us army corps of engineers building strong ® practical applications of risk analysis during design...

US Army Corps of Engineers

BUILDING STRONG®

Practical Applications of Risk Analysis During Design and Construction

Steve Farkus, PE, PMP, Tim Mather, PMP Herschel Baxi, PMPand Eric Lowther, PMP. LEED AP

Louisville District and PMA Consultants LLC May 2011 PPM CoP Conference

ID # 36

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Overview

The nation-wide Army Reserve Construction Program

Customer: Army Reserve Installation Management Directorate (ARIMD)

Project Phases: Design and Construction

2

Overview Template - 2011 PPM CoP Conference

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BLUF

We can best manage Customer expectations when we clearly spell out risks.

Customer accountability will increase when risk is understood.

Our Purpose Today – Inform our audience about quantitative techniques we can use to communicate more clearly.

Communicate Risk and You Manage Expectations

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Risks to Consider

During P&D:

► How confident are we in our construction cost estimate?

► When will we be RTA?

During Construction :

► How confident are we in the contractor’s schedule for completion?

What are our Greatest Risks?

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Key Processes (PMBOK)*:

Risk Management Planning

Risk Identification

Qualitative Risk Analysis

Quantitative Risk Analysis

Risk Response Planning

Risk Monitoring and Control

Risk Management

*Source: A Guide to the Project Management Body of Knowledge, Chapter 11

Measuring the probability and consequences of risks and estimating their implications for project objectives.

Measuring the probability and consequences of risks and estimating their implications for project objectives.

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Simulation in Risk Management

How to use Simulation in Risk Management

What is Monte Carlo?

Where did it come from?

How does it work?

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Simulation in Risk Management

How to use simulation

► Create a model of the critical activities/costs

► Assign three possible durations to each activity or three possible costs to each cost

► Run a simulation (Monte Carlo)

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Simulation in Risk Management

What is Monte Carlo?

Definition: Monte Carlo is the art of approximating an expectation by the sample mean of a function of simulated random variables

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Simulation in Risk Management

Where did Monte Carlo come from?

► Enrico Fermi invented the method while playing solitaire during a convalescence.

► Further developed when working on the Manhattan Project working on calculating potential range of neutron diffusion

► Named Monte Carlo because they needed a code name

► Named after the famous casino in Monaco

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How Simulation Works

A

B

E

C

F

D

H

G

4 days

8 days 10 days

10 days

2 days

5 days

5 days

10 days

8 days

4 6 10OPTD MOST PESS

8 10 15OPTD MOST PESS2 4 7

OPTD MOST PESS

1 2 4OPTD MOST PESS

4 5 9OPTD MOST PESS

6 8 15OPTD MOST PESS

8 10 20OPTD MOST PESS

5 8 12OPTD MOST PESS

7 10 16OPTD MOST PESS

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Iteration Number 1

A

B

E

C

F

D

H

G

4 days

8 days 10 days

10 days

2 days

5 days

5 days

10 days

8 days

4 6 10OPTD MOST PESS

8 10 15OPTD MOST PESS2 4 7

OPTD MOST PESS

1 2 4OPTD MOST PESS

4 5 9OPTD MOST PESS

6 8 15OPTD MOST PESS

8 10 20OPTD MOST PESS

5 8 12OPTD MOST PESS

7 10 16OPTD MOST PESS

7

RNG

5

RNG

1

RNG

9

RNG

11

RNG

4RNG

9

RNG

14

RNG

11

RNG

Completion of “H” (A-B-C-D-H): 38 days

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A

B

E

C

F

D

H

G

4 days

8 days 10 days

10 days

2 days

5 days

5 days

10 days

8 days

4 6 10OPTD MOST PESS

8 10 15OPTD MOST PESS2 4 7

OPTD MOST PESS

1 2 4OPTD MOST PESS

4 5 9OPTD MOST PESS

6 8 15OPTD MOST PESS

8 10 20OPTD MOST PESS

5 8 12OPTD MOST PESS

7 10 16OPTD MOST PESS

6RNG

5RNG

3RNG

11RNG

9RNG

3RNG

7RNG

8RNG

11RNG

Completion of “H” (A-B-C-D-H): 31 daysIteration Number 2

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A

B

E

C

F

D

H

G

4 days

8 days 10 days

10 days

2 days

5 days

5 days

10 days

8 days

4 6 10OPTD MOST PESS

8 10 15OPTD MOST PESS2 4 7

OPTD MOST PESS

1 2 4OPTD MOST PESS

4 5 9OPTD MOST PESS

6 8 15OPTD MOST PESS

8 10 20OPTD MOST PESS

5 8 12OPTD MOST PESS

7 10 16OPTD MOST PESS

7RNG

5RNG

1RNG

8RNG

9RNG

4RNG

12RNG

6RNG

16RNG

Completion of “H” (A-B-F-H): 32 daysIteration Number 3

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Simulation in Risk Management

Simulation can be an effective tool to evaluate a range of possible outcomes

The output is only as good as the input

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Cost Risk

Basic Steps in a Cost Risk Assessment

► Identify and Rank Risks

• All risks not modeled► Review A/E’s estimate

• Don’t double dip on contingency

What is the Cost Risk Modeling Process?

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Cost Risk (cont.)

► Range and Model cost risks

• Include key stakeholders• Some risks may apply to project costs• Monte Carlo modeling

► Report

• Communicate to stakeholders

What is the Cost Risk Modeling Process?

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Cost Risk – Identify Your Risks

A Project Has Many Risks

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Cost Risk – Identify Your Risks

A Project Has Many Risks

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Cost Risk – Rank Your Risks

Risks With Most Impact Selected for Cost Risk Assessment

Risk No. Probability Impact Risk Impact

Risk Rank Cost Element Description A/E Estimate

R12 High High HH 1Facility operations may impact planned availability of construction zones increasing duration of work. $150,000

R4, R10 High High HH 2

Finished tenant interiors may be exposed to elements causing rework leading to increase in project costs. $125,000

R9 High Moderate HM 3Staging and access coordination with roof replacement contractor could delay construction within building interiors. $75,000

R14 High Moderate HM 4 Fireproofing $60,000

R1 Moderate High MH 5Additional quantities of hazardous materials remediation could increase construction costs. $50,000

R3 High Moderate HM 6 Lane closure limitations may interrupt supply of materials $50,000

R6 High High HH 7Corrosion of steel support system behind metal fascia may require additional rehabilitation $50,000

R5 Moderate High MH 8 Modifications to scaffolding to complete equipment relocation $25,000

R11 Moderate Moderate MM 9 Identity and background check requirements $25,000

R13 Moderate Moderate MM 10 Utility relocations $25,000

R7 High High HH 11 CMU replacement in parapet $10,000

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Cost Risk – A/E Estimate Review

Review the A/E’s Estimate

► Review for built in contingencies

• Lump sum line items• % age of sub totals• Quantity / Unit Price

► Cost Risk Assessment develops contingency at the project level based on risks

• No double dips

The A/E Estimate may have contingencies built in

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Cost Risk - Modeling

Range and Model the Costs

► Optimistic, Pessimistic, Most Likely

► Project team input

► Model using Monte Carlo

Estimate a range of the impact of risks

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Cost Risk – Modeling Sample

Project Team Assesses Optimistic, Most Likely, Pessimistic

Risk No. Probability Impact Risk Impact

Risk Rank Cost Element Description Optimistic Most Likely Pessimistic

R12 High High HH 1Facility operations may impact planned availability of construction zones increasing duration of work. $100,000 $150,000 $200,000

R4, R10 High High HH 2

Finished tenant interiors may be exposed to elements causing rework leading to increase in project costs. $75,000 $125,000 $175,000

R9 High Moderate HM 3Staging and access coordination with roof replacement contractor could delay construction within building interiors. $50,000 $75,000 $250,000

R14 High Moderate HM 4 Fireproofing $0 $60,000 $120,000

R1 Moderate High MH 5Additional quantities of hazardous materials remediation could increase construction costs. $0 $50,000 $100,000

R3 High Moderate HM 6 Lane closure limitations may interrupt supply of materials $0 $50,000 $50,000

R6 High High HH 7Corrosion of steel support system behind metal fascia may require additional rehabilitation $0 $50,000 $100,000

R5 Moderate High MH 8 Modifications to scaffolding to complete equipment relocation $0 $25,000 $25,000

R11 Moderate Moderate MM 9 Identity and background check requirements $25,000 $25,000 $40,000

R13 Moderate Moderate MM 10 Utility relocations $25,000 $25,000 $50,000

R7 High High HH 11 CMU replacement in parapet $0 $10,000 $25,000

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Cost Risk – Modeling & Reporting

Model

► Software runs many iterations of selected risks impacting the project

Report

► Probability of delivering within approved budget

► Risk-based project contingency

► Meaningful statistical analysis on risks

Communicating to Stakeholders

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Cost Risk – Reporting Samples

Reports Communicate Impact of Risks on Cost

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Cost Risk – Reporting Samples

Reports Communicate Impact of Risks on Cost

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Cost Risk – Additional Take-Aways

A/E Estimate is not total project cost

► Risks can apply at a project level

• Procurement process• Environmental complexities

Develop Historical Information

Scalable Process

Cost Risk Assessments Enhances Project Management

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Conclusion

Simulation is a valuable tool in the toolkit of every project manager

It’s important to create an accurate model and range for each activity or cost.

Not a panacea

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Summary

We can best manage Customer expectations when we clearly spell out risks.

Customer accountability will increase when risk is understood.

Our Purpose Today – Inform our audience about quantitative techniques we can use to communicate more clearly.

Communicate Risk and You Manage Expectations

BUILDING STRONG®

Questions?

Pay Attention to Risk and the Table is Set for Success