2011palisadevegasuserconf_franciscocruzcontingencyallocation.pdf

7/24/2019 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

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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

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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

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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




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.

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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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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

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12%A420 - Cast Segments East


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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

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


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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%

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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

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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

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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

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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

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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

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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

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Risk Monitoring & Control

Management

Planning

Management

Planning

ReviewReview

ProcessProcess

& Control

& Control


RiskRiskSummarizeSummarize

sQuantification

sQuantification

s esponsePlanning

s esponsePlanning

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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

.

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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

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* 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

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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

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Q ti ?


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Questions ?

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Contact Information


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Contact Information

Francisco CruzSenior Engineer

[email protected]

Senior Engineer

[email protected]

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