Cost & Schedule Risk Analysis
Cost Risk Analysis
Project cost estimates have a bad habit of continually being overrun and projects returning for more funds during execution. Often it is because the contingency and other funds to cover risk were poorly justified, so management reduced or eliminated them at sanction?
We can provide a service that delivers a transparent and defendable cost estimate accuracy and associated contingency / management reserve, and gives guidance on where the team should focus to improve accuracy and optimise contingency.
Steve Jewell built his first cost risk analysis model in the mid 1980’s. The approach used the concept of uncertainty and risk drivers as well as correlation coefficients. This helped ensure that forecast cost outcomes were highly predictable with outturns that were seldom outside +/- 10% of the sanction estimate. Over the years, we have carried out cost modelling using a number of leading software tools.
In 2017, Steve developed a cost risk model using @Risk that is designed primarily for estimators rather than risk experts. A key client has adopted it for roll out across their organization. It provides a template approach that can be easily completed by an estimator, with knowledge of 3 point estimating methods. The template splits the cost estimate into a number of cost items that can be acted upon by factors that represent uncertainty or risk in the components that make up that cost item. These factors generally fall into 3 categories, Scope factors, price/ rates factors and duration/ productivity factors. The factors provide an ability to influence one or many cost items and are more transparent than using correlations. That said the tool also allows a simple approach to add in correlations, say between prices, for additional flexibility.
Before any risk analysis is performed it is essential that an independent review is carried out on the base estimate to ensure it is sound. Risk analysis is not a substitute for a poorly worked estimate. Any review is best carried out by someone outside the team, who is truly independent.
3 point estimates are required as input and some experience of facilitating conversations to gain unbiased input of the subject matter expert is required.
Typical outputs from an analysis would be.
• A cumulative probability “S” curve showing the range of potential project cost outcomes
• A estimate of contingency based on the confidence level required by the client.
• The setting of a “Not to Exceed” value, which would trigger a requirement to seek additional sanction funds
• A list of the individual contingency sums against each cost item.
• A list of the top factors that drive the contingency sum required.
• A list of the top factors that are driving the accuracy range of the estimate.
Schedule Risk Analysis
Project schedules also have a bad habit of continually being overrun. It should be remembered these are again just estimates, but this instance time rather than cost. Whilst projects don’t usually have to return for a sanction of more time, a longer schedule invariably means an increase in cost. More importantly a project that is late in starting up often sees a serious erosion of value and a failure to meet the business promise.
Steve began building schedule risk models in the early 90’s and has carried out over 100 risk analyses since then. We believe that each model must be transparent and a credible representation of the key logic in the project execution strategy, but must be simple enough to be understood by the team. We don’t carry out analysis on models with greater than 500 activities as you cannot see “the wood for the trees”. Schedules and their logic networks are models, estimates of how a project will be executed, underpinned by many assumptions that may and often do prove to be false when the project is executed. There are many reasons why we take our approach, but it is built upon over 20 years of experience. Whilst it may seem attractive ( and many tools encourage this) to just take the projects existing network of 5,000, 10,000 activities or more, you can easily generate results that show very tight accuracy ranges which are not credible. Interrogating teams for 3 point estimates of 10,000 activities is not feasible, so typically they are split into groups of activities and often generic ranges assigned to them. The exercise can become one of just about putting 3 point estimates around a large logic network, rather than standing back and looking at the project and trying to build a risk and uncertainty model.
From the initial client logic network, we produce a schedule model that typically contains no more than 200 activities ( we have built ones for circa 500 activities) . Working with the team, we look to identify key missing activities (eg client and regulatory approval cycles), challenge and remove schedule constraints and expose weak or incorrect logic links, . The review will focus on activities on the critical path and close to the critical path. Later on when the risks are more understood other paths may be added to the model.
3 Point Estimates
We then interview team members in order to 3 point estimates for each activity, challenging any team optimism bias. Taking the time to remove this bias and identify “the missing links” is vitally important in ensuring credible results.
Risks are then linked to activities using the team risk register. We can also provide a service of a facilitated risk workshop if it becomes apparent that there is no risk register or the current one is of insufficient quality. Our experience can be used to add in typical risks we have seen on other projects.
Typical outputs from an analysis would be.
• A cumulative probability “S” curve showing the range of potential project start-up dates.
• Cumulative probability “S” curves showing the range of dates for any activity or milestone
• An estimate of time contingency based on the confidence level required by the client.
• A list of the top factors that drive the key dates allowing clients consider more optimal execution and risk management strategies in place to deliver a faster schedule (or less risky)
• An ability to set a date for sanction with an associated confidence level eg a P50 schedule
• A ability to stress test the project economics by generating a P90 date (90% confident that date will be achieved)
This information helps stakeholders to align on a credible schedule and gives clear targets to focus on to deliver the sanction promise.
Integrated Cost and Schedule Risk Analysis
If required we can provide an integrated approach to cover both Cost and Schedule.