(RISK-3037) Combining Parametric and CPM-based Integrated Cost-Schedule Risk Analysis
Author(s)/Presenters(s): Colin H. Cropley
Time/Room: MON 10:15-11:15/Rhythms 3
Parametric modelling (“P”) of systemic risk plus expected value (EV) modelling of project specific risks to quantify project contingency is described in detail by John K Hollmann in his book “Project Risk Quantification” which highlights the value of empiricism to forecast project cost and schedule outcomes, consistent with AACE RP 40R-08. Hollmann recommends the combined P+EV methodology as reliable, easy to perform and not requiring the use of Critical Path Method (CPM). However, the assessment of schedule risk is not straightforward without use of a CPM schedule.
CPM-based Integrated Cost-Schedule Risk Analysis (ICSRA), described in RP 57R-09, represents the most common approach recognised by AACE used to quantify contingencies. Even more common in practice are CPM-based non-integrated methods using schedule risk analysis (SRA) feeding into separate cost risk analysis (CRA).
All of these CPM-based variants can only refer to past project performance through expert opinions and they are criticised for failing to forecast adequate cost contingency. But when practised carefully using good quality schedules, ICSRA is a good predictor of schedule contingency and enables schedule risk and thus time-dependent cost risk optimisation.
Combining parametric modelling of systemic risk with CPM-based ICSRA is considered invalid because the parametric forecasting covers all project risk except major project specific risk events. This paper describes a valid method of combining P+ICSRA, to optimise schedule risk and forecast realistic cost contingency. It describes experience implementing this methodology.
(RISK-3055) Holistic Risk Management
Author(s)/Presenter(s): Eric Ho
Time/Room: SUN 4:00-5:00/Rhythms 3
When evaluating risks, risk managers often focus on only two types of impacts, cost and schedule. Cost and schedule are the primary focus of quantitative risk analysis, as those are the metrics used to determine contingency and project confidence. However, other types of impacts, while acknowledged, are often dismissed when evaluating risks. This results in risk registers that minimizes or ignores key risks to the project, including those related to impacts on overall project performance. Performance impacts could include impacts to the project’s quality, scope, aesthetics, operations & maintenance, environment, and health & safety. If these metrics are not considered, then the risk register and the risk analysis would not represent the entire range of risks to the project. As such, a risk that could result in a critical performance impact to the project could be minimized or excluded from the risk register and analysis.
(RISK-3078) Cost and Schedule Risks Interact in Megaprojects
Author(s)/Presenters(s): Dr. David T. Hulett, FAACE; Waylon T. Whitehead
Time/Room: MON 11:30-12:30/Rhythms 3
Megaprojects can be described as both complex and fragile. They are technically challenging and may stress the organization’s resources and systems to execute successfully. They are often schedule-driven, magnifying the need for contractors to be closely coordinated and mutually successful. Oil and gas megaprojects are sometimes located in areas where there is a need to create an environment and infrastructure stable enough to support project execution. Management may fail to appreciate the extent to which problems in one area affect other areas. Risks that affect the duration and costs of these projects interact with each other and produce effects that are magnified beyond the impacts of the risks considered individually.
The thesis of this paper is that, for these megaprojects, risks often occur in series rather than parallel and can have a compounding effect on each other. For example, labor productivity may be worse than planned and workplace security risks (work actions or worker safety) may cause work to be suspended. These two risks together reduce the number of days left to execute the plan within schedule, driving up labor costs and jeopardizing the finish date. Using Monte Carlo simulation, we will demonstrate that risks occurring in series, causing the impacts to be worse than the original assessments, are often at the root of extreme overrun.
(RISK-3111) Identifying the Most Probable Cost – Schedule Values from a Joint Confidence Level (JCL) Risk Analysis
Author(s)/Presenters(s): Samuel Steiman, PE; Dr. David T. Hulett, FAACE
Time/Room: TUE 10:15-11:15/Rhythms 3
Integrated cost-schedule risk analysis allows calculation of Joint Confidence Level, the probability that both cost and schedule targets will simultaneously be met. Organizations such as NASA require JCL-70 for major new projects. For most projects where cost and schedule results are not highly correlated, a family of constant JCL-70 outcomes results in a “necklace” of points from which the analyst must select recommended cost/schedule target values.
How should the analyst select defendable targets for presentation to management? This is not a matter of choosing the combination of cost and finish date most pleasing to the performer or the customer, but of choosing the combination that meets the JCL-70 (or whatever level of confidence in the estimate is needed) that is the most likely to occur with the scenario (e.g., pre-mitigation) being considered.
Some “eye-ball” a selected JCL-70 point, approximating the densest point in the scatter plot, but that is not convincing for budgetary purposes. Others draw the regression line through the scatterplot and pick the intersection with the JCL-70 necklace, but linear regression, by answering the best linear fit of the dataset, answers a completely different statistical question and is not necessarily reliable as a measure of the most likely combination of the JCL-70 cost and schedule.
This paper describes innovative graphical methods using three-dimensional histograms and surface plots of the scatter data to identify the most likely cost/schedule values at any JCL. The methods are demonstrated using actual scatter data from four real projects. The results validate the methodology as a sound basis for selecting cost/schedule targets and demonstrate how the regression line intersect becomes unreliable as cost/schedule correlation decrease.
(RISK-3129) Lessons from Financial Risk Management
Author(s)/Presenters(s): Eric Ho
Time/Room: WED 8:00-9:00/Rhythms 3
The financial crisis in the United States from 2007 to 2008 caused the collapse of banks, bailouts by the governments, and trillions of dollars in lost wealth. While the causes of the financial crisis are many, financial institutions and governments have attempted to prevent future collapses with stronger risk controls and regulations. This paper will present the lessons learned from the financial crisis and look at how they can be applied to capital project risk management. Topics that will be covered include risk modeling, risk governance, data collection, resources, transparency, capital reserves, and conflicts of interest. Similar to the banking sector, capital projects should also require stronger procedures and policies to prevent project failures.
(RISK-3175) Actions for Improving Risk Management Culture
Author(s)/Presenters(s): Aaron P. Ingebritson, PE
Time/Room: MON 4:00-5:00/Rhythms 3
Risk assessments can be contentious. Results can challenge strongly held organizational assumptions, impact personal interests such as sales targets, or point out poor decisions and control. Even with excellent historic data and rigorous quantitative assessment, risk assessments are easily questioned or dismissed since the events have not yet occurred. Nevertheless, a robust enterprise risk management program is a critical component of effective project and organizational management, with research indicating a link between proactive risk management and better organizational results. However organizations can be held back in effectively implementing and executing risk management activities by the maturity of their risk management culture (for definition see under “Background,” below).
The aim of this paper was to identify actions that organizations can take to improve their risk culture and to facilitate the establishment of a robust risk management program.
This research was completed by conducting a literature review to identify factors that organizations can take to positively influence their risk culture. To augment the findings of the literature review, a questionnaire was provided to organizational and risk leaders to identify what factors they see as important and what their organizations are doing (or not doing) to improve their risk culture.
(RISK-3208) Risk Allocation to Assess Public Contract: Particular Case - Brazil
Author(s)/Presenters(s): Helber Cunha Macedo, CCP; Carlos Eduardo M. F. Braga; Cesar Teodoro Ferreira; Fabrizio Cesar R. Fonseca
Time/Room: WED 10:30-11:30/Rhythms 3
Several contracts have a scope clearly defined, accountabilities established and allow stakeholders to reach their objectives. However, there are always uncertainties involved. Therefore, to avoid disputes and to ensure that desired results are achieved it is necessary to allocate contract risks to the most capable team to handle them. This means that there could be more ‘things’ to be considered in the budget.
In Brazil, a new Law (13,303) regulates the acquisition process by government companies. For engineering services, the owner must define the contract’s risks allocation. The overall objective of this law is to increase transparency and to minimize future disputes and additives.
In this context, the paper proposes a method to estimate the value of the transferred risks. Finally, through a case study, the proposed methodology is exemplified.
The case study explores owner and contractor perspectives to set their cost estimates while considering contracts risks allocation. According to the proposed method, each party calculates its own probabilistic cost estimate and they could have different distributions. The benefit of establishing a common method is to facilitate establishing a potential negotiation zone, characterized by the overlap of these ranges.
(RISK-3294) Some Key Points of Contingency Drawdown Curves
Author(s)/Presenters(s): Kimberly Kozak, PE; David A. Norfleet, CCP CFCC DRMP
Time/Room: TUE 5:15-6:15/Rhythms 3
The fundamentals of risk quantification used for estimating the amount of contingency for a project are well defined. An important step after quantification is the need for developing a forecast. This forecast is typically represented graphically by a downward-sloping curve. This curve is commonly referred to as a drawdown curve and it demonstrates when the contingency is expected to be used throughout the project’s lifecycle. This paper will present positions on certain key points with respect to the drawdown curve including: 1. the value of creating separate curves for cost and schedule contingency; 2. whether the profile should represent expenditure, i.e. cash flow, or obligation, i.e. when a risk is realized. 3. the most representative slope of the curve; and 4. how to treat management’s desire to use the project’s risk contingency funds for other purposes. 5. generally explore the traditional myths and misunderstandings of contingency drawdown curves.
(RISK-3313) (Panel Discussion) The Future of Decision and Risk Management in the Post-Digital Era
Author(s)/Presenters(s): Dr. Manjula Dissanayake, CCP
Time/Room: TUE 2:15-3:15/Rhythms 1
Let's face it, managing project risk has become challenging and complex than ever and resulted in major overruns in capital project executions across the world. Emerging technologies such as embedded sensors, digital twins and machine learning can enhance risk management, enabling new capabilities and unlocking possibilities considered unfeasible in the past for DRM practitioners. They can use digital as a lever to rationalize and optimize their risk management practices to deliver predictable project outcomes.
This panel discussion will bring together experts with diverse perspectives to discuss how and what should be done to accelerate the adaptation of the technologies in DRM area. Topics will include (1). Current maturity level of decision and risk management in construction industry (2). Key issues and challenges to adopt digital technologies in DRM, and (3) Actionable insights related to people, process and systems. Audience members will be able to participate following a moderated discussion period.