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.
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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
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Projects with Good Cost-
Source: FHWA - Predicted and Annual Impacts of New Starts Project 2007
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Organizational Vision
Scope
IntegratedDeliver
ScheduleCost
RiskRisk Analysis
is not aDiscrete Event
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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
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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
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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
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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.
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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
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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
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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.
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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
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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%
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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
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Cost Risk Analysis
Simulation Settings
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Cost Risk Analysis
Simulate
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Cost Risk Analysis
Analyze Results
Tornado Charts (Regression & Correlation Coefficients)
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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
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
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Risk Monitoring & Control
Management
Planning
Management
Planning
ReviewReview
ProcessProcess
& Control
& Control
ProjectCommunication
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
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
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Q ti ?
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Questions ?
Slide 48
Contact Information
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Contact Information
Francisco CruzSenior Engineer
fcruz@pmaconsultants.com
Senior Engineer
mparikh@pmaconsultants.com
Slide 49
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