Estimating risks, time and cost of a project

Estimating risks, time and cost of a project

Sep 3rd, 2015

Estimating risks, time and cost of a project

Recently we have been asked to review a risk assessment that shored a probabilistic contingencies (cost and schedule) analysis, such as, for example, the AACE International Recommended Practice No. 57R-09, Integrated Cost and Schedule Risk Analysis Using Monte Carlo Simulation of a Critical Path Method (CPM) Model.Real Overcost Probability

The client realized that common approaches such as:

  • Probability Impact Graph based on indexes,
  • “simplistic” definition of probabilities and consequences, and even
  • poorly defined Monte Carlo simulations,

are misleading and would leave them (their contract) vulnerable with severe “misunderstood” overexposures. The point was they were “suspecting” the above, but coud not find concrete answers to their questions.

Here are a few points we identified and reported to the client:

  • Confusing “normal inefficiencies” with risk events, leads to biased estimations.
  • Confusion between probabilities/frequencies/rate of events leads to underestimates contingencies.
  • Poor definition of min, max, most likely events can shift contingencies estimates because of their influence on distributions to be used in Monte Carlo simulations (the oftentimes selected method).
  • Using Monte Carlo when direct methods would solve the problem at hand in a simple and transparent way may give a false sense of security.
  • ….

With that knowledge clients considerably strengthen their position, increase their overall understanding, and are guided toward beneficial contracts.

Indeed, Riskope has often been asked to review Projects‘ risk assessments and Projects’ time & cost estimates. In some cases we have supported the formulation of complex and rather large construction contract clauses, including Force Majeure for which the parties had formulated a common practice project risk approach. A conceptually correct risk assessment ensures fair and competitive pricing or even a competitive leading edge, by giving the necessary base to a healthy cost & schedule contingency evaluation and solve the situations described above.

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Category: Consequences, Mitigations, Probabilities, Risk analysis

2 responses to “Estimating risks, time and cost of a project”

  1. Hello,
    have you considered using Predict! software that appears to do all of the above especially integrating schedule normal variations with specific risk events etc..
    Worth a look if you need some very good software. Sorry if you already have a product of you own.
    Andrew Ferguson
    +61 408 466 276

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