or opportunity for the project schedule. The model considers this information when computing the risk impact to the project cost or project duration. The RBES allows four combinations to be entered in the upper and lower cells: 1 2 3 4 Upper cell Threat Threat Opportunity Opportunity Lower cell Threat Opportunity Threat Opportunity

Risk CorrelationRisk CorrelationNo CorrelationNo Correlation

Risk �“X�”

Risk �“Y�”

1 6

.5 8


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The cell in the middle of Column 6 captures the risk’s name. A more detailed risk description is presented in Column 7. Filling in this information is critical for a full understanding of the risk event. All assumptions that were made to determine the impact and probability should be clearly documented. Column 8 allows the risk elicitor to record information on the risk trigger. The risk trigger is an event, or any other change in project’s condition, that will dramatically increase the probability that risk will occur or will produce immediate risk occurrence. Column 9 has the following functions: it labels the risk cost impact and schedule impact, and it allows implementation of more advanced modeling conditions. The first function is quite obvious and doesn’t need any further explanation. However, the second function requires more explanation and a good understanding of how risk duration may be in “series” or in “parallel” with the precedent risk. The default value is “parallel.” Figure 13—Duration Risks: Series Vs. Parallel Figure 13 presents in graphic form how duration risks may act in “series” or in “parallel.” When the risk durations are in parallel, the model will pick the highest values between them. When the risk durations are in series, the model will calculate the sum of both durations. The next several columns present a visualization of both risk components: cost and duration. A graphical display of the most likely impact is presented in figure 14. The risk matrix is a 5x5 array that segments the range of probability and impact into five areas: very low, low, medium, high, and very high. The risk matrix displays the cost impact with a “$” sign and the duration impact with “Mo” sign.

Duration �“X�” 2 Mo

Duration �“Y�” 1 Mo

Par

alle

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Duration Result 2 Mo


Duration �“Y�” 1 MoSeri

es Duration Result 3 Mo



Par

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Par

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Duration Result 2 MoDuration �“X�” 2 Mo


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Expe

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VL L M H VH

Risk Matrix (Probability of Occurrence by Most Likely Impact)

Impact: Cost ($) and Schedule (Mo)

12$M

Low

Very

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2.0M

o

Very

Low

Figure 14—Risk’s Graphical Display (Cost and Schedule) Impact The last column answers the question about whether or not the risk is on the critical path. If the risk does not change the critical path, then the RBES does not consider its duration component. The authors learned that entering the risk data directly into the spreadsheet is overwhelming for users and the space dedicated for comments or the SMART cell is not enough. So, in order to provide the user a better way to record risk data, the RBES includes 50 additional tabs, which allow the recording and printing of each individual risk and base estimate data. Figure 15 presents a typical risk data tab.

Risk Management The remaining columns are dedicated to capturing the risk management section, which is presented in figure 16. The information included in this section does not affect the calculations, but it is beneficial for establishing a good post-mitigated RBE model. During the risk elicitation, any risk response actions or mitigations should be captured to assist the project team with future risk management activities.


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Threat and/or

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Detailed Description of Risk Event (Specific, Measurable, Attributable,

Relevant, Timebound) [SMART]

Risk Trigger Ty

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Threat MIN 5.00$M

MAX 20.00$M

Most Likel 12.00$M

0 Master Duration Risk

MIN 3.0Mo

MAX 9.0Mo

Threat Most Likel 6.0Mo

Risk Matrix

60%

Comment 1:

Comment 2:

Comment 3:

Act

ive

Pos

itive

cor

rela

tion

Con

stru

ctio

n

Environmental regulations and soil conditions may require a longer bridge.

EIS Aproval

Cos

t

Longer Bridge

Sch

edul

e

Risk Impact ($M or Mo)

VH

H

M Mo $

L

VL

VL L M H VHP

roba

bilit

y

Impact

Figure 15—Risk Data Entry Sheet

Critical Issue

Stra

tegy ACTION TO BE TAKEN: Response

Actions, including advantages and disadvantages.

Ris

k O

wne

r

Risk Review Dates

Date, Status, and Review Comments. Do not delete prior comments, thereby

providing a history.

Is R

isk

on C

ritic

al P

ath?

(16) (17) (18) (19) (20) (21)

YE

S

Risk Response Plan Monitoring and Control

Miti

gatio

n Finalize design to identify all impacted wetlands. Early coordination with the

outside agencies to determine mitigation ratio.

Des

ign

Lead

er/E

nviro

. mgr

2006

-Dec

-2

2007

-Jan

-2 As of Nov. 15, 2005, there are only two potential areas where there could be

additional wetland impacts. As of Dec. 2, 2005, agency has initially determined

that mitigation ration would be 4:1.

Figure 16—Risk Management Section


RISK.S02.21

Cost and Schedule Results Results are presented in the form of graphs (histogram, cumulative distribution function, and tornado) and tables. There are 11 tabs that present the following results:

• Candidates for mitigation in the form of tornado diagrams (1 tab): o Pre-mitigated

• cost • schedule

o Post-mitigated • cost • schedule

• Schedule range (2 tabs) o ad date o end construction date

• Cost range in CY (4 tabs) and YOE dollars (4 tabs) o preliminary engineering o right of way o construction o total estimate

Total Cost Current Year (CY)

0%

5%

10%

15%

20%

25%

39 46 52 58 65 71 78 84 90 97 103

110

116

Total-Cost [$M]

Pre-mitigatedPost-mitigatedBase Pre-mitigatedBase Post-mitigated

Figure 17—Total Project Cost: Pre- and Post-Mitigated


RISK.S02.22

A typical histogram for cost looks like figure 17.

A typical cumulative distribution diagram looks like figure 18.

Total Cost Current Year (CY)

0%

20%

40%

60%

80%

100%

120%

39.1

45.52

51.94

58.36

64.78 71

.277

.6284

.0490

.4696

.8810

3.3

109.7

2

116.1

4

Total-COST [$M]

Pre-mitigatedPost-mitigatedBase Pre-mitigatedBase Post-mitigated

Figure 18—Cumulative Distribution Diagram

A typical output in table form looks like table 2. Table 2 gives numbers related to the base cost and the distribution of possible cost outcomes at different levels of confidence in under-run.

A typical “candidates for mitigation” graph is presented in figure 19. The RBE is a valuable estimating process that may assist the project manager with risk management. The RBE gives management a sharper and far more realistic long-distance view of the prospects awaiting their projects. Through its “candidates for mitigation” graphs, the RBE provides excellent data for developing a sound project risk management plan.


RISK.S02.23

Total Base Estimate (CY)

Pre-mitigated Post-mitigated

75.00 $M 58.00 $M

Statistics Pre-mitigated Post-mitigated

Min 59.00 $M 39.09 $MMax 109.64 $M 77.07 $M

Median 82.72 $M 58.17 $M10% 74.30 $M 45.11 $M20% 76.80 $M 47.97 $M30% 79.85 $M 55.88 $M40% 81.47 $M 57.17 $M50% 82.72 $M 58.17 $M60% 84.10 $M 59.27 $M70% 86.49 $M 61.49 $M80% 88.95 $M 68.94 $M90% 91.15 $M 71.37 $M

Table 2—Base Cost and the Distribution of Possible Outcomes at Different Levels of Confidence in Under-run The RBES spreadsheet is an estimating tool that is useful in implementing the RBE in the heavy construction industry, especially in transportation infrastructure cost and schedule estimates. Also the RBES spreadsheet is a good tool to run “what if” scenarios. It helps project managers keep their estimates up to date and on budget. The RBE and its tool, RBES, may also bring value to Value Engineering studies when it is applied to the “original design” and the “proposed design.” Finally, having the information on pre- and post-mitigation on the same graph gives the viewer a powerful image that could greatly improve the understanding of the project’s challenges, and it provides decision makers new, richer data on which to base their decisions.


RISK.S02.24

Delay of NEPA

Competitive bidding

Shorter bridge

Condemnation

Buffer zone

Longer bridge

Good soil conditions

Extensive roads repair

Unsuitable ground

Shorter alignment

Traffic management

Hazard materials

-6.0$M -4.0$M -2.0$M 0.0$M 2.0$M 4.0$M 6.0$M

Candidates for Cost Risk Management (pre-mitigated)

Risks' Expected Impact

Figure 19—Candidates for Mitigation REFERENCES

1. Flyvbjerg, Bent, “Procedure for Dealing with Optimism Bias in Transportation Planning,” British Department for Transport, Guidance Document, June 2004.

2. Humphreys, Kenneth K., “Risk Analysis and Contingency Determination Using Range Estimating,” AACE International Recommended Practice No. 41R-08.

3. Lichtrenberg, Steen, “How to Avoid Overruns and Delays Successfully – Nine Basic Rules and an Associated Operable Procedure,” 2004, http://www.icoste.org/roundupApr06charimansMessageArticles.html

4. Project Management Institute, “A Guide to the Project Management Body of Knowledge.” PMI, 3rd Edition, ISBN 1-930699-45-X.


RISK.S02.25

5. Reilly, McBride, Sangrey, MacDonald, and Brown, 2004. “The Development of a New Cost-Risk Estimating Process for Transportation Infrastructure Projects.” Civil Engineering Practice, Vol. 19, Number 1. Spring/Summer.

6. WSDOT, “A Policy for Cost Risk Assessment,” http://www.wsdot.wa.gov/NR/rdonlyres/EF230F3B-1FC1-4A2A-9FC9-B66CF0300E1E/0/PolicyforCostRiskAssessment20050805.pdf

7. WSDOT, Cost Estimating Manual, http://www.wsdot.wa.gov/publications/manuals/fulltext/M3034/EstimatingGuidelines.pdf

8. WSDOT, Guidelines for CRA-CEVP workshops, http://www.wsdot.wa.gov/NR/rdonlyres/76111703-D435-4CB7-A965-1297F7F00599/50019/WSDOTGuidelinesforCRACEVPWorkshops_2008October13_1.pdf

9. WSDOT, Glossary for Cost Risk Estimating and Management, http://www.wsdot.wa.gov/NR/rdonlyres/76111703-D435-4CB7-A965-1297F7F00599/46153/CREMGlossary2008JUN.doc

10. WSDOT, Risk-Based Self-Modeling Spreadsheet, http://www.wsdot.wa.gov/publications/fulltext/CEVP/RBE-WEB.xls

11. WSDOT, CEVP/CRA History, http://www.wsdot.wa.gov/Projects/ProjectMgmt/RiskAssessment/history.htm

ABOUT THE AUTHORS

Dr. Ovidiu Cretu, PE Washington State DOT Transportation Building, Box 47331 310 Maple Park, Ave., SE Olympia, WA 98504 USA Phone: +1.360.7057599 Email: [email protected] Terry Berends, PE Washington State DOT 1551 N. Wenatchee Ave. Wenatchee, WA 98807 USA Phone: +1.509.667-3041 Email: [email protected]

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