COST RISK ESTIMATING MANAGEMENT COGNITIVE BIAS & RISK ALLOCATION FOR DESIGN BUILD IMPROVING ODDS OF PROJECT SUCCESS Mark Gabel MSCE, PE, CVS Committee on Construction Contract Administration Section Wednesday August 12, 2020 1
COST RISK ESTIMATING MANAGEMENT
COGNITIVE BIAS&
RISK ALLOCATION FOR DESIGN BUILDIMPROVING ODDS OF PROJECT SUCCESS
Mark GabelMSCE, PE, CVS
Committee on Construction Contract Administration Section
Wednesday August 12, 2020
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uh oh!aaaahhhh!!!!
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great manager of
risk…
or luck…?
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Risk Management…
flexible & scalable
complements other processes
great for design-build
we do not guarantee certainty… we provide probability5
The human condition
6Cynthia Vinney, ThoughtCo., October 31, 2018
cognitive bias
…error in thinking
…numerous types
…influences perceptions
…distort decision-making.
Cynthia Vinney, ThoughtCo., October 31, 2018 7
We are only conscious of 5%of our cognitive activity
awareness
decision makingeconomic decisions
probability estimatesbelief formation and persistence
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anchoring bias
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Authority Bias example
“There is no danger that Titanic will sink. The boat is unsinkable and nothing but inconvenience will be suffered by the passengers.“ —Phillip Franklin, White Star Line
vice-president, 1912 10
Confirmation Bias
I knew it,Bigfoot!
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Availability Heuristic
SIGN
IFIC
ANCE
high
low
The Mind’s Eye
Credit: David Hillson, Understanding and Managing Risk Attitude, Second Edition 12
Representativeness HeuristicBBBBBBBBBBBBBBBB BBB BBB BBB B
GAMBLER’S FALLACY
Black 26 times in a row
Reality quote
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15
Project Cost Components
policy, inflation, & market forces
risk register
design evolution
• well documented• objective • neutral and unbiased
to be revealed
SOURCE
PE + RW + COC (4%)
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Risk
Identification
RiskManagement
Planning
Implement Risk Response
PlanTAKE ACTION!
Risk Monitoring and Control
Risk AnalysisQualitative
orQuantitativepre-response
analysis
Risk Responsequalitative
orquantitative
post-responseanalysis
UpdateProject Management Plan
Current StatusProject Management
PlanScope, Schedule, Estimate
UpdateProject Management Plan
Current StatusProject Management
PlanScope, Schedule, Estimate
Results of response actions
Risk Management Steps
Current StatusProject Management
PlanScope, Schedule, Estimate
Current StatusProject Management
PlanScope, Schedule, Estimate
RiskManagement
Planning
RiskManagement
Planning
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Risk Management Planning: E 1053
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Risk
Identification
RiskManagement
Planning
Implement Risk Response
PlanTAKE ACTION!
Risk Monitoring and Control
Risk AnalysisQualitative
orQuantitativepre-response
analysis
Risk Responsequalitative
orquantitative
post-responseanalysis
UpdateProject Management Plan
Current StatusProject Management
PlanScope, Schedule, Estimate
UpdateProject Management Plan
Current StatusProject Management
PlanScope, Schedule, Estimate
Results of response actions
Risk Management Steps
Current StatusProject Management
PlanScope, Schedule, Estimate
RiskManagement
Planning
Risk
Identification
Risk
Identification
Risk AnalysisQualitative
orQuantitativepre-response
analysis
Risk
Bre
akdo
wn
Stru
ctur
e
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Risk ID / Level 4 Example Title
Level 1 Project Risk
Level 2
ENV 10NEPA/SEPA
– documentation completion, Section 4f/6f,
challenges
Level 3
ENV
ENV 10
ENV 10.10 MMPA Concurrence1st
ENV 10.20 Section 4(f) Issues2nd
ENV 10.30 NEPA/SEPA Delay3rd
decimal (order not critical)
EnvironmentalR
isk B
reak
dow
n St
ruct
ure
CTR 10ProjectDeliveryMethod
-changes or issues
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Qualitative Analysis• Very High (VH)• High (H)• Medium (M) • Low (L) • Very Low (VL)
Pro
bab
ilit
y
I m p a c t
VH
H
M
L
VL
VL L M H VH
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Probability
Impact3 Point Estimate
Minimum Most Likely Maximum
Quantitative Analysis: BEFORE risk response
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Monte Carlo Method
Probabilistic Risk Modeler
Risk Modelling: BEFORE risk responseMax > 100 $M
90% 92.2 $M
80% 87.3 $M
70% 83.8 $M
60% 80.6 $M
50% 77.8 $M
40% 74.9 $M
30% 71.8 $M
20% 68.2 $M
10% 63.3 $M
Min < 50% M
Base 77.7 $M
0%
1%
2%
3%
4%
5%
6%
7%
8%
39.3
45.8
52.3
58.8
65.3
71.8
78.3
84.8
91.4
97.9
104.4
110.9
117.4
Million Dollars ($M)
Histo
gram
of S
imul
atio
n Ou
tcom
es CumulativeDistributionFunction
Model Output: BEFORE risk response
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Risk 1
Risk 2
Risk 3
Risk 4
Risk 5
Base with uncertainty
Model Output
0
Of 10,000
Cost months or dollars
Trial 1
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Trial nRisk 1
Risk 2
Risk 3
Risk 4
Risk 5
Base with uncertainty
Model Output
0 Cost months or dollars
Of 10,000
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Reading the OutputMax > 100 $M
90% 92.2 $M
80% 87.3 $M
70% 83.8 $M
60% 80.6 $M
50% 77.8 $M
40% 74.9 $M
30% 71.8 $M
20% 68.2 $M
10% 63.3 $M
Min < 50% M
Base 77.7 $M
0%
20%
40%
60%
80%
100%
120%
39.3
45.8
52.3
58.8
65.3
71.8
78.3
84.8
91.4
97.9
104.4
110.9
117.4
Million Dollars ($M)
Histo
gram
of S
imul
atio
n Ou
tcom
es
Max > 100 $M
90% 92.2 $M
80% 87.3 $M
70% 83.8 $M
60% 80.6 $M
50% 77.8 $M
40% 74.9 $M
30% 71.8 $M
20% 68.2 $M
10% 63.3 $M
Min < 50% M
Base 77.7 $M
0%
1%
2%
3%
4%
5%
6%
7%
8%
39.3
45.8
52.3
58.8
65.3
71.8
78.3
84.8
91.4
97.9
104.4
110.9
117.4
Million Dollars ($M)
Histo
gram
of S
imul
atio
n Ou
tcom
es
Max > 100 $M
90% 92.2 $M
80% 87.3 $M
70% 83.8 $M
60% 80.6 $M
50% 77.8 $M
40% 74.9 $M
30% 71.8 $M
20% 68.2 $M
10% 63.3 $M
Min < 50% M
Base 77.7 $M
0%
1%
2%
3%
4%
5%
6%
7%
8%
39.3
45.8
52.3
58.8
65.3
71.8
78.3
84.8
91.4
97.9
104.4
110.9
117.4
Million Dollars ($M)
Histo
gram
of S
imul
atio
n Ou
tcom
es CumulativeDistributionFunction
80% confident that project will cost between $63.3 and $92.2 million
90% confident that project will cost less than $92.2 millionMax > 100 $M
90% 92.2 $M
80% 87.3 $M
70% 83.8 $M
60% 80.6 $M
50% 77.8 $M
40% 74.9 $M
30% 71.8 $M
20% 68.2 $M
10% 63.3 $M
Min < 50% M
Base 77.7 $M
0%
20%
40%
60%
80%
100%
120%
39.3
45.8
52.3
58.8
65.3
71.8
78.3
84.8
91.4
97.9
104.4
110.9
117.4
Million Dollars ($M)
Histo
gram
of S
imul
atio
n Ou
tcom
es
Max > 100 $M
90% 92.2 $M
80% 87.3 $M
70% 83.8 $M
60% 80.6 $M
50% 77.8 $M
40% 74.9 $M
30% 71.8 $M
20% 68.2 $M
10% 63.3 $M
Min < 50% M
Base 77.7 $M
0%
1%
2%
3%
4%
5%
6%
7%
8%
39.3
45.8
52.3
58.8
65.3
71.8
78.3
84.8
91.4
97.9
104.4
110.9
117.4
Million Dollars ($M)
Histo
gram
of S
imul
atio
n Ou
tcom
es
Max > 100 $M
90% 92.2 $M
80% 87.3 $M
70% 83.8 $M
60% 80.6 $M
50% 77.8 $M
40% 74.9 $M
30% 71.8 $M
20% 68.2 $M
10% 63.3 $M
Min < 50% M
Base 77.7 $M
0%
1%
2%
3%
4%
5%
6%
7%
8%
39.3
45.8
52.3
58.8
65.3
71.8
78.3
84.8
91.4
97.9
104.4
110.9
117.4
Million Dollars ($M)
Histo
gram
of S
imul
atio
n Ou
tcom
es CumulativeDistributionFunction
90% confident that project will cost less than $92.2 million
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Risk
Identification
RiskManagement
Planning
Implement Risk Response
PlanTAKE ACTION!
Risk Monitoring and Control
Risk AnalysisQualitative
orQuantitativepre-response
analysis
Risk Responsequalitative
orquantitative
post-responseanalysis
UpdateProject Management Plan
Current StatusProject Management
PlanScope, Schedule, Estimate
UpdateProject Management Plan
Current StatusProject Management
PlanScope, Schedule, Estimate
Results of response actions
Risk Responsequalitative
orquantitative
post-responseanalysis
Risk Management Steps
Risk AnalysisQualitative
orQuantitativepre-response
analysis
Risk Responsequalitative
orquantitative
post-responseanalysis
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Many Insignificant RisksSignificant Risk
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Gas line conflict
Risk Culvert Sections Result in Added Cost
Stormwater
High groundwater
Main fish barrier culvert damage and condition
Bridge Design Axle Load Criteria
Level of environmental document and projects covered
Utilities conflicts
Soil reuse
FHWA IRR implications
Special ITS Considerations
Timing of ROW acquisition for open channel at Killian development
Killian to build east channel
Material price adjustments
Bridge costs
Liquefaction mitigation
Design Build delivery (time)
Design Build delivery
-1.5$M -1.0$M -0.5$M 0.0$M 0.5$M 1.0$M 1.5$M
Expected Value Tornado Diagram: Pre-mitigated Risks: Cost Impacts
Pro
babi
lity
Impac t
VH
H
M
L
VL
VL L M H VH
Qualitative
QuantitativeResponse Prioritization
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Monte Carlo Method
Probabilistic Risk Modeler
Risk Modelling: AFTER risk responseModel Output: Before & After ResponseTotal Cost: Year of Expenditure Risk Status→
Results suggest the probability (P) that the realized cost will not exceed that shown P↓
Max 124.0 $M 112.6 $M
90% 98.4 $M 87.7 $M
80% 93.1 $M 83.0 $M
70% 88.8 $M 79.4 $M
60% 85.3 $M 76.3 $M
50% 81.7 $M 73.6 $M
40% 78.4 $M 70.8 $M
30% 74.5 $M 67.9 $M
20% 69.9 $M 64.3 $M
10% 63.5 $M 59.8 $M
Min 30.5 $M 40.3 $M
Base 79.6 $M 79.6 $M
Pre-mitigated
Post-mitigated
0%
2%
4%
6%
8%
10%
12%
30.5
38.3
46.1
53.9
61.7
69.5
77.3
85.1
92.8
100.6
108.4
116.2
124.0
Million Dollars ($M)
Histo
gram
of S
imul
atio
n Ou
tcom
esCumulativeDistributionFunction
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Risk Management Steps
Risk
Identification
RiskManagement
Planning
Implement Risk Response
PlanTAKE ACTION!
Risk Monitoring and Control
Risk AnalysisQualitative
orQuantitativepre-response
analysis
Risk Responsequalitative
orquantitative
post-responseanalysis
UpdateProject Management Plan
Current StatusProject Management
PlanScope, Schedule, Estimate
UpdateProject Management Plan
Current StatusProject Management
PlanScope, Schedule, Estimate
Results of response actions
Risk Responsequalitative
orquantitative
post-responseanalysis
Implement Risk Response
PlanTAKE ACTION!
Implement Risk Response
PlanTAKE ACTION!
Risk Monitoring and Control
UpdateProject Management Plan
Results of response actions
…two iterative cycles of CEVP and risk response
World Tunneling Conference 2011 “The Use of Probabilistic Cost Estimate, CEVP, in the Management of Complex projects to Define Budgets” Reilly, Laird, Sangrey, and Gabel.
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risk management
EXAMPLE
Move tunnel’s south end alignment to avoid impacts to sensitive buildings
historicPioneer Square
neighborhood 32
reduces properties needed
avoid conflicts in construction zone
as design advanced… additional changes, and risk sharing strategies were implemented…
move north end alignment 33
OwnerConceptDesign
Risk Assessment Timing
Design • Bid • Build
Minimal Contractor Input
PrelimDesign
DesignDevelopment
WorkingDrawings
ContractorBids
SelectEngineer
Construction
Design • BuildSelect
Design/ Builder Construction
Extensive Contractor Input
PrelimDesign
DesignDevelopment
WorkingDrawings
enhanced risk management
pre-construction
DBB: early to mid designDB: owner conceptual designDB: design-builder during design
enhanced risk management - construction34
Risk Allocation owner
design-builder
shared
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example only RISK
AssigneeDesign-Build
Allocation
Ow
ner
Shar
ed
DB notes
Local Agency, Utility, Railroad IssuesIdentification of initial local agency impacts X owner provides, db inherits
Obtaining Initial local agency permits X owner provides, db inheritsEstablishing initial local agency requirements XEstablishing final/actual local agency impacts XModifications to existing local agency permits XIdentify initial utility impacts from preliminary des X owner discloses, db inherits
Establish initial Utility Locations / Conditions X relocate in advance or handoff
Define required utility relocations from preliminary des X owner provides, db inheritsRelocation of utilities prior to contract XRelocation of utilities under agreement during contract XModified agreement w/utility based on final design XDamage to Utilities under Construction XVerification of Utility Locations/Conditions XCoordination with Utility Relocation during contract XUtility Owner/Third Party caused/related delays X owner, except if db brought it on Identification of RR impacts based on preliminary design XInitial RR agreement based on preliminary design XCoordinating with RR under agreement XOther work/Coordination XThird Party Agreements (Fed, Local, Private, etc.) XCoordinating with Third Parties under agreement X owner disclose, db inheritsCoordination/collection for third party betterments XCoordination with Other Projects X owner disclose, db inheritsCoordination with Adjacent Property Owners X
example only - unofficial
Table 2 Typical Risk Allocation – Local agencies, Utilities and Railroads
example onlyRISK
AssigneeDesign-Build
Allocation
Ow
ner
Shar
ed
DB notes
Design IssuesDefinition of Scope/Design Criteria XProject Definition X VE refines scope
Establishing Performance Requirement X risk refines expectations
survey/base map / geotech investigations X X geotech uncertainties commonEstablish/Define initial subsurface conditions XInitial project Geotechnical Analysis/Report XProposal specific Geotechnical Analysis/Report XPlan conformance regs/guidelines/RFP XPlan accuracy / conformance to design criteria XDesign Review Process/review time X owner defined, jointly decideDesign QC / QA XChanges in Scope XDesign constructability/contaminated mtls X goes back to designer-owner or db
Right of Way Issues; Design Builder Establishing R/W Limits XAccess Hearings/Findings and order XR/W Plan Approval / appraisal / review X owner assists Establish Just Compensation XAcquire Right of Way / complete relocation X owner assistsConstruction/Permanent Easements XCondemnation / acquisition of parcel XTake Possession / certification X
EnvironmentalInitial Project env impacts and parameters XEnvironmental Investigation XEnvironmental Permits X owner starts, db inheritsEnvironmental Mitigation and Compliance XKnown Hazardous Waste – mitigation XUnknown hazardous waste - mitigation X may be negotiatedObtain Environmental Approvals - CN related X
Table 1 Typical Risk Allocation – Design, R/W – DB, Environmental
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example onlyRISK
AssigneeDesign-Build
Allocation
Ow
ner
Shar
edD
esig
nBu
ilder
notes
ConstructionConstruction IA testing/inspection XSafety X safety is everyone’sDBE compliance and Materials documentation XConstruction Quality/Workmanship / Schedule XFinal Construction/Mtls QC/QA Plan & oversight XConst. Staking/Erosion Control/Spill Prevention XAccidents/Damage in work zone / Third Party XOperations & Maintenance During Construction XMaintenance of Traffic XWSP Callbacks - on site traffic control assistance XDamage to Utilities under Construction XFalsework / Shop Drawings XEquipment failure/breakdown / Work Methods XEarly Construction / At Risk Construction XCommunity Relations XPerformance of defined mitigation measures / Warranty X
Force Majeure / Acts of GodStrikes/Labor Disputes XTornado/Earthquake XEpidemic, terrorism, rebellion, war, riot, sabotage XArchaeological, paleontological discovery XSuspension of any environmental approval XChanges in Law XLawsuit against project XStorm/Flooding XFire or other physical damage X
Differing Site Conditions/Changed ConditionsChanged / Differing Site Conditions X
Completion and WarrantyEstablishment/definition of any risk pool XLong term ownership / Final Responsibility XInsurance X
Table 3 Typical Risk Allocation – Construction, Force Majeure, other
example only - unofficial
Allocation
Ow
ner
Shar
edD
esig
nBu
ilder
Differing Site Conditions/Changed Conditions X
Allocation
Ow
ner
Shar
edD
esig
nBu
ilder
Differing Site Conditions/Changed Conditions X
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major points – risk managementDB projects enjoy additional & particular benefits:
• owner savviness for procurement.
•Forum for community engagement.
•Team building.
•Fosters a spirit of innovation.
•Builds trust with taxpayers.
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Great manager of risk… or luck?
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