Risk
Management
Part 3 – Building Cost and
Schedule Models that
Incorporate Variability
and Risk
by
Donald E. Shannon, PMP, CFCM, CPCM, DML
The Contract Coach, Albuquerque, NM
Disclaimer
Information in this presentation makes reference to various
software products. This should not be interpreted as a
recommendation or endorsement by any of the sponsors of any
one product. Individuals should conduct appropriate research to
identify a product that best meets their specific needs. Where
appropriate, credit has been given to the software OEM
especially where screen shots of their products have been used.
A listing of the products commonly used to accomplish the
simulation and scheduling functions described herein is included
at the end of this presentation
Building a Model Project
Managing in the virtual world ….
Time to Build Our Model
 Our model of the effort
(contract, project, etc) must
include:
 Tasks to be performed
 Resources to be used in
accomplishing those tasks
 Labor
 Materials
 Other (Travel, subcontracts,
etc.)
 Cost data for the each of the
resources and tasks
 Schedule data
 Risk Data
Tools to be Used
 Excel or Numbers spreadsheet
 Project, Primavera, FastTrack,
or other scheduling application
 Simulation program such as:
 @Risk
 Risky Project
 Primavera
 Full Monty
What We Will Do
 Create Work Breakdown






Structure
Expand (decompose) WBS into
various tasks
Identify resources for each
task
Create risk register
Map risks to each task
Determine cost baseline with
and without risk
Create probabilistic estimates
for cost at completion and
completion date.
Proper Prior Planning
Prevents Poor Performance
 When should these models be created?
 Ideally during the acquisition planning / proposal phase
 Aid in determining project cost or verifying other estimates
 Project schedule demonstrates understanding of project scope
 Risk analysis identifies likely problems/issues that must be
addressed during performance phase
 Models are component of overall project plan and will aid in
creating winning proposal
 If detailed planning is deferred until contract award, this
planning must be done to support kick-off
Model Components
 Work Breakdown Schedule
Project
Schedule
 Resource Loaded Project
Schedule
 Risk Register
WBS
 Risks
Project
Model
 Probability, impact, polarity
 Cost estimates/quotes
 Basis of estimate
 Assumptions
 Factors
 Cost Estimating Relationships
Cost
Estimate
Basis of
Estimate
Risk
Register
Example - Product (End Item)
 Prototype system
 Competitive Test
 Production System contract
 100 systems
 Spare Parts
 Deployment to 60 +/- facilities
 Training
 66M Contract value
 Option for additional systems
 Option for facility integration
(conveyor system)
Example - WBS
WBS Children
 WBS Dictionary – defines what is or is not included in a WBS code.
 Program Schedule – elaborates on WBS to identify what effort must
be accomplished for each WBS element, when that effort will occur,
how long that effort will take, and what resources are required to
accomplish the effort.
 Project Budget – quantifies what the cost of each WBS element will be
by assigning a cost to each resource used in the schedule.
 Cost estimate for proposal/negotiation purposes
 The Budget also is influential in setting up the account codes used to
track performance
 Performance Baseline – Combines the Budget and Schedule so as to
depict when the budget will be spent and the associated work that will
be accomplished.
Example - Resource Loaded
Project Schedule
Example - Risk Register
#
Risk
1a
Customer asserts requirement change does not
constitute a “change” and will not pay for
“additional work”
6
+/-
Prob.
Impact
Score
-
4
4
16
Inability to manufacture critical optical assembly
chassis to specifications
-
3
5
15
1b
Requirement change is covered by changes
clause and results in a change order
+
4
3
12
4
Bad weather closes office
-
3
3
9
5
Flu epidemic impacts workforce availability
-
3
3
9
3
Loss of key staff during project
-
2
4
8
2
Inability to obtain project financing
-
1
5
5
Example - Cost Estimate
Commonly Used Tools
 Project Management
 Microsoft Project (several
versions – PC only)
 Primavera (several versions) PC
Only
 ProjectLibre / Open Project
(Free multi-platform)
 FastTrack Schedule (Mac and PC
versions)
 Deltek Open Plan (Web Based)
 OmniPlan (Mac)
 Merlin (Mac)
 Open Workbench (PC)
 2Plan (Mac, PC and Linux)
 Excel (via templates and macros)
 Project Risk Management
 RiskyProject (Stand-alone PC
only Includes Project software))
 @Risk (Excel add-in PC Only)
 Oracle Crystal Ball (Excel add-in
PC Only)
 Oracle Risk Analysis (Enterprise
solution)
 Risk Engine (Excel add-in MAC)
 SimVoi (Excel add-in Mac and
PC)
 Deltek (Web based – Enterprise
level)
 Other Tools
 WBS Chart Pro
Time to Get To Work!
 Step 1. Create Work Breakdown
Structure
 It is the framework (skeleton) upon
which all else rests.
 Hierarchical (tree like) structure
 Top-Down structure
 Product Oriented
 Mil-STD-881C is convenient (and
FREE) reference/guide
 Level 1 = End Item
 Level 2 = Major Systems
 Level 3 = Subsystems and/or major
components
 Level n (lowest level) = work
package
What’s a Work Package

In traditional cost/schedule systems,
the criteria for defining work
packages is as follows:



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Each work package is clearly
distinguishable from all other work
packages
Each work package has a scheduled
start and finish date
Each work package has an assigned
budget that is time-phased over the
duration of the work package
Each work package either has a
relatively short duration, or can be
divided into a series of milestones
whose status can be objectively
measured, or
Each work package has a schedule
that is integrated with higher-level
schedules.
Work Packages are deliverable
oriented
Build the Schedule
 The WBS tells us WHAT will be
done
 The schedule tells us WHEN it
will be done AND:
 How long it will take (duration)
 Who will do the work
(resources)
 What must occur before this
work can be done
(predecessors)
 What materials or other
(direct) costs will be incurred
 When it will be done
Elaboration
 Expanding the WBS element
or WP contents into greater
detail
 Stop when additional detail
does not contribute to the
understanding
 Example: Install lighting
fixtures probably does not
need additional detail
 Can be done by a single
person or group
 Time to accomplish is less
than a single reporting
period (e.g., week or
month)
Broadly Defined Scope
Additional Detail
More Detail
Yet
Detailed
Scope
Project Scheduling
 Project scheduling is an iterative
process
 Start with the goal first
 Desired outcome or product
 Define the steps to that goal
 Typically based on past
Progressive
Elaboration
experience or logical
progression
 Usually organized into groups by
process, function or product
(i.e., a Work Breakdown
Structure or WBS)
 “Top Down” approach
 Start with generalities and then
break down into smaller (more
detailed) steps
 PMI defines this process as
decomposition
 Result is a task list
Project Scheduling
Progressive
Elaboration
 Several passes are made
through the work, each
providing increased detail.
 Some tasks are too vaguely
defined initially to break
down
 These are entered as a
single large task to be
defined when sufficient
data is available
 This technique is called
Rolling Wave planning by
PMI
Identify Resources
 Resource pool for project or
enterprise
 Labor Resources
 May list by name or specialty
 Total number available = 2 ½
 2 full time people
 1 half time person
 Facilities
 Special tools or equipment
items
 Subcontracts
Project Scheduling
 Once tasks are identified they are
further developed
 Effort: The amount of work
Progressive
Elaboration
needed to complete the task e.g.,
60 labor hours, 48 clock hours
 Duration: The period of time it will
take the workforce to accomplish
the effort e.g., 60 labor hours ÷ 2
people = 3 days + 6 hours
 Resources: Who and/or what is
needed to do the work.
 People
 Equipment
 Supplies
Estimating Effort
 Most difficult and error prone
step in the entire process
 Several techniques
 Analogy – compare new task




to something done previously
Parametric Estimate – use
planning factors or rules to
equate work to effort i.e., 100
sq/ft per hour per person
Expert Opinion – Obtain
estimate (preferably 3 points)
from subject matter expert.
Historical data i.e., flat rate
Delphi – consensus of experts
Estimating Effort
 Remember that estimates are
not exact
 Try to model as a three-point
estimate
 Optimistic
 Most likely
 Pessimistic
 Beware of estimate bias
 When obtaining expert opinion
seek “most likely” value first,
then identify possible +/- for the
range.
 Recognize frequently performed
tasks tend to be underestimated
while seldom performed tasks
tend to be overestimated.
Assign Effort/Resources
 Effort includes labor hours, skill




levels, and duration
Effort = summation of labor
hours x rate for each person
working on the project
Effort is one half of resource
assignment – the other half is
materials, tools, equipment, and
subcontracts.
Each task in the schedule must
be assigned the appropriate
resources
When complete, the cost of the
task may be computed from the
individual costs.
Sequencing
 WBS elements and work
packages (WP) must be
sequenced
 What are the entry conditions
to begin work on the WP
 When must the WP be
completed to meet delivery
schedule
 What is the duration?
 Backwards Planning
 If we want to be done by date
x when must we begin?
Project Scheduling
 Sequence tasks based on
dependencies among the
various tasks
 Finish to Start (Task 2
cannot start until Task 1
finishes)
 Finish to Finish (Task 2
cannot end until Task 1
finishes)
 Start to Finish (Task 2
cannot end until Task 1
starts)
 Start to Start (Task 2
cannot start until task 1
starts)
 Lead or lag is also
considered
 Task 2 cannot begin until
2 days after Task 1
completes
 Task 1 must start 2 weeks
before Task 2
Project Scheduling
 The product of the preceding is
a network of tasks which is
displayed in one of several
formats:
 Network Node
 Gantt
 PERT
Network
Diagrams
Network Node Diagram
Gantt Chart
Critical Path
Network Paths
 Typically networks have more
than one path
 The longest path through the
network is defined as the
Critical Path
 Tasks on the Critical Path
(critical tasks) have no slack
time
 Tasks not on the critical path
have slack time
Start  A C F Finish = 7 Weeks
Start A  D Finish = 5 Weeks
Start  B E  Finish = 6 weeks
Determine Program Cost
 Individual work package totals
 Labor hours x rate = Direct
Labor Cost1
 Material costs
 Sub contract costs
 Special tooling, fixtures, etc.
 Work packages ‘roll-up’ into
WBS element cost
 WBS totals “up the tree” to
provide subtotals at each level
 Top level WBS (by definition)
contains 100% of the program
cost
1. Assumes use of fully burdened labor rates
Be Careful How Costs
are “Rolled Up”
 Bottom-up (aka “grass roots”)
estimates are potentially the
best.
 Must be aware of possibility of
double counting work
 Must be aware of correlation
between / among WBS elements
when summing
 Adding “most likely” values will
underestimate true cost
 Sum of the means is more
accurate approach
 Better yet do a Monte Carlo
simulation
 Best approach is to do bottom-
up and then compare with top
down estimate.
18
16
14
12
10
8
6
4
2
0
Allocate Costs Over Time
 “Spread” the costs over the
period of performance
 Creates time phased budget
 Cost per period of time
 When combined with
schedule allows creation of
Budgeted Cost of Work
Scheduled (BCWS)
 The combined
schedule/budget product is
termed the “Performance
Baseline”
Identify and Categorize Risks
 As per the first session
 Brainstorm to identify as many
risks as possible
 Assign probability (likelihood of
occurrence)
 Identify potential outcome(s)
 Probability
 Impact
 Determine appropriate strategy
and develop plans
 Determine residual risk
Document Risks
Content © 2014 Intavar Institute
Add Risk to Cost/Schedule
 Global Risks
 Impact the entire
project
 Individual Risks
 Impact a task
 May be applied to
more than one
task
Content © 2014 Intavar Institute
Adding Risks to Model
Risks can be global (for
all tasks or resources)
or local (for specific
tasks or resources)
Define risk chance, outcome and
result. Risks can have mutually
exclusive outcomes, different
outcomes of the same risk
Content © 2014 Intavar Institute
Time to “Turn the Crank”
 Once the model has been built
we can run a simulation and
determine:
 Probabilistic completion date
 Probabilistic total cost
 Critical path
 Risk adjusted schedule
 And More…….
When your project schedule
and risk breakdown structure is
ready, click here to perform
Monte Carlo simulations
Content © 2014 Intavar Institute
Combining Probability
Distributions
Risk Adjusted Schedule
Compare original project schedule and result of analysis
White bars represent
original project
schedule (no risks)
Blue bars represent
project schedule with
risks
Content © 2014 Intavar Institute
Risk Analysis Results
Project Summary:
project duration, cost,
and finish time with
and without risks
Results of analysis
for project cost,
finish time, and
duration
Content © 2014 Intavar Institute
Cost vs Schedule
Content © 2014 Intavar Institute
Update Schedule to Track Progress
This task is 100%
completed (green bar)
Risky project automatically
adjusts the probability of risks
for partially completed tasks
Content © 2014 Intavar Institute
This task is partially
completed (yellow bar)
Summary
 A mathematical model
combining schedule, cost, and
risk is an essential project
control tool
 The quality of the model
depends on the quality of the
data i.e., “garbage in garbage
out”
 The models results help guide
critical management decisions
and provide insight into the
“why” as well as the “what”
Produced by: The
Contract Coach
The Contract Coach
5338 La Colonia Dr NW
Albuquerque, NM 87120
(505) 259-8485
http://www.contract-coach.com