Modelling
Dr Stephen Grey, Broadleaf Capital International
Palisade conference, Sydney May 2012
Broadleaf
Developments in project cost and
schedule modelling
Dr Stephen Grey
Associate Director
Broadleaf Capital International
Project cost and schedule risk
Broadleaf
COPYRIGHT
This document contains substantial pre-existing Intellectual Property of value to
Broadleaf Capital International Pty Ltd (Broadleaf).
It is provided for the information of those to whom it has been released but not to
sell, licence or otherwise transfer it to any third party, whether in its original
form or as part of any further development that those who receive it might
undertake, without Broadleaf’s prior agreement.
Dr Stephen Grey
mobile +61 412 223 256
grey@broadleaf.com.au
BROADLEAF CAPITAL INTERNATIONAL PTY LTD
Creating value from uncertainty
Specialists in managing strategic, enterprise and project risk
www.Broadleaf.com.au
© Broadleaf Capital International Pty Ltd, 2012  www.Broadleaf.com.au
© Broadleaf Capital International Pty Ltd, 2012
Creating value from uncertainty, www.Broadleaf.com.au
2
Page 1
Modelling
Dr Stephen Grey, Broadleaf Capital International
Palisade conference, Sydney May 2012
Broadleaf
Project cost and schedule risk
Outline
How we express risks
How we link risks to a model
Assessing uncertainty
Stages of a project’s life
Integrating cost and schedule
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Project cost and schedule risk
Characteristic outputs
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Creating value from uncertainty, www.Broadleaf.com.au
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Page 2
Modelling
Dr Stephen Grey, Broadleaf Capital International
Palisade conference, Sydney May 2012
Project cost and schedule risk
Broadleaf
It seems simple
Estimate
Risks
Possible variations
@Risk
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Project cost and schedule risk
Broadleaf
Challenges
Estimate
Risks
Is the relationship between
the risks and the estimate clear?
How effective is the assessment of
ranges and how much
time does it absorb?
Possible variations Are ranges expressed in
@Risk
the same terms in the model
as were used when
they were assessed?
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© Broadleaf Capital International Pty Ltd, 2012
Creating value from uncertainty, www.Broadleaf.com.au
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Page 3
Modelling
Dr Stephen Grey, Broadleaf Capital International
Palisade conference, Sydney May 2012
Project cost and schedule risk
Broadleaf
Risks and consequences
Geotechnical conditions
Survey data (levels)
Ground loading
(detailed design of
steel and concrete)
Man hours effort
Quantity of
earthworks
Plant hours
Material costs
Quality of workforce
Relationships with
Owner’s team and
Operations team
Overhead spend rate
Management
team size
Complexity of site
and project
Demand for
accommodation
Demand for FIFO
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Project cost and schedule risk
Modelling
Where do you try to grasp this?
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© Broadleaf Capital International Pty Ltd, 2012
Creating value from uncertainty, www.Broadleaf.com.au
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Page 4
Modelling
Dr Stephen Grey, Broadleaf Capital International
Palisade conference, Sydney May 2012
Project cost and schedule risk
Broadleaf
Risks and consequences
Geotechnical conditions
Survey data (levels)
Ground loading
(detailed design of
steel and concrete)
Man hours effort
Quantity of
earthworks
Plant hours
Material costs
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9
Project cost and schedule risk
Broadleaf
Mapping risks to an estimate
Railway connection
Stockpile and reclaim
Ship loader
Uncertainty in this cost Uncertainty in this cost Uncertainty in this cost
© Broadleaf Capital International Pty Ltd, 2012  www.Broadleaf.com.au
© Broadleaf Capital International Pty Ltd, 2012
Creating value from uncertainty, www.Broadleaf.com.au
10
Page 5
Modelling
Dr Stephen Grey, Broadleaf Capital International
Palisade conference, Sydney May 2012
Project cost and schedule risk
Broadleaf
Mapping – rates cut across
Stockpile and reclaim
Ship loader
Earthworks
Earthworks
Earthworks
Concrete
Concrete
Concrete
Structural steel
Structural steel
Electrical
Electrical
Railway connection
Rate
Rate Structural steel
Electrical
Rate
Rate
The uncertainties in the three costs are
linked but not in a simple way
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Project cost and schedule risk
Broadleaf
Mapping – quantities cut acrosss
Railway connection
Rate
Stockpile and reclaim
Ship loader
Earthworks
Earthworks
Earthworks
PF
Labour
Labour
Labour
Bulk material
Bulk material
Bulk material
Plant
Plant
Plant
Management
Management
Management
Qty
Qty
Qty
The uncertainties in the three costs are
linked but not in a simple way
© Broadleaf Capital International Pty Ltd, 2012  www.Broadleaf.com.au
© Broadleaf Capital International Pty Ltd, 2012
Creating value from uncertainty, www.Broadleaf.com.au
12
Page 6
Modelling
Dr Stephen Grey, Broadleaf Capital International
Palisade conference, Sydney May 2012
Project cost and schedule risk
Broadleaf
Drivers
Rather than assess uncertainty directly in $
Look for the drivers that link risk to $
e.g. Labour costs
 Labour rate
 Productivity (hours)
 Quantity or scale
Usually affects
labour in many areas
e.g. Bulk material cost Same
 Quantity or scale
 Unit rate
May be market driven
or project specific
(complexity)
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Project cost and schedule risk
Broadleaf
Drivers
e.g. Overheads
Output of a model in
its own right
 Duration
 Team size
 Rates for managers, buildings, vehicles …
e.g. Escalation
 Commodity prices
 Cash flow phasing (duration)
 Un escalated cost
Output of a model in
its own right
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© Broadleaf Capital International Pty Ltd, 2012
Creating value from uncertainty, www.Broadleaf.com.au
14
Page 7
Modelling
Dr Stephen Grey, Broadleaf Capital International
Palisade conference, Sydney May 2012
Project cost and schedule risk
Broadleaf
Modelling with drivers
Labour $ = Base $ x Rate x PF x Qty
Bulk material $ = Base $ x Qty x Unit rate
Models are simpler
Less need for intangible correlations
Easier to understand relationship between
individual uncertainties and overall risk
Events?
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Project cost and schedule risk
Broadleaf
Typical framework
Labor
Hours
A
C
E
I
M
P
R
S
T
W
X
Y
Z
TOTAL
Paint & Insulation
Concrete Works
Electrical
Instrumentation
Mechanical
Pipework
Architectural
Structural
Earthworks
Indirects
Contingency
Escalation
Owners Cost
Labor
Amount
Construct.
Equipment
Sub
Contract
Permanent
Equipment
Bulk
Material
Contractor
Distributables
Freight
Total
7,564
75,270
39,677
0
0
62,138
6,741
135,688
264,264
734,281
7,698,154
3,466,292
27,671
0
17,780,660
905,731
14,327,752
50,258,225
3,649,817
5,887,549
2,751,885
1,634,065
16,086,270
21,859,562
5,286,887
78,165
852,123
340,063
3,823,520
0
2,469,363
310,316
1,431,912
9,028,432
301,088
371,201
3,238,884
2,321,120
220,860
125,225,884
3,838,314
16,317,093
6,378,895
174,704,061
49,453,092
321,691
2,225,301
1,928,556
1,206,732
0
13,611,946
1,529,979
5,796,154
26,429,948
353,520
47,959,453
616,451
922,046
44,596,005
222,768
4,377,702
289,922
1,390,078
621,735
6,786,423
5,296,479
0
0
18,024,408
1,633,619
9,437,837
360,736
2,161,812
10,825,149
31,399,864
0
8,643,719
95,943
3,795,392
63,375,928
687,176
3,775,566
1,286,590
113,862,138
687,332
7,426,660
286,811
2,162,649
148,375,948
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
50,714,455
0
0
0
0
43,938,374
4,621,375
25,716,139
23,204,115
291,458,970
145,667,876
87,226,650
24,792,061
43 ,954,774
534,775,187
0
0
0
0
37,848,610
0
0
Breakdown by category and discipline
allows simple application of drivers
© Broadleaf Capital International Pty Ltd, 2012  www.Broadleaf.com.au
© Broadleaf Capital International Pty Ltd, 2012
Creating value from uncertainty, www.Broadleaf.com.au
16
Page 8
Modelling
Dr Stephen Grey, Broadleaf Capital International
Palisade conference, Sydney May 2012
Project cost and schedule risk
Broadleaf
Assessing ranges
Realistic range assessments
Minimising the burden on the participants
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17
Project cost and schedule risk
Broadleaf
Assessing uncertainties
Likelihood
3
1
2
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© Broadleaf Capital International Pty Ltd, 2012
Creating value from uncertainty, www.Broadleaf.com.au
Outcome
18
Page 9
Modelling
Dr Stephen Grey, Broadleaf Capital International
Palisade conference, Sydney May 2012
Broadleaf
Project cost and schedule risk
Once our minds have focused on one value,
it’s difficult to move away
If we start from the centre and work out we
tend to understate the range
© Broadleaf Capital International Pty Ltd, 2012  www.Broadleaf.com.au
Broadleaf
19
Project cost and schedule risk
Assessing uncertainties
Likelihood
Very rare
circumstances
Very rare
circumstances
Outcome
© Broadleaf Capital International Pty Ltd, 2012  www.Broadleaf.com.au
© Broadleaf Capital International Pty Ltd, 2012
Creating value from uncertainty, www.Broadleaf.com.au
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Page 10
Modelling
Dr Stephen Grey, Broadleaf Capital International
Palisade conference, Sydney May 2012
Project cost and schedule risk
Broadleaf
Assessing uncertainties
Likelihood
What you expect
Good – 1 in
10 jobs you
would do this
well
Bad – 1 in 10
jobs you would
face this
Text book
example
- all
perfect
2
Worst
credible
4
5
3
1
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Outcome
21
Project cost and schedule risk
Assessing uncertainties
Not as simple as Best / Worst
ALSO
Framing is crucial
 Assumptions
 What we do know
 What could really happen
– Pessimistic scenario
– Optimistic scenario
– Likely scenario
Then describe the
range in numbers
© Broadleaf Capital International Pty Ltd, 2012  www.Broadleaf.com.au
© Broadleaf Capital International Pty Ltd, 2012
Creating value from uncertainty, www.Broadleaf.com.au
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Page 11
Modelling
Dr Stephen Grey, Broadleaf Capital International
Palisade conference, Sydney May 2012
Project cost and schedule risk
Broadleaf
Flow of work
Identify drivers
Design model structure
Assess ranges of drivers (P10, Likely, P90)
Build model
Validate
Analyse
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Project cost and schedule risk
Broadleaf
Consult & communicate
Establish the context
Treatment
Qualitative context
Identify
Objectives
1
What can
happen?
Stakeholders
How could it
happen?
Criteria
Key elements
2
Quantitative
context
Analyse
Review controls
Consequences
Likelihoods
Significance
Evaluate
Plan & implement
actions
Evaluate risks &
opportunities
Identify options
Rank risks &
Select the best
opportunities
Develop plans
Screen out
minor issues
Implement
Structure
Parameters
Interpretation
Time
(min,likely,max)
Uncertainty
Scope
Financial
Probabilities
Risk to targets
Measures or KPIs
Physicals
Distributions
5
Reconcile targets
and risk levels
Set or revise targets
3
Revise plans
Basis for calculation
Operations
© Broadleaf 2008
Control environment
Correlations
Sources of
Revise policy and
uncertainty
6
4
control environment
Quantitative validation and reconciliation
Monitor and review
© Broadleaf Capital International Pty Ltd, 2012  www.Broadleaf.com.au
© Broadleaf Capital International Pty Ltd, 2012
Creating value from uncertainty, www.Broadleaf.com.au
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Page 12
Modelling
Dr Stephen Grey, Broadleaf Capital International
Palisade conference, Sydney May 2012
Broadleaf
Project cost and schedule risk
Stages in a project’s life
Drivers change as we move through




Concept (factoring)
Selection phase (mixed – factoring, detailed)
Sanction (detailed build up quantities and rates)
Implementation (contract values, claims …)
One size does not fit all
 How people see the estimate and schedule
 Where the uncertainties lie
 Linking them together as simply as possible
© Broadleaf Capital International Pty Ltd, 2012  www.Broadleaf.com.au
Broadleaf
25
Project cost and schedule risk
Integrating cost and schedule
Schedule drives many costs
 Management overheads
 Temporary facilities
 Damages or penalties
Schedule dictates cash flow phasing
 Escalation
 Capital management
 NPV
© Broadleaf Capital International Pty Ltd, 2012  www.Broadleaf.com.au
© Broadleaf Capital International Pty Ltd, 2012
Creating value from uncertainty, www.Broadleaf.com.au
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Page 13
Modelling
Dr Stephen Grey, Broadleaf Capital International
Palisade conference, Sydney May 2012
Broadleaf
Project cost and schedule risk
Summary
Simpler modelling with risk drivers
Attention to how we assess ranges
Structured analysis process we can plan
Stages in a project’s life
Integrating cost and schedule analysis
© Broadleaf Capital International Pty Ltd, 2012  www.Broadleaf.com.au
© Broadleaf Capital International Pty Ltd, 2012
Creating value from uncertainty, www.Broadleaf.com.au
27
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