risk.03 integrated cost and schedule risk analysis integrated cost and... · integrated cost and...

(RISK.03)Integrated Cost and Schedule Risk

Analysis: A Draft AACE Recommended Practice

Dr. David T. Hulett

2

Author Biography• David T. Hulett, Hulett & Associates, LLC• Degree:

– Ph.D.

• University:– Stanford University

• Years of Experience:– 20+

• Professional Field:– Project risk analysis and management, project scheduling

• The purpose of integrated analysis of schedule and cost risk to estimate the appropriate level of cost contingency reserve on projects

• The main contribution is to include the impact of schedule risk on cost risk and hence on the need for cost contingency reserves

• Additional benefits include the prioritizing of the risks to cost, some of which are risks to schedule so that cost risk mitigation may be conducted in a cost-effective way.

Purpose

Linkage of Schedule and Cost Risk• Some resources such as labor, rented

equipment and level-of-effort support by the project management team will cost more if they are engaged on the project longer than planned because activities take longer than expected

• Risks to schedule will also be risks to the cost of these resources

Platform / Risk ModelResource-Loaded Schedule

• The platform of this analysis is a resource-loaded project schedule– One may use a summary schedule or a

detailed project schedule• The budget (without contingency) must be

assigned to the activities – Using resources that may be summary in

nature (e.g., construction, detailed engineering or procurement) or detailed

Monte Carlo Simulation• Monte Carlo simulation is the standard

approach to discovering the impact of multiple risks on the overall project schedule or cost risk

• Simulating a resource-loaded project schedule derives both schedule risk and the cost risk implication in the same simulation

• The results also produce a list of risks that are prioritized through the risk model, for risk mitigation

Inputs• A best-practice project schedule, basically a

schedule following recommended practice CPM scheduling. A schedule of 300 – 1,000 activities can summarize and represent a large project in this strategic analysis

• A contingency-free cost estimate, meaning that line items do not have contingency padding built in and there is no below-the-line contingency included

• Good-quality risk data – usually risks that have been identified during a qualitative risk analysis of the project leading to a list of prioritized risks are characterized by their probability and impact ranges

Outputs• How likely are the project plan’s cost and schedule

targets to be met given the risk that may affect that plan?

• How much contingency of time and cost needs to be provided to meet the risk threshold of the project management or other stakeholders?

• Which risks are most important to the achievement of the project schedule and cost estimate?

• A unique and useful result is the finding of joint time-cost risk result joint probability distribution, often shown as a scatter diagram of time-cost points showing the possibility of meeting both time and cost objectives jointly

Best Practice CPM Schedule 1• All work needed to complete the project must

be represented in the schedule. The schedule should relate to the WBS

• There should not be any “danglers.” This means that each activity needs a predecessor to its start date and a successor from its finish date

Activity 101Predecessor Successor

F-S or S-S F-S or F-F

• The schedule should not rely on date constraints or fixed lags between activities

• The schedule should be recently statused• The schedule should have resources costed and

assigned to activities– Summary resources are OK– The purpose of these resources is to get the costs on

the right activities, not to level resources– Sometimes we create hammocks and apply summary

resources to those

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Best Practice CPM Schedule 2

Example of Resources Used

11

Risk Data Inputs• Risk events may or may not happen, but if they

do happen they will have a positive or negative impact on the cost or schedule or both– Risk events’ probabilities are < 100%– They have uncertain impacts as well

• Uncertainties include ambiguities such as estimating error and uncertainties such as the level of labor productivity or the price of steel. – These uncertainties are 100% likely to occur but their

impact on the project cost or schedule is uncertain

12

Collecting Risk Data

• The input risk data are usually collected in risk workshops or interviews. – In workshops the people may be influenced

by strong personalities or people in higher positions in the organizations.

– In individual interview sessions, usually protected by promises of confidentiality, people can discuss their concerns and make estimates without feeling the influence of others

13

Risk Drivers (aka Risk Factors)

• The risks’ impacts are specified by 3-point estimates– In Risk Drivers (Risk Factors) the impacts are ranges

of multiplicative factors. The 3-point estimate of impact is converted to a triangular distribution

• Risks are applied to activities– A schedule risk will multiply the duration of the activity

that it is assigned to – For any iteration the software selects an impact at

random from the distribution and uses that factor for that iteration

14

Examples of Three Risk Types

• Schedule duration estimate immaturity is an ambiguity. It has 100% probability of occurring and its impact range is both good and bad

• Construction labor productivity is an uncertainty that, compared to the assumption, could be lower or higher

• The possibility of quality, key personnel unavailability is a risk event– It may or may not occur– In this case its impact is never to the good

15

Uncertainty and Ambiguity Risks Occur 100% of the time

16

Schedule inaccuracy operates 100% of the time (all iterations). On a construction activity of 100 days duration the results are triangularThe construction labor productivity risk would look similar to this figure

95 100 105 110 115 120

Distribution (start of interval)

0

20

40

60

80

100

120

140

160

180

200

220

240

Hits

0% 95

5% 99

10% 100

15% 101

20% 102

25% 103

30% 104

35% 104

40% 105

45% 106

50% 106

55% 107

60% 108

65% 109

70% 109

75% 110

80% 111

85% 113

90% 114

95% 116

100% 120

Cum

ulat

ive

Freq

uenc

y

0010 - Construction : Duration

Risk Events are Described by their Probability and Impact

• If probability is < 100%, the risk will occur in that percentage of iterations, chosen at random

• On an iteration if the risk occurs, a factor chosen at random from its impact range will multiply the duration of the activities to which it is assigned

• If the risk does not occur the multiplicative factor is 100% with no effect on duration

17

Risk Events occur with a Probability < 100%

18

100 102 104 106 108 110


0

100

200

300

400

500

600

700

800

900

Hits

0% 100

5% 100

10% 100

15% 100

20% 100

25% 100

30% 101

35% 102

40% 103

45% 103

50% 104

55% 104

60% 105

65% 105

70% 105

75% 106

80% 106

85% 107

90% 107

95% 108

100% 110

Cum

ulat

ive

Freq

uenc

y

0010 - Construction : Duration Here a risk event, the possible unavailability of quality key staff, occurs 70% of the time. Hence, in 30% (900) of the 3,000 iterations the original duration of construction, 100 days, is correct. In 70% (2,100) of the iterations, the duration is longer than 100 days as a triangle

Risk Driver Strategy• Risks are usually higher-level strategic

risks rather than tactical or technical risks• Data about risks is derived from in-depth

interviews• A risk is usually assigned to several

activities• An activity may have several risks

assigned

19

A Construction Activity withThree Risks Assigned

2090 100 110 120 130 140


0

10

20

30

40

50

60

70

80

90

100

110

120

130

140

150

160

Hits

0% 90

5% 99

10% 101

15% 103

20% 105

25% 106

30% 108

35% 109

40% 110

45% 111

50% 112

55% 113

60% 114

65% 115

70% 117

75% 118

80% 120

85% 122

90% 124

95% 127

100% 143

Cum

ulat

ive

Freq

uenc

y

0010 - Construction : Duration

The interaction of the three risks produces the expected histogram.In traditional 3-point risk estimating, the analyst and interviewees must approximate the result of three risks on duration. The Risk Driver analysis computes the distribution.

Risk Drivers Avoid the Need to Estimate the Correlation Coefficient

© 2009 Hulett & Associates LLC

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Activity A Activity B

Activities A and B Correlation is Calculated to be 100%

In the traditional approach to risk analysis, the correlation coefficient has to be estimated.

Risk Drivers model how correlation occurs and the coefficient is a natural result of the model

Risk #1P = 50%, Factors

.95, 1.05, 1.15

Risk Factors Model How Correlation Occurs (2)

© 2009 Hulett & Associates LLC

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.95, 1.05, 1.15

Activity A Activity B

Activities A and B Correlation is Calculatedto be 48%


.8, .95, 1.05


1.0, 1.1, 1.2

Risk Drivers model correlation as it is caused in the projectbased on the common (Risk # 1) and confounding (Risks # 2 and #3) risks

affecting pairs of activitiesThe correlation coefficient is the result, not the assumption

Integrating Cost and Schedule Risk using Risk Drivers

• The risks to activity durations will affect– Durations and completion dates– Costs of labor-type resources

• For each iteration the cost as well as the finish date is calculated

• Enhanced results include– Scatter diagrams (joint distributions) of time

and cost– Probabilistic cash flows by month

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Schedule Risk applied to Activity with Labor Resource – Cost/Time Scatter

Risk ID Risk Probability Minimum Most Likely Maximum

1 Labor Productivity may be Uncertain 100% 95% 105% 120%

24

$600,000 $620,000 $640,000 $660,000


0

100

200

300

400

500

600

700

Hits

0% $585,000

5% $596,000

10% $600,000

15% $603,000

20% $606,000

25% $609,000

30% $611,000

35% $613,000

40% $615,000

45% $617,000

50% $619,000

55% $621,000

60% $623,000

65% $626,000

70% $628,000

75% $631,000

80% $634,000

85% $638,000

90% $642,000

95% $647,000

100% $660,000Cu

mul

ativ

e Fr

eque

ncy

RP one-pathEntire Plan : Cost

0%

0% 49%

51%

10/08/2012 20/08/2012 30/08/2012 09/09/2012 19/09/2012 29/09/2012 09/10/2012 19/10/2012

Entire Plan: Finish

51%

$590,000

$600,000

$610,000

$620,000

$630,000

$640,000

$650,000

$660,000

Entir

e P

lan:

Cos

t

51%

RP one-path

10/ 09/ 2012

$619,000

Deterministic Point Inside both limits Outside both limits

Schedule Risk

Effect on Cost Risk of Adding Burn Rate Uncertainty

25$580,000 $590,000 $600,000 $610,000 $620,000 $630,000 $640,000 $650,000 $660,000 $670,000 $680,000

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Cum

ulat

ive

Prob

abili

ty

Distribution AnalyzerRP one-path - Entire Plan - Cost RP one-path - Entire Plan - Cost

8%

9% 41%

42%

10/08/2012 20/08/2012 30/08/2012 09/09/2012 19/09/2012 29/09/2012 09/10/2012 19/10/2012

Entire Plan: Finish

51%

$580,000

$590,000

$600,000

$610,000

$620,000

$630,000

$640,000

$650,000

$660,000

$670,000

$680,000

Entir

e Pl

an: C

ost

50%

RP one-path

10/ 09/ 2012

$624,453


Risk ID RiskDuration Impacts Cost Impacts

Probability Minimum Most Likely Maximum Minimum Most

Likely Maximum

1 Labor Productivity may be Uncertain 100% 95% 105% 120% 95% 100% 110%

Schedule, and Burn Rate Risk

Schedule Risk Alone

Add Uncertainty in Procurement Costs

• Equipment and material costs may be risky but not generally because their activities’ durations are uncertain

• Putting risk factors on material-type resources causes the risk to be applied to the entire cost

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Schedule Impact Factors Cost Impact Factors

Risk ID Risk Probability Minimum Most Likely Maximum Minimum Most Likely Maximum

1Labor Productivity may be Uncertain 100% 95% 105% 120% 95% 100% 110%

2Suppliers may be busy 100% 100% 100% 100% 90% 105% 120%

Impact on Cost Risk of Adding Risk to Material Resources

27$560,000 $570,000 $580,000 $590,000 $600,000 $610,000 $620,000 $630,000 $640,000 $650,000 $660,000 $670,000 $680,000 $690,000 $700,000 $710,000 $720,000 $730,0000%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Cum

ulat

ive

Prob

abili

ty

Distribution AnalyzerRP one-path - Entire Plan - Cost RP one-path - Entire Plan - Cost RP one-path - Entire Plan - Cost

16%

16% 34%

34%

10/08/2012 20/08/2012 30/08/2012 09/09/2012 19/09/2012 29/09/2012 09/10/2012 19/10/2012 29/10/2012 08/11/2012

Entire Plan: Finish

50%

$560,000

$580,000

$600,000

$620,000

$640,000

$660,000

$680,000

$700,000

$720,000

Entir

e Pl

an: C

ost

50%

RP one-path

23/ 09/ 2012

$640,372


Schedule, Burn Rate and Material Risk

Schedule Risk Alone

Schedule, and Burn Rate Risk

Simple Example: Construction Project

28

Cost Resources Risk Factors

We have Created and AssignedEight Risk Factors

29

Basic Cost and Schedule Results

30

21-Dec-12 05-May-14


0

100

200

300

400

500

600

700

Hits

0% 19-Dec-12

5% 27-Apr-13

10% 25-May-13

15% 13-Jun-13

20% 03-Jul-13

25% 18-Jul-13

30% 01-Aug-13

35% 14-Aug-13

40% 28-Aug-13

45% 08-Sep-13

50% 20-Sep-13

55% 02-Oct-13

60% 16-Oct-13

65% 29-Oct-13

70% 14-Nov-13

75% 30-Nov-13

80% 16-Dec-13

85% 06-Jan-14

90% 03-Feb-14

95% 23-Mar-14

100% 02-Dec-14

Cum

ulat

ive

Freq

uenc

y

AACEI Integrated Cost-Schedule RiskEntire Plan : Finish Date

P-80 is 16 Dec 2013, a 7-month slip

$600,000 $800,000 $1,000,000


0

200

400

600

800

Hits

0% $537,199

5% $619,334

10% $636,168

15% $648,572

20% $658,705

25% $667,247

30% $675,521

35% $683,271

40% $692,139

45% $699,319

50% $706,146

55% $713,313

60% $721,955

65% $730,838

70% $740,066

75% $749,866

80% $760,750

85% $775,498

90% $792,533

95% $819,295

100% $1,008,966

Cum

ulat

ive

Freq

uenc

y

AACEI Integrated Cost-Schedule RiskEntire Plan : Cost

P80 is $760 million, a 22% reserve

Joint Cost-Schedule Distribution

31

7%

6% 17%

70%

21-Dec-12 31-Mar-13 09-Jul-13 17-Oct-13 25-Jan-14 05-May-14 13-Aug-14 21-Nov-14

Entire Plan: Finish

76%

$550,000

$600,000

$650,000

$700,000

$750,000

$800,000

$850,000

$900,000

$950,000

$1,000,000

Entir

e Pl

an: C

ost

77%

AACEI Integrated Cost-Schedule Risk

03-Dec-13

$752,918


Joint C/S Distribution, Cross-hairs at 70% Joint Confidence Level

Deterministic Plan

Probabilistic Cash Flow

32

Deterministic Cost: $624,220

Det

erm

inis

tic F

inis

h: 2

9-Ap

r-13

21-Jan-11 01-May-11 09-Aug-11 17-Nov-11 25-Feb-12 04-Jun-12 12-Sep-12 21-Dec-12 31-Mar-13 09-Jul-13 17-Oct-13 25-Jan-14 05-May-14 13-Aug-14 21-Nov-14

Time

0

200,000

400,000

600,000

800,000

1,000,000

Cum

ulat

ive

Deterministic Plan

P-80

Prioritizing Risks To Cost

33

Risks to Cost in Priority Order at the P‐80P‐80

ALL RISKS IN 760.8NO RISK 624.2Contingency Reserve at P‐80 136.6

Risks Prioritized for Effect on CostActivity Duration Estimates are Inaccurate 39.2Site Conditions / Site Access may Slow Logistics 23.2Key Engineering Personnel may be Unavailable 18.4Cost Estimate is Inaccurate 14.9Capable Management may not be Assigned 13.4Equipment Suppliers may be busy 9.1Design Complexity may Challenge Engineers 3.4Environmental Agency may be Slow 0.1

TOTAL Contingency Accounted For 121.6

Some Interaction Effects are not Captured

Prioritize risk mitigations using this table

QUESTIONS?

David T. Hulett, Ph.D.Hulett & Associates, LLC

Los Angeles, CA(310) 476-7699

[email protected]

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