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Improving project cost evaluations

Improving project cost evaluations

Aug 29th, 2018

We read last week a CIM annoucement of a Metallurgy and Materials Society (MetSoc) webinar on September 20 about Improving project cost evaluations.

BQE Water President & CEO David Kratochvil will present the seminar.

Subject matter

Our friend David will discuss the shortcomings of conventional Net Present Value and risk assessments applied to water treatment plants. He will explain how to overcome potential uncertainties with the Risk Adjusted Life Cycle Cost analysis approach.

Comparing alternatives for a project requires careful quantitative and convergent risk analysis. Without it neither short term (construction, implementation) nor long term (all the way to closure and wastes of waste) life cycle costs can be rationally evaluated. And long term is particularly important for water treatment plants, environmental cleanups, restorations rehabilitation that are oftentimes foreseen for long service lives.

Risk adjusted life cycle cost analysis

Riskope has used probabilistic specific methodology for Improving project cost evaluations since the beginning of the 2000s.

We have never stopped pushing the envelope of these developments. Lately, we have used the pelican beak analogy to show how important it is to invest more in preliminary analyses, detailed a priori risk evaluations.

Pelican beak analogy shows enhanced planning benefits

Graph explaining the Pelican Beak analogy

That is in contrast with common practice approaches: their users satisfy themselves with “risk-myopia” and NPV.

At Riskope we bring value to projects by deploying and maintaining an updated risk register using ORE, in order to benefit of the advantages, without incurring in risk over-exposures.

Strategic and tactical planning (Let’s define Strategic, Tactical and Operational planning) will thus be optimized.

Improving project cost evaluations with ORE and risk adjusted life cycle cost analysis

  • NPV cannot differentiate alternatives because a) it does not properly evaluate the long term b) it does not explicitly include risks. ORE does both.
  • Alternatives selection (Short term and long term), True life-cycle costs, (cradle to grave), have to include risks. Those are for example construction, life-cycle risks including life-end operations. Waste of wastes handling costs have to be included as well. ORE allows that.
  • The risk register needs to bring clarity to the managers and be easily updatable (because of the changing environment). We built ORE around that.
  • ORE can study the effect of mitigations on the overall risk of an operation
  • Clear definition (quantified) of risks thanks to ORE will limit time in court battling, especially in case of Force Majeure events (climate change).

Examples of typical conundrums and what ORE will deliver

Below we have sampled a series of questions from clients and we explain the kind of replies ORE can give.

The example focuses on water treatment processes and plants.

Conundrums What you should expect (risk assessment deliverables)
How many lines of defence? For example Buffer
pond or not, frequency of sampling, etc.
Probability of occurrence of mishaps and failures,
with or without mitigations and lines of defence, including Common
Cause Failures and Inter-dependencies.
Which mitigation and at what costs? Different risk profiles of an operation depending on the implemented mitigation.
Usual Path vs Design Built & Operate? Quantified life cost for each alternative.
Risk transfers, long term risks, exclusions and Force Majeure clauses?  A clear definition (quantified) of each in order to bring value and limit legal liabilities.
How to define true construction and lifecycle costs including wastes of wastes, and related risks. Rational estimates including risks, explicit uncertainties, and possibility to update as new data become available.

 

Contact Riskope to know more about ORE deployments and long term estimates. Improving project cost evaluations is possible and brings value.

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Category: Consequences, Mitigations, Optimum Risk Estimates, Probabilities, Probability Impact Graphs, Risk analysis, Risk management

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