Contingency Allocation for
Large Infrastructure Projects
Using @ Risk
11/11/11
Presented By
Francisco Cruz, PMP, PMI-RMP
Mitul Parikh, PE, PMP
PMA Consultants
Agenda
•
•
•
•
Overview of PMA
The Case for Risk Analysis
Risk Analysis Approach for Large Infrastructure Projects
Final Remarks
Slide 2
PMA - Clients
Slide 3
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
Slide 4
(i.e., tunnels, airports, bridges, and ports)
The Case - Key Observations
What are the three most common causes of cost overruns?
Material Price Escalation
60%
55%
Poorly Defined Scope
Industrial Relations
Others
57%
36%
34%
21%
17%
15%
Achieving Productivities
6%
Lack of Approvals
D i
Design
C
Creep
Time Delay
19%
Achieving Productivities
57%
Weather
32%
Design Creep
Poorly Defined Scope
Contractual Disputes
36%
Time Delay
What are the three most common causes of delays?
Lack of Approvals
40%
Contractual Disputes
Weather
*
Material Price Escalation
4%
g Process
Commissioning
2%
13%
2%
Others
26%
19%
* KPMG 2008 Global Construction Survey
According to the Bent Flyvbjerg’s
Flyvbjerg s Study on Large Projects
Projects,
•
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 have
not improved over time.
Slide 5
*
Cost Estimate Classification Matrix
Class Degree of
End Usage
Expected
Accuracy
Range
Project
Definition
V
0% to 2%
Concept Screening
-50% a +100%
IV
1% tto 15%
St d or Feasibility
Study
F
ibilit
-30%
30% a +50%
50%
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
200
50
80
90
130
115
Rough Order of Magnitude
Budget Authorization
Definitive
100 Ud (Actual)
Slide 6
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
Projects with Undesired
Cost-Benefit
Cost
Benefit Ratio
Source: CATO Institute, Tax & Budget Bulletin, No. 17, 2003; FHWA - Predicted and Annual Impacts of New
Starts Project – 2007; Flyvbjerg,
Flyvbjerg B.
B - Survival of the Unfittest
Unfittest, 2009
•
Characteristics.
•
Explanations.
1. Overestimate Benefits
1. Technical
2. Underestimate Cost
2. Psychological (Planning Fallacy and Optimism
Bias)
3. Minimize Environmental Impact
4. Maximize Social Benefit
3. Political-Economic
Underestimated Costs + Overestimated Benefits = Funding
Slide 8
Projects with Good CostBenefit Ratio
Source: FHWA - Predicted and Annual Impacts of New Starts Project – 2007
Slide 9
Organizational Vision
Scope
Integrated
Project
Deliveryy
Cost
Risk Analysis
is not a
Discrete Event
Schedule
Risk
Slide 10
Life-cycle Risk Analysis
Project
Approval
Preliminary &
Detailed Planning
Execution
Closure
Total Project Risks
Risks
Amount
att Stake
St k
Amount at Stake
Typical Risk Events per Phase
Unavailable
Subject
j
Matter Experts
Poor Definition of
Problem
Unclear
Obj ti
Objectives
Buy-in
(by Competitive
Bidding)
No Risk
Management
g
Plan
Hasty Planning
Poor Specifications
Unclear Scope of
Work
No Management
Support
Poor Role Definition
Inexperienced Team
Unskilled Labor
Material Availability
A ailabilit
Strikes, Weather
Scope Changes
Changes in
Schedule
Regulatory
Requirements
OSHA / EPA
Compliance
Poor Quality
Unacceptable to
Client
As-Built
Changes
Cash Flow
Problems
Source: “Project Management … a Systems Approach to Planning, Scheduling & Controlling”, 7th edition
Harold Kerzner, PhD
Slide 11
Implementing A Risk Management
Practice - Nurture
• Well defined review, qualitative and
quantitative processes
Qualitative
Risk
Assessment
Schedule
Development,
Estimate
Review
Quantitative
Risk
Analysis
• Increasing standardization in
templates, procedures, style
• Clear recipe to integrate Risk
Components
• Stricter adherence to organization
project management standards
• Project Managers actively seek
Recommended Project Cost
&S
Schedule
h d l Contingencies
C ti
i
risk support
Slide 12
Implementing A Risk Management
Practice - Mature
Risk
Management
Planning
• Migration to project risk
assessment life cycle
Review
Process
Risk Monitoring
& Control
Project
Communication
Summarize
• Increasing standardization in
templates, procedures, style
• New risk components being
integrated
Risk
Identification &
Prioritization
• Continued adherence and
feedback to organization project
management standards
• Risk management inherent to
Risk Response
Planning
Risk
Quantification
project management culture
• Risk practice scalable to project
size
Slide 13
Benefits to Project Delivery
Project
j
Document Review
ƒ Clarity in Scope
Assumptions.
Qualitative Assessment
ƒ Better Estimates.
ƒ Recognition and
transparency in project
challenges.
ƒ Better Schedules.
ƒ Focus on project agenda.
ƒ Improved Project Controls
ƒ Brainstorming and
innovative solutions.
Quantitative Analysis
y
ƒ Risk based, documented
project contingencies.
ƒ SMART support
pp to p
project
j
change management.
ƒ Early risk warnings and
mitigation strategies.
ƒ Risk Register is a Project
Team’s
Team
s tool.
tool
ƒ Key stakeholders to the
table.
Slide 14
Schedule & Cost Risk Analysis
Process
Qualitative Risk Analysis
OPRA™
Critical &
“Risk-sensitive”
s se s e
sequences
Project Risks
& Uncertainty
SRA
Range
Summarize
Simulate
Prioritize
Review
Simulate
Model
Identify
RMP
Summary
Sequences
Sequences,
Probabilistic
Branching
Durations of
Critical
Activities
Model
Identify
Project Scope,
Estimate Issues,
Project Assumptions,
CPM & GPM Schedules, Possible Risks &
Response Plans
Estimates
E
Execution
ti Pl
Plans &
Strategy
Range
CRA
@Risk™
Cost Breakdown,
Variables, &
Distributions
Develop Ranges for
Variables: Scope, Price,
Productivity, & Duration
Reports,
Graphics,
Options to
R
Respond
d tto
risks
Quantitative Risk Analysis
Slide 15
Identify Risks
Qualitative Risk Assessment
Scope
Price
Schedule
Productivity
Technology
Selection
Design Options
Level of Definition
Equipment Design
Environmental
Onsite/Offsite
Site Layout
Demolition
Market Conditions
Equipment
Vendors
Materials
Labor Rates
Exchange Rates
Engineering Rates
Indirect/Overhead
Construction
Equipment
Release of Work /
Approval
Periods
Procurement
Periods
Equipment/Material
Delivery
Work Area
Restrictions
Coordination with
j
Other Projects
External
Constraints
Vendor/Contractor
Resources
Near Operating
Areas
Workforce Quality
Labor Productivity
Turnaround Timing
Contract Strategy
Weather
Conditions
Manpower Density
Shift
Work/Overtime
Other
Contracting
Strategy
Joint Ventures
Communication
Permitting
Political
Influences
Slide 16
Qualitative Risk Assessment
Risk Management
Planning
R i
Review
Process
Risk Monitoring
& Control
Project
Communication
Summarize
Risk Response
Planning
Risk
Identification &
Prioritization
Risk
Quantification
Slide 17
Risk Thresholds
Figure 1: Defined Conditions for Probability Scales of a Risk
Probability
Low
Medium
High
Very High
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
Very Low
Low
Medium
Cost
Insignificant
Cost Increase
<2% of TPC
2 7%
2-7%
Increase
Time
0-2
Week
Time Increase
3-6 Week Time
Increase
Scope
Scope
S
Decrease
Barely
Noticeable
Quality
Quality
Degradation
Barely
Noticeable
High
Cost
8 15%
8-15%
Increase
Very High
Cost
>15%
15%
Cost
Increase
7-12
Week
Time Increase
13-18
Week
Time Increase
>18
Week
Time increase
Minor Areas of
Scope Affected
Major Areas of
Scope Affected
Scope
S
Reduction
Unacceptable
to PA
Project
P
j t Does
D
not
Satisfy
Original Intent
at Completion
Only
Most
Demanding
Specs Not Met
Degradation
Requires
PA
Approval
Quality
Reduction
Unacceptable
to PA
Major Re-work
Required
to
Complete
Project
Project team
defines
thresholds to
classify risks
and reduce
subjectivity
Slide 18
Prioritization
• Probability & Impact Matrix (P/I)
Probability
VH
5.00
H
4.00
M
3.00
L
2.00
VL
1.00
5.00
4.00
3.00
2.00
1.00
1.00
VL
Probability-Impact
Score Legend
High = > 9
Med = 5 - 9
Low = 1 - 4
10.00
8.00
6.00
4.00
2.00
2.00
L
Threats
15.00
12.00
9.00
6.00
3.00
3.00
M
I
Impact
t
20.00
16.00
12.00
8.00
4.00
4.00
H
25.00
20.00
15.00
10.00
5.00
5.00
VH
Tolerance is
used to define
Ri k appetite
Risk
tit off
the organization
• Tolerance Thresholds
Slide 19
Risk Register
Sample
S
l Risk
Ri k Register
R i t used
d tto prioritize
i iti risks
i k and
d subsequently
b
tl input
i
t
in the quantitative model.
Slide 20
Quantitative Risk Analysis
Risk
M
Management
t
Planning
Review
Risk Monitoring
& Control
Process
Project
j
Communication
Risk
Identification &
Prioritization
Summarize
Risk Response
Pl
Planning
i
Risk
Q
Quantification
tifi ti
Slide 21
Schedule Validation
NetPoint - GPM Alternative to CPM
Slide 22
Ranging Considerations
Quantitative Risk Assessment
• Do the potential outcomes fit
the normal, triangular or beta
distribution function?
• Would a different distribution
function be better, such as
discrete/uniform or compound?
• Does the deterministic
schedule duration or the cost
estimate
ti t truly
t l representt th
the
“most likely” outcome for that
y
activity?
Slide 23
Schedule Risk Analysis
Primavera Risk Analysis
Include only
y schedule driven Risks in the model.
Slide 24
Schedule Risk Analysis
Distribution Graph – Used to determine probabilistic completion
dates for a given percentile.
Data
Finish Date of :
Entire Plan
Schedule Distribution Plot
892
100
Hits
80
60
40
20
0
17/06/2017
100% 29/01/2020
95% 23/09/2019
90% 31/07/2019
85% 08/07/2019
80% 14/06/2019
75% 21/05/2019
70% 01/05/2019
65% 10/04/2019
60% 21/03/2019
55% 01/03/2019
50% 19/02/2019
45% 31/01/2019
40% 17/01/2019
35% 31/12/2018
30% 13/12/2018
25% 26/11/2018
20% 06/11/2018
15% 15/10/2018
10% 13/09/2018
5% 31/07/2018
0% 15/02/2018
Cumulative Frrequency
Entire Plan : Finish Date
Analy sis
Iterations:
1000
Statistics
Minimum:
Maximum:
Mean:
Bar Width:
15/02/2018
29/01/2020
21/02/2019
month
Highlighters
g g
50%
80% - Determinis...
Deterministic (03...
80%
90%
19/02/2019
892
<1%
14/06/2019
31/07/2019
30/10/2018
Distribution
st but o (sta
(startt o
of interval)
te a )
Deterministic Date – 02/03/2017
P90 Date – 07/31/2019
Slide 25
Schedule Risk Analysis
Tornado Diagram – Duration Cruciality (Correlation of Activity Duration &
Criticality to Project Duration)
Large Infrastructure Program - Probabilitic Schedule
Duration Cruciality
A155 - Preparation of 100% Design Documents
57%
A240 - Select D/B Team & Execute Contract
43%
A730 - Switch Traffic to Final Alignment
42%
A160 - Designer Incorporates Review Comments
33%
A140 - Review & Accept DDP Report
A710 - Erect segments West
22%
14%
A150 - Preparation & Review of 90% Design Documents
12%
A410 - Set-up Casting Yard & Forms
12%
A420 - Cast Segments East
12%
Slide 26
Schedule Risk Analysis
Tornado Diagram – Risks (Prioritized based on degree of influence on the project)
Large Infrastructure Program - Probabilitic Schedule
Duration Sensitivity
REN4 - Environmental permits may not be received by Q1 2012
57%
RC20 - Restricted Work Hours may delay construction
40%
RD2 - Procurement Process could take longer than 8 months
32%
RD11 - FHWA Design Exception for substandard geometry may not be received b...
31%
RD9 - Cash Collection may not be temporarily stopped in toll Lanes
17%
RD3 - Program amy not bet fully defined by Q1, 2012
RD1 - Design Package for Design Build may take longer than expected
RD4 - Field Inspections may show considerable distress on main Structure
14%
11%
9%
Slide 27
Schedule Risk Analysis
Distribution Analyzer
y
- Helps
p determine impact
p
of each risk on project
p j
schedule
Distribution Analyzer
Removing RD1 - Finish Date
Removing RC14 - Finish Date
Removing RC23 - Finish Date
Removing RD2 - Finish Date
Variation:13 Variation:128 Variation:19
Variation:144
Removing RC20 - Finish Date
Removing REN4 - Finish Date
Variation:111
Variation:73
Variation:82
Removing RD9 - Finish Date
Removing RD11 - Finish Date
All Risks - Finish Date
100%
Variation:175
Variation:5
Variation:54 Variation:85
Variation:119 Variation:25
Variation:59
60%
Variation:72
Variation:127
40%
20%
0%
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
Slide 28
04/ 01/ 2021
C u m u lative P ro b ab ili ty
80%
Cost Risk Analysis
• Palisade’s @
@Risk Model
• Use only Cost driven risks in this analysis
C t Ri
Cost
Risk
kU
Uncertainty
t i t V
Variables
i bl
• The following items can vary from the deterministic estimate
based on the estimator’s interpretation of the Contract
Documents
• Quantity / type of material / Price
• Construction Means & Methods
• Labor & Equipment Productivity
Slide 29
Typical Risk Assessment Exclusions
• Changes in contracting strategy
• Force Majeure, such as war or terrorist activities (work
suspensions due to hurricanes included)
• Drastic change in market conditions
• Major scope changes
g
facility
y operation
p
disruptions
p
• Significant
• Strikes
• Impact of Politics
Slide 30
Cost Risk Analysis
Insert Ranges (Risks & Estimate) & Define Distribution
Slide 31
Cost Risk Analysis
Simulation Settings
Slide 32
Cost Risk Analysis
Simulate
Slide 33
Cost Risk Analysis
Analyze Results
Tornado Charts (Regression & Correlation Coefficients)
Slide 34
Cost Risk Analysis
Total Cost Distribution Graph
Slide 35
Risk Based Contingency
Schedule Based Cost Contingency from OPRA
Overall Project Completion
Variability (Probabilistic Dates‐ Deterministic Dates)
Deterministic Contingency =(Probabilistic Date ‐ Deterministic Date) X Indirect Costs (i.e., $10,000/day)
‐
P10
587
$ 5,870,000
Most Likely ‐ P50
746
$ 7,460,000
P90
908
$ 9,080,000
OPRA – Oracle Primavera Risk Analysis
Slide 36
Risk Based Contingency
Cost Based Contingency from @Risk
Overall Project Completion
Total cost
Risk Based cost contingency
Deterministic Estimate
$ 250,000,000
‐
P10
$ 265,277,700
$ 15,277,700
Most Likely ‐ P50
$ 273,829,600
$ 23,829,600
P90
$ 283,200,200
$ 33,200,200
Slide 37
Integrated Cost & Schedule
Risk Results
C t D
Cost
Driven
i
C
Contingency
ti
= $33
$33,200,000
200 000
Schedule Overrun = P90 Date – Deterministic Date
= 908 d
days
Overhead/Financial Expenses - $ 10,000/day
Schedule Based Cost Contingency = 908 X 10,000 = $9,080,000
Total Risk Based Contingency
C
= Schedule
S
C
Contingency + C
Cost C
Contingency
Total Risk Based Contingency (P90) = $ 42,280,000
Slide 38
Multi-Year Capital Forecasting
Pre-Risk Assessment Capital Allocation
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Total
Construction
$0
$0
$25,000
$60,000
$65,000
$80,000
$20,000
$0
$0
$0
$250,000
Inflation
$0
$0
$1,500
$5,400
$7,800
$12,000
$3,600
$0
$0
$0
$30,300
Total Direct Costs
$0
$0
$26,500
$65,400
$72,800
$92,000
$23,600
$0
$0
$0
$280,300
Engineering Staff
$7,000
$11,800
$13,000
$1,180
$1,180
$950
$950
$0
$0
$0
$36,060
Project Management Staff
$3,000
$3,000
$8,000
$4,000
$5,000
$5,000
$5,000
$0
$0
$0
$33,000
Subtotal Staff Costs
$10,000
$14,800
$21,000
$5,180
$6,180
$5,950
$5,950
$0
$0
$0
$69,060
Administrative Costs
$200
$296
$420
$104
$124
$119
$119
$0
$0
$0
$1,381
Project Contingency
$816
$1,208
$3,834
$5,655
$6,328
$7,846
$2,374
$0
$0
$0
$28,059
Total Indirect Costs
$11,016
$16,304
$25,254
$10,938
$12,632
$13,915
$8,443
$0
$0
$0
$98,500
Total Project Cost
$11,016
$16,304
$51,754
$76,338
$85,432
$105,915
$32,043
$0
$0
$0
$378,800
Total Project Cost (Cum)
$11,016
$27,320
$79,073
$155,412 $240,843 $346,758 $378,800 $378,800 $378,800 $378,800 $378,800
Direct Costs
Indirect Costs
Empirical
Contingency
Allocation
All figures should be multiplied by $1000
Slide 39
Multi-Year Capital Forecasting
Post-Risk Assessment Capital Allocation
Cost Categories
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Total
Construction
$0
$0
$30,000
$50,000
$54,000
$62,000
$24,000
$20,000
$10,000
$0
$250,000
Inflation
$0
$0
$1 800
$1,800
$4 500
$4,500
$6 480
$6,480
$9 300
$9,300
$4 320
$4,320
$4 200
$4,200
$2 400
$2,400
$0
$33 000Risk
$33,000
Total Direct Costs
$0
$0
$31,800
$54,500
$60,480
$71,300
$28,320
$24,200
$12,400
$0
Based
Contingency
$283,000
Allocation
Engineering Staff
$7,000
$11,800
$13,000
$1,180
$1,180
$950
$950
$950
$950
$0
$37,960
Project Management Staff
$3,000
$3,000
$8,000
$4,000
$5,000
$5,000
$5,000
$5,000
$5,000
$0
$43,000
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
Direct Costs
Indirect Costs
* Analysis represents a pre-mitigated analysis
Additional
Overhead
Expenses
All figures should be multiplied by $1000
Slide 40
Post Mitigated Analysis
• Post-mitigated analysis can be used to:
• Track the progress of mitigation in successive
iterations of risk analyses to help re
re-cast
cast
appropriate contingency levels
• Perform what-if analyses on to determine the
affect of specific mitigation steps and help the
Team evaluate prudent measures for risk
response
Slide 41
Risk Monitoring & Control
Risk
Management
Planning
Review
Process
Risk Monitoring
& Control
Project
Communication
Risk
Identification
Summarize
Ri k R
Risk
Response
Planning
Ri k
Risk
Quantification
Slide 42
Risk Monitoring and Control
• Often project risk assessments end up being
expert-facilitated discrete events.
• Project
P j t tteams never ttake
k ownership
hi off risk
i k
monitoring and control.
• Risk monitoring and control must become
integral to project change management for a
truly successful risk management process
process.
Slide 43
Risk Monitoring and Control
* The results in the above chart are for illustration purposes only. They do not reflect current risk activity
Contingency Management
Contingency Rundown Chart
R
Remaining
Contingency ($ Thousands)
$25,000
Contingency Rundown
Plan
Contingency Rundown
Actual
$20,000
$15,000
$10,000
$5,000
$6 900
$6,900
$0
$5,100
Financial Period
* Constantly monitored and revised as indicated by organization policy
Slide 45
Final Remarks
• Quantitative Risk Assessment should be performed at
different stages of the project to revalidate the contingency.
• Management
M
could
ld have
h
a contingency
i
d
drawdown
d
plan
l b
based
d
on their organization’s governance policy.
• Risk Assessment helps owners devise better procurement
strategies.
• Risk Assessment can help an organization allocate proper
amount of capital for a project and reduce project overruns
Slide 46
References
•
Survival
S
i l off th
the U
Unfittest:
fitt t Wh
Why th
the W
Worstt IInfrastructure
f t t
G
Gets
t Built
B ilt
– And What We Can Do About It, Oxford Review of Economic
Policy, vol. 25, no. 3, 2009, pp. 344-367
•
FHWA – Risk Assessment and Allocation for Highway
Construction Management
•
Palisade @Risk Webinar – Project Cost Analysis by Javier
Ordonez, PhD
•
Schedule Risk Analysis – David Hulett
•
Integrated Cost - Schedule Risk Analysis – David Hulett
Slide 47
Questions ?
Slide 48
Contact Information
Francisco Cruz
Senior Engineer
fcruz@pmaconsultants.com
Mitul Parikh
Senior Engineer
mparikh@pmaconsultants.com
Slide 49