2011palisadevegasuserconf_franciscocruzcontingencyallocation.pdf

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    Contingency Allocation for

    Using @ Risk

    Presented By

    Francisco Cruz, PMP, PMI-RMPMitul Parikh, PE, PMP

    PMA Consultants

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    Agenda

    Overview of PMA

    Risk Analysis Approach for Large Infrastructure Projects

    Final Remarks

    Slide 2

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    PMA - Clients

    Slide 3

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    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(i.e., tunnels, airports, bridges, and ports) Slide 4

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    The Case - Key Observations

    60%Material Price Escalation

    What are the three most common causes of cost overruns? *Poorly Defined Scope 57%

    What are the three most common causes of delays?*

    55%

    40%

    36%

    32%

    Poorly Defined Scope

    Contractual Disputes

    Time Delay

    Design Creep

    Lack of Approvals

    Contractual Disputes

    36%

    34%

    21%

    es gn reep

    Weather

    19%

    6%

    4%

    2%

    Ach ieving Product iv it ies

    Lack of Approvals

    Weather

    Industrial Relations

    Material Price Escalation

    Ach iev ing Productivi ties

    Commissioning Process

    17%

    15%

    13%

    2%

    Time Delay

    * KPMG 2008 Global Construction Survey

    26%Others 19%Others

    ,

    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 havenot improved over time.

    Slide 5

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    Cost Estimate Classification Matrix

    Class Degree of End Usage Expected

    Definition

    RangeV 0% to 2% Concept Screening -50% a +100%

    o u y or eas y - a +

    III 10% to 40% Budget Authorization or Control -20% a +30%

    II 30% to 70% Control or Bid/Tender -15% a +20%

    I 70% to 100% Check Estimate or Bid/Tender -10% a +15%

    Source: AACEI RP 18R-97

    80 130

    Budget Authorization

    100 Ud (Actual)Slide 6

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    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

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    Projects with Undesired

    -

    Source: CATO Institute, Tax & Budget Bulletin, No. 17, 2003; FHWA - Predicted and Annual Impacts of New

    Characteristics.

    1. Overestimate Benefits

    Explanations.

    1. Technical

    , . - ,

    2. Underestimate Cost

    3. Minimize Environmental Impact

    4. Maximize Social Benefit

    2. Psychological (Planning Fallacy and OptimismBias)

    3. Political-Economic

    Underestimated Costs + Overestimated Benefits = Funding

    Slide 8

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    Projects with Good Cost-

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

    Slide 9

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    Organizational Vision

    Scope

    IntegratedDeliver

    ScheduleCost

    RiskRisk Analysis

    is not aDiscrete Event

    Slide 10

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    Life-cycle Risk Analysis

    ProjectApproval

    Preliminary &

    Detailed PlanningExecution Closure

    Risks Amount

    Total Project Risks

    at Stake

    Typical Risk Events per Phase

    UnavailableSubject

    No RiskManagement Plan

    Unskilled Labor

    Poor Quality

    Matter Experts

    Poor Definition of

    Problem

    Unclear

    Hasty Planning

    Poor Specifications

    Unclear Scope of

    Work

    a er a va a y

    Strikes, Weather

    Scope Changes

    Changes in

    Schedule

    naccep a e o

    Client

    As-Buil t

    Changes

    Cash Flowec ves

    Buy-in

    (by Competitive

    Bidding)

    No ManagementSupport

    Poor Role Definiti on

    Inexperienced Team

    RegulatoryRequirements

    OSHA / EPA

    Compliance

    Problems

    Source: Project Management a Systems Approach to Planning, Scheduling & Controlling, 7th edition

    Harold Kerzner, PhD

    Slide 11

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    Implementing A Risk Management

    -

    Schedule

    Well defined review, qualitative andquantitative processes

    ua a veRisk

    Assessment

    Development,

    EstimateReview

    Increasing standardization intemplates, procedures, style

    Clear recipe to integrate RiskQuantitative

    RiskAnalysis

    Components

    Stricter adherence to organizationproject management standards

    Recommended Project Cost

    Project Managers actively seekrisk support

    c e u e on ngenc es

    Slide 12

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    Implementing A Risk Management

    -

    Migration to project riskassessment life cycle

    Management

    Planning

    Management

    Planning

    ReviewReviewRisk MonitoringRisk Monitoring

    templates, procedures, style

    New risk components being

    ProcessProcess& Control& Control

    Continued adherence andfeedback to organization project

    ProjectCommunication

    RiskIdentification &

    RiskIdentification &SummarizeSummarize

    Risk management inherent toproject management culture

    Risk practice scalable to project

    size

    Quantification

    Quantification

    Planning

    Planning

    Slide 13

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    Benefits to Project Delivery

    Pro ect Document Review Qualitative Assessment Quantitative Anal sis

    Clarity in Scope

    Assumptions.

    Better Estimates.

    Recognition andtransparency in projectchallenges.

    Risk based, documentedproject contingencies.

    SMART su ort to ro ect

    Better Schedules.

    Improved Project Controls

    Focus on project agenda.

    Brainstorming and

    innovative solutions.

    change management.

    Early risk warnings andmitigation strategies.

    Risk Register is a Project .

    Key stakeholders to thetable.

    Slide 14

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    Schedule & Cost Risk Analysis

    SimulateCritical &Risk-sensitive

    Durations ofCriticalSummary

    OPRA

    Model

    RangesequencesProject Risks& Uncertainty

    ,ProbabilisticBranching

    SummarizeSRA

    Review

    Model

    Range

    Simulate

    @Risk

    Reports,Graphics,Options to

    PrioritizeRMP

    Project Scope,Project Assumptions,CPM & GPM Schedules,Estimates

    Estimate Issues,Possible Risks &Response Plans

    Develop Ranges forVariables: Scope, Price,Productivity, & Duration

    Cost Breakdown,Variables, &Distributions

    espon orisks

    CRA

    xecu on ansStrategy

    Quantitative Risk AnalysisSlide 15

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    Identify Risks

    Qualitative Risk Assessment

    TechnologySelection

    Design Options

    Market ConditionsEquipmentVendors

    Release of Work /Approval

    Periods

    Near OperatingAreas

    Workforce Quality

    ContractingStrategy

    Joint Ventures

    Level of Definition

    Equipment Design

    Environmental

    Onsite/Offsite

    Materials

    Labor Rates

    Exchange Rates

    Engineering Rates

    Procurement

    Periods

    Equipment/Material

    Delivery

    Labor Productivity

    Turnaround Timing

    Contract Strategy

    Weather

    Communication

    Permitting

    PoliticalInfluences

    Site Layout

    Demolition

    Indirect/Overhead

    ConstructionEquipment

    Work Area

    Restrictions

    Coordination with

    Other Pro ects

    Conditions

    Manpower Density

    ShiftWork/Overtime

    ExternalConstraints

    Vendor/Contractor

    Resources

    Slide 16

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    Qualitative Risk Assessment

    Risk ManagementPlanning

    Risk ManagementPlanning

    ev ew

    Process

    ev ew

    ProcessRisk Monitoring

    & ControlRisk Monitoring

    & Control

    ProjectCommunication Risk

    Identification &Prioritization

    RiskIdentification &Prioritization

    SummarizeSummarize

    RiskRiskRisk ResponseRisk Response

    Slide 17

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    Risk Thresholds

    Figure 1: Defined Conditions for Probability Scales of a Risk

    Very Low Low Medium High Very High

    Probability 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 Low Medium High Very High

    Insi nificant 2-7% Cost 8-15% Cost >15% Cost defines

    thresholds toclassify risksand reduce

    CostCost Increase

    18 Week

    Time increase

    subjectivityScopecope

    DecreaseBarely

    Noticeable

    Minor Areas ofScope Affected

    Major Areas ofScope Affected

    cope

    ReductionUnacceptable

    to PA

    ro ec oes

    not SatisfyOriginal Intent

    at Completion

    QualityOnly Most Degradation

    Quality Major Re-work

    QualityBarely

    Noticeable

    Demanding

    Specs Not Met

    Requires PA

    ApprovalUnacceptable

    to PA

    Complete

    Project

    Slide 18

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    Prioritization

    VH 5.00 5.00 10.00 15.00 20.00 25.00

    Probability Threats

    Probability & Impact Matrix (P/I)

    H 4.00 4.00 8.00 12.00 16.00 20.00

    M 3.00 3.00 6.00 9.00 12.00 15.00

    L 2.00 2.00 4.00 6.00 8.00 10.00

    VL 1.00 1.00 2.00 3.00 4.00 5.00

    1.00 2.00 3.00 4.00 5.00VL L M H VH

    Tolerance is

    used to define

    Probability-Impact

    Score Legend

    High = > 9

    mpact s appe e othe organization

    Med = 5 - 9

    Low = 1 - 4

    Slide 19

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    Risk Registeramp e s eg s er use o pr or ze r s s an su sequen y npu

    in the quantitative model.

    Slide 20

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    Quantitative Risk Analysis

    RiskRiskanagemen

    Planning

    anagemen

    PlanningReviewReviewRisk MonitoringRisk Monitoring

    ProjectCommunication

    RiskIdentification &Prioritization

    RiskIdentification &Prioritization

    SummarizeSummarize

    RiskRiskRisk ResponseRisk Response

    Slide 21

    uan ca onuan ca onann ngann ng

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    Schedule Validation

    NetPoint - GPMAlternative to CPM

    Slide 22

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    Schedule Risk Analysis

    Primavera Risk Analysis

    Include onl schedule driven Risks in the model.

    Slide 24

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    Schedule Risk Analysis

    Distribution Graph Used to determine probabilistic completiondates for a given percentile.

    Data

    Finish Date of :Entire Plan

    Analysis

    Iterations: 1000

    892

    10090% 31/07/2019

    95% 23/09/2019

    100% 29/01/2020

    Schedule Distribution PlotEntire Plan : Finish Date

    Statistics

    Minimum: 15/02/2018

    Maximum: 29/01/2020

    Mean: 21/02/2019

    Bar Width: month

    Highlighters

    80

    60% 21/03/2019

    65% 10/04/2019

    70% 01/05/2019

    75% 21/05/2019

    80% 14/06/2019

    85% 08/07/2019

    equ

    ency

    50% 19/02/2019

    80% - Determinis... 892

    Deterministic (03...

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    Schedule Risk Analysis

    Tornado Diagram Duration Cruciality (Correlation of Activity Duration &

    Criticality to Project Duration)

    Large Infrastructur e Program - Probabilitic ScheduleDuration Cruciality

    42%

    43%

    57%A155 - Preparation of 100% Design Documents

    A240 - Select D/B Team & Execute Contract

    A730 - Switch Traffic to Final Alignment

    22%

    33%A160 - Designer Incorporates Review Comments

    A140 - Review & Accept DDP Report

    12%

    12%

    14%A710 - Erect segments West

    A150 - Preparation & Review of 90% Design Documents

    A410 - Set-up Casting Yard & Forms

    Slide 26

    12%A420 - Cast Segments East

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    Schedule Risk Analysis

    Tornado Diagram Risks (Prior itized based on degree of inf luence on the project)

    57%REN4 - Environmental permits may not be received by Q1 2012

    Large Infrastructur e Program - Probabil itic ScheduleDuration Sensitivity

    32%

    40%RC20 - Restricted Work Hours may delay construction

    RD2 - Procurement Process could take longer than 8 months

    17%

    31%RD11 - FHWA Design Exception for substandard geometry may not be received b...

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

    11%

    14%RD3 - Program amy not bet fully defined by Q1, 2012

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

    Slide 27

    9%RD4 - Field Inspections may show considerable distress on main Structure

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    Schedule Risk Analysis

    Distribution Anal zer - Hel s determine im act of each risk on ro ect schedule

    Distribution Analyzer

    Removing RD1 - Finish Date Removing RC23 - Finish Date Removing RC20 - Finish Date Removing RD9 - Finish Date All Risks - Finish Date

    Variation:175Variation:111Variation:73Variation:82Variation:144Variation:19Variation:128Variation:13

    80%

    100%

    ty

    Removing RC14 - Finish Date Removing RD2 - Finish Date Removing REN4 - Finish Date Removing RD11 - Finish Date

    Variation:127Variation:72Variation:59

    Variation:25Variation:119Variation:85Variation:54

    Variation:5

    40%

    60%

    um

    ulative

    Probabili

    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 04/ 01/ 2021

    0%

    20%

    Slide 28

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    Cost Risk Analysis

    Palisades @Risk Model

    Use only Cost driven risks in this analysis

    os s ncer a n y ar a es

    based on the estimators interpretation of the ContractDocuments

    Construction Means & Methods

    Labor & Equipment Productivity

    Slide 29

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    Typical Risk Assessment Exclusions

    Changes in contracting strategy

    Force Majeure, such as war or terrorist activities (worksuspensions due to hurricanes included)

    Drastic change in market conditions

    Major scope changes

    Significant facility operation disruptions

    Strikes

    Slide 30

    Impact of Politics

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    Cost Risk Analysis

    Insert Ranges (Risks & Estimate) & Define Distribution

    Slide 31

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    Cost Risk Analysis

    Simulation Settings

    Slide 32

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    Cost Risk Analysis

    Simulate

    Slide 33

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    Cost Risk Analysis

    Analyze Results

    Tornado Charts (Regression & Correlation Coefficients)

    Slide 34

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    Cost Risk Analysis

    Total Cost Distr ibution Graph

    Slide 35

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    Risk Based Contingency

    Schedule Based Cost Contingency from OPRA

    OverallProject

    Completion

    Variability(Probabilistic

    DatesDeterministicDates)

    Contingency =(Probabilistic

    DateDeterministicDate) X

    IndirectCosts(i.e.,$10,000/day)

    Deterministic

    P10 587 $5,870,000

    MostLikelyP50 746 $7,460,000

    P90 908 $ 9,080,000

    Slide 36

    OPRA Oracle Primavera Risk Analysis

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    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

    MostLikelyP50 $273,829,600 $23,829,600

    P90 $ 283,200,200 $33,200,200

    Slide 37

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    Integrated Cost & Schedule

    os r ven on ngency = , ,

    Schedule Overrun = P90 Date Deterministic Date

    = ays

    Overhead/Financial Expenses - $ 10,000/day

    Schedule Based Cost Contingency = 908 X 10,000 = $9,080,000

    Total Risk Based ontingency = chedule ontingency + ost ontingency

    Total Risk Based Contingency (P90) = $ 42,280,000

    Slide 38

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    Multi-Year Capital Forecasting

    Post-Risk Assessment Capital Allocation

    Cost Categories 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Total

    Direct Costs

    Construction $0 $0 $30,000 $50,000 $54,000 $62,000 $24,000 $20,000 $10,000 $0 $250,000

    , , , , , , , ,

    Total Direct Costs $0 $0 $31,800 $54,500 $60,480 $71,300 $28,320 $24,200 $12,400 $0 $283,000

    Indirect Costs

    Engineering Staff $7,000 $11,800 $13,000 $1,180 $1,180 $950 $950 $950 $950 $0 $37,960

    Pro ect Mana ement Staff 3 000 3 000 8 000 4 000 5 000 5 000 5 000 5 000 5 000 0 43 000

    ContingencyAllocation

    , , , , , , , , , ,

    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

    * Analysis represents a pre-mitigated analysis

    Slide 40

    Al l f igures should be mult ip lied by $1000OverheadExpenses

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    Post Mitigated Analysis

    Post-mitigated analysis can be used to:

    Track the progress of mitigation in successive-

    appropriate contingency levels

    Perform what-if analyses on to determine theaffect of specific mitigation steps and help theTeam evaluate prudent measures for risk

    Slide 41

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    Risk Monitoring & Control

    Management

    Planning

    Management

    Planning

    ReviewReview

    ProcessProcess

    & Control

    & Control

    ProjectCommunication

    RiskRiskSummarizeSummarize

    sQuantification

    sQuantification

    s esponsePlanning

    s esponsePlanning

    Slide 42

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    Risk Monitoring and Control

    Often project risk assessments end up being

    expert-facilitated discrete events.

    ro ec eams never a e owners p o r smonitoring and control.

    integral to project change management for a

    .

    Slide 43

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    Risk Monitoring and Control

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

    C ti M t

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    Contingency Management

    $20,000

    $25,000

    sands)

    Contingency Rundown Chart Contingency RundownPlan

    Contingency RundownActual

    $5,000

    $10,000

    $15,000

    ngency($Thou

    $06,900

    $5,100

    emainingConti

    R

    Financial Period

    Slide 45

    * Constantly monitored and revised as indicated by organization policy

    Fi l R k

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    Final Remarks

    Quantitative Risk Assessment should be performed atdifferent stages of the project to revalidate the contingency.

    Management could have a contingency drawdown plan basedon their organizations governance policy.

    strategies.

    Risk Assessment can help an organization allocate proper

    amount of capital for a project and reduce project overruns

    Slide 46

    R f

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    References

    urv va o e n es : y e ors n ras ruc ure e s u

    And What We Can Do About It, Oxford Review of EconomicPolicy, vol. 25, no. 3, 2009, pp. 344-367

    FHWA Risk Assessment and Allocation for HighwayConstruction Management

    Ordonez, PhD

    Schedule Risk Analysis David Hulett

    Integrated Cost - Schedule Risk Analysis David Hulett

    Slide 47

    Q ti ?

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    Questions ?

    Slide 48

    Contact Information

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    Contact Information

    Francisco CruzSenior Engineer

    [email protected]

    Senior Engineer

    [email protected]

    Slide 49